QUALCOMM Incorporated — Form 10-Q Summary
Business context and reporting period
Reports the second quarter and first six months of fiscal 2023, ended March 26, 2023. Qualcomm earns revenue primarily through QCT, its semiconductor business, and QTL, its patent licensing business; QSI makes strategic investments. The unaudited interim statements cover 13-week and 26-week periods and should be read with the company’s fiscal 2022 Form 10-K.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 |
|---|---|---|
| Revenue | $9.275 billion | $11.164 billion |
| Operating income | $2.090 billion | $3.858 billion |
| Net income | $1.704 billion | $2.934 billion |
| Diluted EPS | $1.52 | $2.57 |
| Gross margin | 55% | 58% |
Revenue fell 17% year over year and net income fell 42%. Six-month revenue was $18.738 billion, versus $21.868 billion; net income was $3.939 billion, versus $6.333 billion. Six-month gross margin was 56%, versus 59%. The six-month effective tax rate was 7%, compared with 13% in the prior-year period; management estimates an 8% effective tax rate for fiscal 2023.
Q2 QCT revenue was $7.942 billion, down 17%; QTL revenue was $1.290 billion, down 18%. QCT handset revenue declined to $6.105 billion from $7.349 billion, and IoT revenue declined to $1.390 billion from $1.828 billion. Automotive revenue increased to $447 million from $371 million. QCT EBT margin fell to 27% from 35%; QTL EBT margin fell to 68% from 73%.
Cash flow, liquidity and capital
For the first six months, operating cash flow was $4.552 billion, compared with $4.755 billion. Investing activities used $357 million, including $851 million of capital expenditures; financing activities used $3.558 billion. Cash, cash equivalents and marketable securities totaled $6.676 billion at March 26, 2023, excluding cash classified as held for sale.
Short-term debt was $499 million and long-term debt was $15.486 billion. The company issued $1.9 billion of long-term notes and repaid $1.446 billion of long-term debt during the six-month period. It had no borrowings under its $4.3 billion revolving credit facility. It repurchased $2.173 billion of stock and paid $1.676 billion in dividends during the period. A 7% dividend increase to $0.80 per share was announced in March.
Changes, outlook, risks and unusual items
- Management attributed weaker results mainly to macroeconomic pressure on device demand and customers reducing elevated inventories. It expects these conditions to continue over the next several quarters, affecting revenue, results, cash flows and historical QCT seasonality. No quantified quarterly revenue or earnings guidance is provided in the supplied filing text.
- Management expects continued price increases from certain semiconductor wafer suppliers and intense competition, particularly in China. It also expects continued commercial 5G network deployments and device launches. Automotive and IoT are part of its diversification strategy.
- Inventory was $6.858 billion, up from $6.341 billion at fiscal year-end. Management warned that demand uncertainty could lead to excess or obsolete inventory and related charges. It also expects underutilization at its manufacturing facilities in the near term.
- Other expense included restructuring charges of $208 million for Q2 and $288 million for the six-month period, substantially all severance costs. The actions are expected to be substantially completed by fiscal year-end; additional charges remain possible.
- New federal tax rules require capitalization and amortization of research and development costs. Qualcomm estimated an approximately $1.1 billion additional fiscal 2023 cash-tax impact; remaining current-year federal tax-payment deadlines were postponed until October 2023.
- Veoneer’s Non-Arriver businesses are reported as held for sale and discontinued operations. Their results were a $2 million gain for Q2 and a $36 million loss for the six-month period. Qualcomm expected the sales to be completed in fiscal 2023, subject to approvals and closing conditions.
- Material risks include revenue concentration among a small number of customers and licensees, customer vertical integration, China and U.S./China trade tensions, supply-chain dependence, cyclical demand, competition, and legal and regulatory challenges to the licensing model. The filing identifies ongoing litigation, including the ARM dispute; the company states it believes the claims described are without merit. The Korea Supreme Court affirmed the prior judgment in the KFTC case, concluding that appeal process.
- Management said cash, expected operating cash flow and financing activities should meet capital requirements for at least the next 12 months and thereafter for the foreseeable future. Disclosure controls were deemed effective at quarter-end, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether smartphone and IoT demand recover and customer inventory drawdowns ease as management expects.
- Whether QCT margins stabilize amid supplier price increases, product-mix changes and lower utilization.
- Whether inventory levels decline without material excess or obsolete inventory charges.
- Developments in licensing-related litigation and regulation, the ARM dispute, and U.S./China trade and export policies.
- The realized cash-tax impact of R&D capitalization and the timing of payments postponed to October 2023.