QUALCOMM Incorporated — Q3 Fiscal 2019 Form 10-Q
Reporting period: Three and nine months ended June 30, 2019; comparable periods ended June 24, 2018. Figures are unaudited and in U.S. dollars.
Business context and results
Qualcomm develops and sells wireless semiconductors and licenses its intellectual property. Its principal segments are QCT (semiconductors) and QTL (technology licensing), with QSI focused on strategic investments. Third-quarter results were significantly affected by a settlement with Apple and its contract manufacturers.
| Metric | Q3 FY2019 | Q3 FY2018 |
|---|---|---|
| Revenue | $9.635 billion | $5.577 billion |
| Operating income | $5.317 billion | $903 million |
| Net income | $2.149 billion | $1.202 billion |
| Diluted EPS | $1.75 | $0.81 |
| Gross margin | 78% | 55% |
Revenue rose 73% year over year, largely because Qualcomm recorded approximately $4.7 billion of licensing revenue from the Apple settlement; this amount was not allocated to segment results. Excluding that settlement, equipment and services revenue declined $579 million and QTL segment licensing revenue declined $151 million year over year. QCT revenue was $3.567 billion, down 13%; QTL revenue was $1.292 billion, down 10%. QCT’s EBT margin was 14%, versus 15%; QTL’s was 70%, versus 71%.
For the first nine months, revenue was $19.459 billion versus $16.833 billion, and net income was $3.880 billion versus a $4.451 billion loss. The prior-year loss included substantial tax and regulatory charges. Comparisons are also affected by the fiscal 2019 adoption of ASC 606, which accelerates estimated royalty recognition by one quarter; prior periods were not restated.
Cash flow, balance sheet and capital returns
| Metric | June 30, 2019 | September 30, 2018 |
|---|---|---|
| Cash, cash equivalents and marketable securities | $14.394 billion | $12.123 billion |
| Total current assets | $19.204 billion | $17.384 billion |
| Total current liabilities | $10.853 billion | $11.389 billion |
| Short-term debt | $3.000 billion | $1.005 billion |
| Long-term debt | $13.426 billion | $15.365 billion |
| Total liabilities | $28.670 billion | $31.911 billion |
For the first nine months, operating cash flow was $6.059 billion, up from $4.331 billion; investing activities used $469 million, compared with $2.615 billion provided in the prior-year period; and financing activities used $3.446 billion. Operating cash flow benefited in part from the Apple settlement and timing of payments. The company said available liquidity, expected operating cash flow and financing activities should meet requirements for at least 12 months.
Qualcomm paid $2.257 billion in dividends and repurchased $1.088 billion of stock during the nine months. At quarter-end, $7.8 billion remained authorized under its $30 billion repurchase program. Reported short- and long-term debt totaled approximately $16.4 billion. The company had no borrowings under its $5 billion revolving credit facility; commercial paper outstanding was approximately $998 million.
Material developments, outlook and risks
- Apple: The April 2019 settlement ended outstanding litigation and established a six-year global patent license, effective April 1, 2019, with an option to extend for two years, plus a multiyear chipset supply agreement. Qualcomm expects chipset revenue under that supply agreement to begin in the second half of fiscal 2020 and expects related engineering costs to rise over time.
- Tax charge: A change in U.S. Treasury regulations led Qualcomm to forgo a tax-basis step-up on previously distributed intellectual property. The resulting $2.5 billion deferred-tax-asset write-off contributed to third-quarter tax expense of $3.352 billion and a 61% effective tax rate. Management estimated a 41% full-year fiscal 2019 effective tax rate, including this discrete charge and a first-quarter $570 million tax benefit.
- Regulatory matters: The May 2019 FTC ruling imposed licensing and business-practice injunctions and seven years of monitoring. Qualcomm appealed; a partial stay was pending at the filing date. In July 2019, the European Commission imposed a $275 million fine related to an Icera complaint; the charge was recorded in Q3 and Qualcomm said it would appeal. Approximately $1.4 billion was accrued for EC fines and related amounts. The company stated it had not accrued losses for other identified legal matters because it considered losses possible, but not probable, and could not reasonably estimate a range.
- Huawei and market conditions: A second interim Huawei agreement ended in Q3 after three $150 million minimum quarterly royalty payments. Negotiations continued without a final agreement; Qualcomm warned that nonpayment or underpayment could hurt future results and cash flows. QCT faced lower Apple modem sales, weaker demand from Chinese OEMs, intense competition and longer handset replacement cycles.
- Outlook: Management expects 5G deployments and device launches to expand, alongside opportunities in automotive, IoT and networking, while anticipating declining demand for older 3G/4G products over time. No specific financial guidance was provided in the filing text summarized here. The company reported that its cost plan had achieved substantially all of its targeted $1 billion annual cost reduction run rate by the end of Q2 fiscal 2019.
Key facts for investors to verify
- How much of reported earnings and margin expansion reflects the nonrecurring $4.7 billion Apple settlement, and how do results compare after excluding it?
- How ASC 606 royalty estimates and subsequent adjustments affect revenue comparability and unbilled receivables.
- Developments in the FTC appeal, EC fine appeals and other licensing disputes, including potential effects on royalty rates and licensing practices.
- Whether Qualcomm reaches a final Huawei agreement and the timing and financial contribution of Apple chipset sales expected from H2 fiscal 2020.
- Cash needs for debt, dividends, repurchases, the possible $1.15 billion RF360 minority-interest transaction and remaining tax payments.