QUALCOMM Incorporated — Q1 Fiscal 2021 Form 10-Q
Business context and period: This unaudited quarterly report covers the three months ended December 27, 2020 (13 weeks), compared with the three months ended December 29, 2019. Qualcomm earns revenue primarily from QCT semiconductor products and QTL intellectual-property licensing; QSI makes strategic investments.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $8.235 billion | $5.077 billion | Up 62% |
| Operating income | $2.526 billion | $1.030 billion | Up $1.496 billion |
| Net income | $2.455 billion | $925 million | Up 165% |
| Diluted EPS | $2.12 | $0.80 | Up $1.32 |
| Operating cash flow | $3.175 billion | $1.118 billion | Up $2.057 billion |
- Equipment and services revenue was $6.442 billion, versus $3.534 billion; licensing revenue was $1.793 billion, versus $1.543 billion.
- Gross margin was 58% in both periods. Research and development expense rose to $1.653 billion from $1.406 billion; selling, general and administrative expense was $567 million versus $528 million.
- QCT revenue rose 81% to $6.533 billion; QCT earnings before tax (EBT) were $1.919 billion versus $479 million. Revenue streams were handsets $4.216 billion, RFFE $1.061 billion, automotive $212 million and IoT $1.044 billion.
- QTL revenue increased 18% to $1.660 billion; QTL EBT was $1.270 billion versus $1.017 billion. QSI EBT was $158 million, compared with a $3 million loss, primarily reflecting investment gains and lower impairment losses.
- Cash, cash equivalents and marketable securities totaled $12.333 billion at quarter-end, up $1.084 billion from September 27, 2020. Current assets were $19.792 billion and current liabilities $9.223 billion.
- Debt included $500 million short-term debt and $15.231 billion long-term debt on the balance sheet; management reported $15.5 billion of principal debt outstanding. Cash and marketable securities were below total reported debt.
- Investing cash use was $1.202 billion, including $469 million of capital expenditures. Financing cash use was $1.645 billion, including $739 million in dividends, $444 million in share repurchases and $449 million in tax withholding on vested share awards.
Material changes and unusual items
- Revenue and earnings growth was led by QCT, with increased 5G demand, Apple device launches, and higher handset, RFFE, automotive and IoT sales. Higher handset revenue reflected both increased chipset shipments and higher revenue per chipset.
- QTL growth reflected higher estimated 3G/4G/5G device sales by key licensees, including royalties under the new Huawei license agreement; COVID-19 effects and weaker China demand partly offset growth.
- Investment and other income rose to $219 million from $65 million, including $118 million of net gains on marketable securities. The effective tax rate was 6%, including $212 million of discrete net tax benefits; management estimated an 11% full-year fiscal 2021 effective tax rate.
- Huawei receivables were $1.2 billion at quarter-end. After quarter-end, Huawei paid a $500 million settlement installment as scheduled.
- Qualcomm resumed repurchases during the quarter, buying 3 million shares for $444 million; $4.2 billion remained authorized. A $0.65-per-share dividend was announced after quarter-end.
Outlook, risks and contingencies
- Management expected QCT revenue to remain favorably affected versus the prior year by Apple shipments and connected-device demand, and expected 5G deployments and device launches to continue through 2021 and beyond. It anticipated higher R&D spending, particularly for 5G and application-processor technologies. The filing provides no numerical earnings or revenue guidance.
- Management said it did not then expect a significant future COVID-19 impact on results or a material manufacturing or supply disruption, while emphasizing that the pandemic’s duration and effects remained uncertain.
- Management cited constrained semiconductor capacity, especially at leading process nodes, and said it might not realize the full benefit of increased demand from certain Chinese OEMs. Key risks include customer and licensee concentration, Apple and other customers developing their own chips, competition, China exposure and U.S.-China trade restrictions.
- Regulatory and legal matters include a pending appeal of a $242 million European Commission fine and a pending appeal of a separate €997 million EC fine; related liabilities, including interest and currency effects, were about $301 million and $1.3 billion, respectively, at quarter-end. The Ninth Circuit reversed the FTC district-court judgment and vacated its injunction; the FTC’s rehearing petition was denied.
- A 2020 Korean Fair Trade Commission investigation concerning RFFE practices remained open. Qualcomm said other antitrust losses were reasonably possible but not probable and that potential loss amounts could not be reasonably estimated. It warned that adverse outcomes could materially affect results, cash flows or financial condition.
- In January 2021, Qualcomm agreed to acquire NUVIA for approximately $1.4 billion before adjustments, subject to regulatory approval and other closing conditions; closing was expected in Q2 FY2021. The company expected to fund the deal with existing cash.
- Qualcomm believed existing liquidity, operating cash flow and financing activities would meet working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future. It had no borrowings under its $4.5 billion revolving facility at quarter-end.
Important facts for investors to verify
- Whether 5G-led QCT growth, Apple-related shipments and favorable product mix persist, and how supply constraints affect demand fulfillment and margins.
- Whether customer concentration, vertical integration by customers, and China-related trade or regulatory developments affect sales or collections.
- Progress and financial outcomes of the EC appeals, the Korean RFFE investigation, and other licensing and competition proceedings.
- Collection of Huawei balances and the timing of remaining settlement installments and royalties.
- Completion, regulatory approval, funding and subsequent costs or benefits of the NUVIA acquisition.
- Whether the reported quarter’s tax benefits and investment gains recur; the reported 6% quarterly tax rate included discrete benefits and differs from management’s 11% annual estimate.