QUALCOMM Incorporated — Q3 Fiscal 2020 Form 10-Q
Reporting period: Quarter ended June 28, 2020 (13 weeks); year-to-date figures cover the nine months ended that date. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $4,893 | $9,635 | $15,185 | $19,459 |
| Operating income | $782 | $5,317 | $2,803 | $6,967 |
| Net income | $845 | $2,149 | $2,238 | $3,880 |
| Diluted EPS | $0.74 | $1.75 | $1.95 | $3.17 |
| Gross margin | 57% | 78% | 57% | 67% |
Revenue mix: Q3 equipment and services revenue was $3.794 billion, up from $3.531 billion; licensing revenue was $1.099 billion, down from $6.104 billion. For the first nine months, equipment and services revenue was $11.376 billion versus $11.037 billion, and licensing revenue was $3.809 billion versus $8.422 billion.
Segment performance: QCT Q3 revenue was $3.807 billion (up 7% year over year) and earnings before tax (EBT) were $603 million, versus $504 million. QTL revenue was $1.044 billion (down 19%) and EBT was $646 million, versus $898 million. QSI recorded a $58 million EBT loss for the first nine months, compared with $337 million of EBT in the prior-year period.
Cash flow and balance sheet: Nine-month operating cash flow was $4.073 billion, down from $6.059 billion. Investing cash outflow was $4.925 billion, including $1.059 billion of capital expenditures and net purchases of marketable securities; financing cash outflow was $4.871 billion. Cash and cash equivalents were $6.120 billion at quarter-end, and cash, cash equivalents and marketable securities totaled $10.634 billion. Reported short-term and long-term debt totaled $15.925 billion ($500 million and $15.425 billion, respectively); principal notes outstanding were $15.5 billion. The company had no borrowings under its $4.5 billion revolving credit facility.
Total assets were $32.328 billion and stockholders’ equity was $3.306 billion at June 28, 2020, compared with $32.957 billion and $4.909 billion, respectively, at September 29, 2019. Inventories rose to $2.343 billion from $1.400 billion, primarily reflecting the 5G ramp and COVID-related shifts in customer demand timing.
Material changes and explanations
- Year-over-year Q3 revenue and earnings comparisons were heavily affected by $4.7 billion of licensing revenue recognized in Q3 FY2019 from the April 2019 Apple and contract-manufacturer settlement. This revenue was not allocated to segment results.
- Q3 FY2019 also included a $2.5 billion tax expense from derecognition of a deferred tax asset following an IRS agreement. Q3 FY2020’s effective tax rate was 3%; the nine-month rate was 7%.
- QCT benefited from stronger 5G product demand and favorable product mix, partly offset by lower chipset shipments. MSM integrated-circuit shipments were approximately 130 million in Q3 FY2020 versus 156 million a year earlier.
- QTL’s Q3 decline reflected lower Huawei royalties after an interim agreement expired and reduced licensee device sales amid COVID-19. Nine-month QTL revenue was higher year over year, mainly due to the new Apple license agreement, partly offset by lower Huawei royalties and lower estimated revenue per unit.
- Nine-month investment and other income, net, fell to $46 million from $377 million, including $349 million of impairment losses on other investments. A significant portion related to OneWeb, which filed for bankruptcy.
Outlook, risks and unusual items
- Management expected COVID-19 to continue weighing on QCT and QTL revenue in the near term, while assuming device sales would gradually recover in the September quarter. It reported minimal disruption to its ability to manufacture, test and fulfill customer orders to date. No specific consolidated revenue or EPS guidance is provided in the supplied filing text.
- In July 2020, Qualcomm settled its prior Huawei licensing dispute and entered a new long-term global patent license agreement. Management expected approximately $1.8 billion of Q4 FY2020 revenue from settlement amounts and estimated royalties for the March and June quarters, and expected to begin recording royalties for Huawei’s September-quarter sales. These are post-quarter events and estimates, not Q3 recognized revenue.
- The company estimated a 9% FY2020 annual effective tax rate as of Q3, later expecting 11% after considering July tax regulations and the Huawei agreements. Further tax regulations could adversely affect taxes, results or cash flows.
- Qualcomm suspended share repurchases for at least the near term in Q3 to preserve liquidity. It had repurchased 30.9 million shares for $2.5 billion during the first nine months and paid $2.1 billion in dividends. A $0.65-per-share dividend was declared for payment in September 2020.
- Significant legal and regulatory exposure remains. The FTC case was on appeal, with parts of the injunction stayed; the Ninth Circuit had not ruled. The company reported $1.4 billion accrued for two EC fines under appeal, supported by financial guarantees. A new 2020 KFTC investigation concerned RFFE practices; potential remedies could include fines or restrictions. Other antitrust and consumer class-action matters also remain pending. Qualcomm said it had not accrued losses for these matters, other than the EC fines, because losses were not considered probable and ranges could not be reasonably estimated.
- Management believed available liquidity, operating cash flow and financing activities would cover working and other capital needs for at least the next 12 months. Key risks include the pandemic and recovery pace, U.S.–China trade restrictions, customer and licensee concentration, competition and 5G adoption, supply constraints, and adverse licensing or antitrust outcomes.
Important facts for investors to verify
- Whether Huawei’s settlement and new license agreement produced the expected Q4 revenue and cash collections, and how much was recurring royalty revenue versus settlement-related recognition.
- Whether device demand recovered as assumed and whether elevated 5G-related inventory converted to sales without excess or obsolescence.
- Developments in the FTC appeal, EC fine appeals, KFTC proceedings and other licensing disputes, including any resulting changes to licensing practices or royalty revenue.
- Cash generation, debt and capital returns after the share-repurchase suspension, including the ability to sustain dividends amid pandemic-related uncertainty.
- The actual FY2020 effective tax rate and effects of tax regulations and the Huawei agreements.