QUALCOMM Incorporated — FY2019 Form 10-K Summary
Business context and reporting period
QUALCOMM develops wireless integrated circuits and software through QCT, licenses intellectual property through QTL, and makes strategic investments through QSI. The fiscal year ended September 29, 2019, comprised 52 weeks; the prior fiscal year comprised 53 weeks. The filing also reports fourth-quarter results.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $24.273 billion | $22.611 billion |
| Operating income | $7.667 billion | $621 million |
| Net income (loss) | $4.386 billion | ($4.964 billion) |
| Diluted EPS | $3.59 | ($3.39) |
| Gross margin | 65% | 55% |
| Operating cash flow | $7.286 billion | $3.908 billion |
| Cash, cash equivalents and marketable securities | $12.296 billion | $12.123 billion |
| Short-term and long-term debt | $15.933 billion | $16.370 billion |
FY2019 capital expenditures were $887 million. Dividends paid totaled $2.968 billion; share repurchases totaled $1.793 billion. The company reported $4.909 billion in stockholders’ equity, up from $807 million.
Fourth-quarter FY2019 revenue was $4.814 billion, operating income $701 million, net income $506 million, and diluted EPS $0.42. QCT generated FY2019 revenue of $14.639 billion and earnings before tax (EBT) of $2.143 billion; QTL generated $4.591 billion of revenue and $2.954 billion of EBT.
Material changes versus the prior year
- Revenue rose 7%, but included $4.7 billion of QTL licensing revenue from the April 2019 settlement with Apple and its contract manufacturers. The payment and release of certain customer-related liabilities were recognized in the third quarter.
- Equipment and services revenue fell $2.789 billion, mainly because of lower QCT modem shipments, including lower sales to Apple, and weaker demand from Chinese OEMs. QCT sold approximately 650 million MSM integrated circuits, down from 855 million.
- QTL revenue decreased $451 million excluding the extraordinary effect of the Apple settlement in consolidated results; lower estimated royalties per unit and royalty-cap reductions weighed on segment results. QTL EBT margin declined to 64% from 68%.
- Operating income and net income improved sharply from FY2018, which included a $2.0 billion NXP termination fee, a $1.2 billion European Commission fine, cost-plan charges and a $5.7 billion tax charge related to U.S. tax reform.
- FY2019 included a $275 million European Commission fine charge and $213 million in net cost-plan charges. Income tax expense was $3.095 billion, including a $2.5 billion charge from derecognition of a deferred tax asset, partly offset by a $570 million tax benefit from tax elections.
- Operating cash flow increased by $3.378 billion, reflecting the Apple settlement and timing of customer-related payments, despite lower segment revenue.
Outlook, risks and unusual items
- Management expects the transition to 5G to support new device and industry opportunities, but notes that initial commercial deployments began in 2019 and will continue into FY2020 and beyond. Smartphone shipments declined about 4% in the cited period; calendar 2020 shipments were expected to be approximately flat.
- Qualcomm expects revenue under its multi-year Apple chipset agreement to begin in the second half of FY2020. Apple used a competitor’s modems in its 2019 smartphone launch.
- Huawei negotiations remained unresolved: a second interim agreement provided $450 million of FY2019 royalties, but Qualcomm recorded no Huawei royalty revenue in the fourth quarter and said interim payments did not represent the full amount due.
- The company appealed the FTC court ruling imposing licensing and chipset-related remedies. The Ninth Circuit granted a partial stay in August 2019; the appeal remained pending. The filing warns that adverse legal or regulatory outcomes could affect licensing practices, revenue, cash flows and capital returns.
- Management stated cash and expected operating cash flow and financing activities were expected to meet working and other capital needs for at least 12 months. Remaining authorization under the $30 billion repurchase program was $7.1 billion at year-end; repurchases may reduce cash available for investment and operations.
- Other notable exposures include customer and licensee concentration, U.S.–China trade restrictions, intense chipset competition, reliance on Asia-based suppliers, royalty-estimation uncertainty, and approximately $2.3 billion in remaining U.S. tax-reform Toll Charge payments over seven years.
- The filing gives no formal numerical revenue or earnings guidance. It states the company intends to continue quarterly dividends, subject to capital availability and other considerations.
Important facts for investors to verify
- Separate recurring operating performance from the $4.7 billion Apple settlement and assess the effect of the new royalty revenue-recognition method, which accelerated recognition by one quarter.
- Track QCT shipments, customer mix and margins, including future Apple chipset revenue and competitive or in-house modem sourcing by major customers.
- Monitor Huawei royalty negotiations and collections, and the outcome and scope of the FTC appeal and other licensing proceedings.
- Review the sustainability of cash generation against debt maturities, dividends, buybacks, purchase commitments and remaining tax payments.
- Check reported tax results and reserves: FY2019 included significant discrete tax items, and unrecognized tax benefits were $1.7 billion at year-end.