QUALCOMM Incorporated — FY2016 Form 10-K
Reporting period: Fiscal year ended September 25, 2016 (52 weeks). The filing also reports fourth-quarter results. Unless noted otherwise, figures are in U.S. dollars.
Business context and reporting period
Qualcomm earns revenue primarily from QCT, which sells chipsets and related software, and QTL, which licenses intellectual property and collects royalties. QSI makes strategic investments. The business depends on adoption of cellular standards, chipset demand, and licensees’ device sales. Approximately 98% of FY2016 revenue came from international customers and licensees.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $23.554 billion | $25.281 billion |
| Operating income | $6.495 billion | $5.776 billion |
| Net income attributable to Qualcomm | $5.705 billion | $5.271 billion |
| Diluted EPS | $3.81 | $3.22 |
| Gross margin | 59% | 59% |
| Cash provided by operating activities | $7.400 billion | $5.506 billion |
Revenue fell 7%, while net income attributable to Qualcomm rose 8%. Equipment and services revenue declined to $15.467 billion from $17.079 billion; licensing revenue declined to $8.087 billion from $8.202 billion. The 17% effective tax rate compared with 19% in FY2015.
- QCT: Revenue was $15.409 billion, down 10%; earnings before tax (EBT) were $1.812 billion versus $2.465 billion, and EBT margin declined to 12% from 14%. MSM chipset shipments fell 10% to approximately 842 million.
- QTL: Revenue was $7.664 billion, down 4%; EBT was $6.528 billion versus $6.882 billion, with EBT margin of 85%. The quarter included $266 million of licensing revenue related to termination of an infrastructure license agreement.
- Fourth quarter: Revenue was $6.184 billion, operating income $1.804 billion, net income attributable to Qualcomm $1.599 billion, and diluted EPS $1.07. In Q4 FY2015, the corresponding figures were $5.456 billion, $1.140 billion, $1.061 billion, and $0.67.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $32.350 billion at year-end, including $29.6 billion held by foreign entities and $2.8 billion by U.S. entities. Short-term debt was $1.749 billion and long-term debt $10.008 billion. Operating cash flow improved by 34% year over year.
- Cash returns: Qualcomm repurchased $3.922 billion of stock and paid $2.990 billion in dividends in FY2016. Dividends announced per share increased to $2.02 from $1.80.
Material changes versus FY2015
- Lower chipset shipments, pricing and product mix drove the decline in QCT revenue; premium-tier share shifts reduced sales of integrated Snapdragon processors, while competition in China remained intense.
- QTL revenue declined despite higher reported licensee device sales, reflecting lower revenue per reported unit and recognition of unearned license fees. Qualcomm said it believed some licensees were underreporting sales and some companies remained unlicensed.
- Operating income increased despite lower revenue. FY2015 included a $975 million China NDRC fine; FY2016 included a $380 million gain on sale of wireless spectrum and $202 million of restructuring and related charges.
- Research and development expense decreased to $5.151 billion from $5.490 billion, in part due to the Strategic Realignment Plan. The plan’s cost reductions were completed by fiscal year-end; approximately 2,500 employees left during FY2016, primarily due to the plan.
- Cash from operations rose to $7.400 billion, partly reflecting working-capital changes, including the prior-year $950 million supplier-capacity prepayment.
Outlook, risks and unusual items
- Management expected continued demand for 3G/4G devices, particularly lower-tier smartphones in emerging markets, and continued investment in LTE, 5G, RF front-end, IoT, automotive and other adjacent markets. The filing provides no specific quantified FY2017 earnings or revenue guidance.
- Qualcomm agreed after year-end to acquire NXP for approximately $38 billion in cash, with closing expected by the end of calendar 2017, subject to regulatory, shareholder-tender and other conditions. The company intended to use foreign-held cash and new debt and had secured $13.6 billion of committed financing. The deal could materially increase debt and use a substantial portion of cash; Qualcomm could owe a $2.0 billion termination fee in specified circumstances.
- A planned TDK RF front-end joint venture, expected to close in early calendar 2017, involved $1.2 billion for Qualcomm’s initial interest and assets, with an option to acquire TDK’s interest for $1.15 billion after 30 months.
- Key risks include ongoing competition and loss of chipset share, customer and licensee concentration, reliance on third-party Asian manufacturing suppliers, royalty-reporting disputes, and regulatory investigations in multiple jurisdictions. Several investigations and legal proceedings could result in fines, injunctions or changes to business practices; the company recorded no accrual for contingent losses in the cited proceedings, stating loss was not considered probable and a range could not be reasonably estimated.
- Qualcomm noted the expected rise in its Singapore tax rate in FY2017 as tax incentives expire. It had not recorded an estimated $11.5 billion tax liability related to $32.5 billion of foreign earnings considered indefinitely reinvested. It also anticipated potentially recognizing losses if it sold a substantial portion of its securities portfolio to help fund the NXP acquisition.
- Other notable exposures include market-value sensitivity of investments, interest-rate risk, and possible effects of product defects or security issues. The company cited Samsung’s discontinuation of the Galaxy Note 7 as a potential demand risk. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting as of September 25, 2016.
Most important facts for investors to verify
- Progress, regulatory approvals, financing, integration plans and final funding mix for the proposed NXP acquisition.
- QCT’s chipset share, premium-tier product mix, shipment trends, margins and competitive position, especially in China.
- QTL royalty collections, license renewals, underreporting disputes, and outcomes of regulatory investigations and litigation.
- Cash available after any securities sales, resulting realized gains or losses, foreign-cash tax implications, and post-acquisition debt and liquidity.
- Whether management’s growth investments in RF front-end, automotive, IoT and 5G generate returns sufficient to offset pressure in the core chipset business.