QUALCOMM Incorporated — Q3 Fiscal 2022 Form 10-Q
Reporting period: Third quarter ended June 26, 2022; comparative quarter ended June 27, 2021. Year-to-date figures cover the nine months ended on those dates. Amounts are in U.S. dollars.
Business context and results
QUALCOMM develops and sells wireless semiconductors and licenses intellectual property. Its principal businesses are QCT (semiconductors) and QTL (licensing), with QSI making strategic investments. QCT serves handset, radio-frequency front-end (RFFE), automotive and IoT markets.
| Metric | Q3 FY2022 | Q3 FY2021 | Change |
|---|---|---|---|
| Revenue | $10.936 billion | $8.060 billion | +36% |
| Operating income | $4.472 billion | $2.195 billion | Higher, including a one-time legal benefit |
| Net income | $3.730 billion | $2.027 billion | +84% |
| Diluted EPS | $3.29 | $1.77 | +86% |
| Gross margin | 56% | 58% | Down 2 percentage points |
For the first nine months, revenue was $32.805 billion versus $24.230 billion; net income was $10.063 billion versus $6.245 billion; and diluted EPS was $8.84 versus $5.43. Year-to-date gross margin was 58%, compared with 57%.
Revenue mix and segment performance
- Q3 equipment and services revenue rose to $9.266 billion from $6.428 billion; licensing revenue was $1.670 billion versus $1.632 billion.
- QCT revenue increased 45% to $9.378 billion. Handsets contributed $6.149 billion, RFFE $1.046 billion, automotive $350 million and IoT $1.833 billion. Management cited higher handset average selling prices and shipments, plus growth in IoT, RFFE and automotive.
- QCT segment earnings before tax (EBT) were $2.996 billion, or 32% of revenue, versus $1.795 billion, or 28%.
- QTL revenue was $1.519 billion and EBT was $1.080 billion; its EBT margin remained 71%. Licensing revenue growth reflected favorable mix, including 5G, partly offset by lower estimated multimode device sales.
- QSI recorded a $101 million Q3 EBT loss, versus $156 million of EBT in the prior-year quarter, primarily reflecting losses on investments.
The consolidated Q3 gross margin decline reflected a lower proportion of higher-margin QTL licensing revenue in the revenue mix. QCT gross margin was flat year over year, according to management.
Cash flow, liquidity and debt
- Cash from operations for the first nine months was $7.650 billion, down from $9.459 billion. Inventory increased by $2.201 billion in operating cash-flow movements; supplier capacity advances and working-capital requirements also weighed on cash generation.
- Investing cash outflow was $5.514 billion, including $4.743 billion for acquisitions and other investments, primarily Veoneer, and $1.628 billion of capital expenditures. Financing cash outflow was $6.004 billion, including $2.629 billion of repurchases and $2.371 billion of dividends.
- At June 26, cash and cash equivalents were $2.676 billion and marketable securities were $4.172 billion, totaling $6.848 billion, excluding $522 million of cash classified as held for sale. The comparable total at September 26, 2021 was $12.414 billion.
- Balance-sheet current assets were $18.999 billion and current liabilities were $11.829 billion. Inventory rose to $5.418 billion from $3.228 billion at September 26, 2021.
- Reported short-term debt was $1.945 billion and long-term debt was $13.600 billion. The company reported $15.4 billion of aggregate principal in floating- and fixed-rate notes, plus $500 million of commercial paper; $1.45 billion of notes matures in January 2023. No borrowings were outstanding under its $4.5 billion revolving credit facility.
- Management stated that existing liquidity, expected operating cash flow and financing activities should meet working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future.
Material changes, unusual items and capital allocation
- A June 2022 European Union General Court ruling annulled the European Commission’s 2018 decision and €997 million fine. QUALCOMM recorded a $1.1 billion benefit in other income and a $62 million reduction in interest expense in Q3. This significantly increased reported earnings and is not a recurring operating item; an appeal remained possible at the filing date.
- QUALCOMM completed the Veoneer acquisition on April 1, 2022, funding approximately $4.7 billion of cash consideration. The Arriver and Non-Arriver businesses’ operating results were not included in the reported periods because they are reported on a one-quarter lag. Non-Arriver assets and liabilities were classified as held for sale; the purchase-price allocation remained preliminary.
- The company issued $1.5 billion of notes in May 2022 and used the proceeds, with cash on hand, to repay notes that matured that month.
- During the first nine months, QUALCOMM repurchased 18 million shares for $2.6 billion and paid $2.4 billion in dividends. It had $8.6 billion remaining under its $10 billion repurchase authorization. A $0.75-per-share dividend was announced after quarter-end.
- Unrecognized tax benefits were $2.2 billion, primarily related to a Korean withholding-tax refund claim. Beginning in fiscal 2023, required capitalization and amortization of R&D expenditures could materially increase cash tax payments if not delayed or repealed; management also noted potential adverse effects from proposed U.S. tax changes.
Outlook, commentary and principal risks
Management expected QCT revenue in fiscal Q4 to remain favorably affected compared with the prior-year quarter, despite weaker global handset and consumer-product demand and COVID-related measures in China. It expected supply and demand to remain generally balanced, continued 5G deployments and device launches, and higher R&D costs year over year. The filing gives no numerical revenue or earnings guidance.
Key risks include dependence on a small number of customers and licensees (two accounted for 22% and 17% of Q3 revenue), customer development of in-house chips, exposure to China and U.S.–China trade tensions, semiconductor cyclicality and supply constraints, and the possibility of lower consumer demand. QUALCOMM also highlighted licensing disputes and regulatory proceedings, including Korean competition matters, the pending appeal in the Icera EC case and U.S. securities and consumer class actions. The company said losses for most disclosed proceedings were reasonably possible but not probable and could not be reasonably estimated. It believes its claims and business practices are defensible.
Important facts for investors to verify
- How much of Q3 earnings growth reflects sustainable operating performance versus the $1.1 billion EC fine reversal and related interest benefit.
- Whether handset demand, customer shipments and high inventory levels support management’s Q4 outlook, particularly amid China restrictions and macroeconomic weakness.
- The final Veoneer purchase-price allocation, disposition timing and proceeds from the Non-Arriver businesses; the filing expected a sale in fiscal 2023, subject to conditions.
- Near-term debt maturities, cash generation and the capacity to fund capital returns, acquisitions and supplier commitments while liquidity has declined.
- Developments in licensing and competition cases, the potential Korean tax-refund outcome, and the cash-tax impact of R&D capitalization requirements from fiscal 2023.