QUALCOMM Incorporated — FY2014 Form 10-K
Reporting period: Fiscal year ended September 28, 2014 (52 weeks). The filing also reports fourth-quarter results. Qualcomm develops wireless chips and software, and licenses its intellectual property. Its principal segments are QCT (chipsets) and QTL (licensing); QSI makes strategic investments.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $26.487 billion | $24.866 billion | +7% |
| Operating income | $7.550 billion | $7.230 billion | +4% |
| Net income attributable to Qualcomm | $7.967 billion | $6.853 billion | +16% |
| Diluted EPS | $4.65 | $3.91 | +19% |
| Cash provided by operations | $8.887 billion | $8.778 billion | +1% |
| Capital expenditures | $1.185 billion | $1.048 billion | +13% |
- Operating margin was approximately 28.5%, versus 29.1% in FY2013; net margin was approximately 30.1%, versus 27.6%. Equipment-and-services gross margin was approximately 43%, compared with 42%.
- Revenue comprised $18.625 billion of equipment and services (up $1.637 billion) and $7.862 billion of licensing (down $16 million). QCT revenue was $18.665 billion, up 12%; QTL revenue was $7.569 billion, essentially flat.
- QCT shipped approximately 861 million MSM integrated circuits, up 20% from 716 million. QCT EBT was $3.807 billion; QTL EBT was $6.590 billion.
- Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $7.702 billion. Qualcomm returned $7.134 billion through repurchases and dividends, or 93% of free cash flow.
- Cash, cash equivalents and marketable securities totaled $32.022 billion, up $2.616 billion year over year. Total assets were $48.574 billion and stockholders’ equity was $39.166 billion. No loans or debentures were reported at year-end.
- Cash and marketable securities included $26.2 billion held by foreign entities, mostly treated as indefinitely reinvested. Qualcomm disclosed an estimated $9.1 billion tax liability if approximately $25.7 billion of foreign earnings were repatriated.
Changes, unusual items and capital allocation
- Net income included a $430 million after-tax gain from the sale of Omnitracs’ North and Latin America operations, completed for $788 million net of cash sold. Operating results of those operations were not material to periods presented.
- Qualcomm recorded $607 million of QMT goodwill and long-lived-asset impairments, plus $16 million of goodwill impairment related to its former QRS division. The QMT charges reflected reduced expected cash flows and a shift toward licensing next-generation display technology and focusing on wearables.
- A $173 million ParkerVision damages accrual from FY2013 was reversed after the court overturned the infringement verdict in Qualcomm’s favor; ParkerVision appealed. A separate ParkerVision case alleged infringement of 11 additional patents.
- Net investment income rose to $1.228 billion from $964 million, including $770 million of realized gains on marketable securities. Management expected lower interest and dividend income and lower realized gains in FY2015 following portfolio rebalancing.
- Repurchases were $4.549 billion and cash dividends were $2.586 billion. The quarterly dividend was raised to $0.42 per share. Qualcomm stated an intention to return 75% of free cash flow to shareholders over the foreseeable future; FY2014 payout exceeded that target.
- Fourth-quarter FY2014 revenue was $6.692 billion, operating income $1.992 billion, net income attributable to Qualcomm $1.894 billion and diluted EPS $1.11. The quarter included no Omnitracs sale gain, which was recorded in the first quarter.
Outlook, risks and contingencies
- Management expected continued growth in 3G/4G devices, led by smartphones and emerging markets, and identified China’s LTE rollout as an opportunity. It provided no specific numerical revenue or earnings guidance in the text provided.
- Management cited China-related challenges: an NDRC antitrust investigation, alleged underreporting of royalties by certain licensees, a licensee dispute and possible delays in signing new licenses. Qualcomm considered a loss in the NDRC matter probable, but could not reasonably estimate a loss range. Potential remedies include business-practice changes and a fine of 1%–10% of prior-year revenue.
- Other regulatory matters included European Commission and FTC investigations into chipset sales, rebates or licensing practices; ongoing Korean and Japanese proceedings; and SEC/DOJ FCPA investigations. The SEC had issued a Wells Notice concerning alleged benefits to individuals associated with Chinese state-owned entities. Qualcomm reported those benefits were valued at less than $250,000, excluding employment compensation. Outcomes and potential losses were uncertain.
- Other significant risks include intense chipset competition and pricing pressure, reliance on a small number of customers and licensees, dependence on third-party foundries and suppliers, royalty exposure to device prices and reporting compliance, and patent litigation. Two customers’ products accounted for 49% of consolidated revenue in FY2014.
- Qualcomm agreed in October 2014 to a recommended £1.6 billion (approximately $2.5 billion) cash offer for CSR plc, subject to shareholder and regulatory approvals, with closing expected by summer 2015. It expected to use existing cash resources.
- Purchase obligations totaled $3.607 billion, including $3.421 billion due in FY2015; $2.8 billion related to integrated-circuit inventory commitments. Management anticipated borrowing in FY2015 may supplement U.S.-based cash for shareholder returns.
Most important facts for investors to verify
- Whether China’s NDRC investigation, royalty-reporting disputes and license delays result in a material financial penalty, changed licensing terms or reduced collections.
- How much of FY2014 earnings growth was attributable to recurring operations versus the Omnitracs gain, realized investment gains, and the ParkerVision accrual reversal; also monitor QMT impairments.
- Whether QCT shipment growth can offset lower average selling prices and lower-margin product mix, and whether QTL royalty revenue holds up amid device-price pressure and licensee reporting issues.
- Customer concentration, including the 49% revenue share tied to products of Samsung and Hon Hai/Foxconn and other suppliers to Apple, and the related accounts-receivable exposure.
- Liquidity available for U.S. needs given the concentration of cash overseas, planned shareholder returns, purchase commitments and proposed CSR acquisition.
- Developments and potential financial or operating effects of the SEC/DOJ, FTC, European Commission, patent and other legal proceedings.