QUALCOMM Incorporated — FY2020 Form 10-K
Reporting period: Fiscal year ended September 27, 2020 (52 weeks). This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars.
Business context
Qualcomm develops wireless technologies and sells integrated circuits and related products through QCT, licenses intellectual property through QTL, and makes strategic investments through QSI. Its business is closely tied to smartphone demand and device launches, with growing exposure to 5G, RFFE, automotive and IoT.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $23.531 billion | $24.273 billion | Down 3% |
| Operating income | $6.255 billion | $7.667 billion | Down 18% |
| Net income | $5.198 billion | $4.386 billion | Up 19% |
| Diluted EPS | $4.52 | $3.59 | Up 26% |
| Gross margin | 61% | 65% | Down 4 percentage points |
| Operating margin | 26.6% | 31.6% | Down 5.0 percentage points |
| Cash from operations | $5.814 billion | $7.286 billion | Down $1.472 billion |
| Capital expenditures | $1.407 billion | $887 million | Up $520 million |
| Cash, cash equivalents and marketable securities | $11.249 billion | $12.296 billion | Down $1.047 billion |
| Short- and long-term debt, carrying value | $15.726 billion | $15.933 billion | Down $207 million |
Cash from operations less capital expenditures was approximately $4.407 billion, versus $6.399 billion in FY2019. Current assets were $18.519 billion and current liabilities $8.672 billion at year-end, a current ratio of approximately 2.1. Debt principal was $15.472 billion for notes plus $500 million of commercial paper; the $4.5 billion revolving facility was undrawn. Interest expense was $602 million.
Net income rose despite lower operating income, principally because income tax expense fell to $521 million from $3.095 billion; the effective tax rate was 9% versus 41%. FY2019 included a $2.5 billion deferred-tax-asset charge and a $570 million tax benefit, making year-over-year earnings comparisons unusually affected by tax items.
Segments and material changes
- QCT: Revenue was $16.493 billion, up 13%; earnings before tax (EBT) were $2.763 billion, up 29%. Higher 5G-related product mix and RFFE demand more than offset lower unit shipments, including COVID-19 impacts and lower legacy modem sales to Apple and Huawei. MSM integrated circuit shipments fell to approximately 575 million from 650 million.
- QTL: Segment revenue was $5.028 billion, up 10%; EBT was $3.442 billion, up 17%. Results benefited from a full year of Apple royalties and a new Huawei license, partly offset by COVID-19, lower revenue per unit and the absence of $450 million received from Huawei under a prior interim agreement in FY2019.
- QSI: Revenue was $36 million versus $152 million; EBT was a loss of $11 million versus income of $344 million. Investment impairments, including OneWeb, contributed to the decline.
- Consolidated licensing revenue fell to $7.233 billion from $9.662 billion, partly because FY2019 included $4.7 billion from the Apple dispute settlement. FY2020 included $1.8 billion related to the Huawei settlement and license, recorded outside segment results.
Outlook, commentary and risks
Management expected the pandemic to continue weighing on QCT and QTL demand in the near term, while noting limited impact on its ability to manufacture and ship products to date. It anticipated continued 5G network and device launches, increased R&D spending in FY2021, higher near-term demand from certain Chinese OEMs, and increased QCT shipments supporting Apple’s 2020 iPhone launches. Management cautioned that supply-chain ramp timing could limit its ability to capture all expected Chinese OEM demand. The filing provides no numerical FY2021 earnings or revenue guidance.
In July 2020, Qualcomm settled its dispute with Huawei and entered a new long-term global patent license. It recognized $1.8 billion in FY2020 revenue, including amounts due under the settlement and royalties for earlier quarters; Huawei had paid the first installment and those earlier-quarter royalties by year-end. Approximately $1.3 billion remained receivable, with settlement installments due by June 2021. Recognition depended on management’s assessment of Huawei’s ability and commitment to pay.
The Ninth Circuit reversed and vacated the FTC district court ruling and injunction in August 2020; it denied the FTC’s rehearing petition in October 2020. Other legal and regulatory matters remained, including appeals of European Commission fines and a 2020 Korean investigation concerning RFFE. Approximately $1.5 billion was accrued for two EC fines, supported by financial guarantees while appealed. The company said other contingent losses were reasonably possible but not probable and could not be reasonably estimated.
Principal risks include COVID-19 and cyclical handset demand; reliance on a small number of customers and licensees; customer vertical integration, including Apple’s modem development; significant China exposure and U.S.-China trade restrictions; intense competition and pricing pressure; dependence on limited third-party semiconductor suppliers; and patent-licensing challenges, litigation and regulation. The company suspended repurchases in the third quarter of FY2020 to preserve liquidity and resumed them in FY2021; $4.6 billion remained authorized. FY2020 dividends paid were $2.882 billion, and management stated it intended to continue quarterly dividends subject to capital availability.
Investor verification priorities
- Assess the sustainability and collectability of the $1.8 billion Huawei-related revenue and the remaining receivable and scheduled payments.
- Separate recurring operating performance from the Apple and Huawei settlements, tax items and investment impairments when comparing periods.
- Track 5G and RFFE growth, QCT margins and inventory, which increased 86% to $2.60 billion during FY2020.
- Review the status and potential financial effects of EC fines, Korean proceedings, consumer litigation and other licensing disputes.
- Monitor China-related revenue concentration, customer modem insourcing, supplier capacity and the continuing effects of COVID-19 on device demand.