QUALCOMM Incorporated — Q2 FY2022 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 27, 2022. Unless noted otherwise, financial amounts are in U.S. dollars; figures are unaudited. Comparisons are with the periods ended March 28, 2021, or with September 26, 2021 for balance-sheet items.
Business context and financial performance
Qualcomm develops and sells wireless semiconductor products and licenses its intellectual property. Its principal businesses are QCT (semiconductors) and QTL (licensing); QSI makes strategic investments.
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Total revenue | $11.164B | $7.935B | $21.868B | $16.170B |
| Operating income | $3.858B | $2.166B | $7.722B | $4.692B |
| Net income | $2.934B | $1.762B | $6.333B | $4.217B |
| Diluted EPS | $2.57 | $1.53 | $5.55 | $3.66 |
| Gross margin | 58% | 57% | 59% | 57% |
- Quarterly revenue rose 41% and net income rose 67% year over year. Growth was primarily in equipment and services revenue, which increased $3.178B in the quarter. Licensing revenue was $1.747B, up $51M.
- QCT quarterly revenue increased 52% to $9.548B; QCT earnings before tax (EBT) were $3.340B, or 35% of segment revenue, versus 25% a year earlier. Handsets contributed $6.325B, IoT $1.724B, RFFE $1.160B, and automotive $339M.
- QTL quarterly licensing revenue decreased to $1.580B from $1.614B; QTL EBT was $1.154B. For the six months, QTL revenue increased to $3.398B from $3.273B.
- QSI recorded a quarterly EBT loss of $269M, mainly reflecting fair-value losses on certain marketable equity investments. Investment and other expense was $298M for the quarter, compared with income of $104M a year earlier.
Cash flow, liquidity and debt
- Six-month operating cash flow was $4.755B, down from $6.086B. The filing cites $1.6B of supplier capacity-commitment advance payments and increased working-capital needs; inventory increased $1.337B in operating cash-flow changes.
- Six-month capital expenditures were $1.074B. Investing activities used $638M and financing activities used $4.044B, including $2.129B of share repurchases and $1.529B of dividends paid.
- At March 27, cash and cash equivalents were $7.173B and marketable securities were $4.373B, totaling $11.546B, down from $12.414B at fiscal year-end. Current assets were $21.610B and current liabilities were $13.432B.
- Reported principal debt was $15.5B; balance-sheet short- and long-term debt totaled $15.680B. Debt included $500M of commercial paper; $1.5B of principal was due in May 2022 and another $1.5B in January 2023. No amounts were drawn on the $4.5B revolving credit facility.
- Management said available liquidity, expected operating cash flow and financing were expected to meet working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future.
Material changes, outlook and risks
- QCT growth reflected higher handset revenue per chipset, favorable mix toward higher-tier 5G products, increased RFFE demand, and growth in IoT and automotive. Management said QCT revenue should remain favorably affected for the rest of FY2022 across these areas, but did not provide numeric forward guidance in the supplied filing text.
- Semiconductor capacity constraints continued. Qualcomm had made $1.6B in advance payments under multi-year capacity commitments and warned supply-chain challenges could prevent it from meeting all customer demand. It expects near-term working-capital requirements to rise and R&D spending to increase year over year.
- On April 1, 2022, after quarter-end, Qualcomm and SSW Partners completed the Veoneer transaction. Qualcomm funded substantially all of approximately $4.7B of consideration in exchange for the Arriver business and rights to most proceeds from the eventual sale of Veoneer’s other businesses; Qualcomm also agreed to provide approximately $300M in funding to those businesses. Purchase-price accounting was still underway.
- Qualcomm raised its quarterly dividend 10%, from $0.68 to $0.75 per share, effective for dividends payable after March 24, 2022. At quarter-end, $9.1B remained authorized under its repurchase program.
- Management estimated a 14% FY2022 effective tax rate. Starting in FY2023, U.S. tax rules would require R&D costs to be capitalized and amortized; if unchanged, management expects significantly higher cash tax payments, though a favorable effect on tax provision may result. Proposed U.S. tax changes could also adversely affect results and cash flows.
- Major risks include customer and licensee concentration, customers developing their own chips, U.S.–China trade and national-security tensions, reliance on limited suppliers and constrained capacity, cyclicality, and challenges to Qualcomm’s licensing practices. COVID-19 effects remained uncertain, including lockdown impacts in China; the company did not expect a significant effect from Russia’s invasion of Ukraine given its limited direct and indirect business there.
Contingencies and unusual items
- Qualcomm reported $1.2B of liabilities for an appealed European Commission fine and $276M for a separate appealed fine, both including related interest and other adjustments. The General Court’s decision on the $997M fine was expected June 15, 2022; the appeal of the approximately €242M fine remained pending.
- Other regulatory and legal matters include a pending Korea Supreme Court appeal of a KFTC decision and a separate KFTC investigation concerning RFFE practices. Apart from the EC fines, Qualcomm had not accrued contingent losses for the described matters because it considered losses reasonably possible but not probable; possible loss amounts were not reasonably estimable. The company warned adverse outcomes could materially affect results, cash flows or financial condition.
- A securities class-action motion for judgment on the pleadings was denied in February 2022; no trial date had been set. In a separate securities case, the Ninth Circuit affirmed dismissal in February 2022. Qualcomm obtained a favorable district-court judgment in the ParkerVision case in March 2022, but ParkerVision appealed in April.
- Marketable-securities losses and losses on deferred-compensation-plan assets contributed to the quarter’s investment and other expense. Qualcomm noted fair values of early- and growth-stage investments could remain volatile.
Important facts for investors to verify
- Whether QCT growth and higher-tier handset mix continue, and whether supply constraints limit shipments or margins.
- Customer and licensee concentration: individual counterparties represented up to 19% of quarterly revenue and up to 22% of six-month revenue.
- Cash-flow and working-capital trends, including inventory, supplier advances and the ability to fund the Veoneer-related commitments while maintaining capital returns.
- Debt maturities, refinancing plans and the impact of the FY2023 R&D tax-change requirements on cash taxes.
- Developments in EC and other licensing-related litigation and investigations, including potential remedies and any changes to royalty arrangements.
- Integration, accounting treatment and eventual sale proceeds associated with Veoneer’s Non-Arriver businesses.