QUALCOMM Incorporated — Form 10-Q summary
Reporting period: First quarter of fiscal 2018, the 13 weeks ended December 24, 2017. Comparisons are with the 13 weeks ended December 25, 2016 unless otherwise noted. Qualcomm’s principal businesses are QCT (semiconductors) and QTL (technology licensing).
Financial performance
- Revenue: $6.068 billion, up 1% year over year. Equipment and services revenue rose to $4.704 billion from $4.139 billion; licensing revenue fell to $1.364 billion from $1.860 billion.
- Segment results: QCT revenue was $4.651 billion and pretax earnings were $955 million, versus $4.101 billion and $724 million. QTL revenue was $1.299 billion and pretax earnings were $887 million, versus $1.811 billion and $1.532 billion.
- Margins and expenses: Gross margin declined to 56% from 59%, mainly because licensing revenue represented a smaller share of total revenue. Operating income was $29 million, versus $778 million. Costs included a $1.183 billion European Commission fine; R&D was $1.420 billion and SG&A was $773 million.
- Profit and tax: Pretax loss was $27 million and net loss was $5.953 billion, or $4.03 per diluted share, compared with net income of $681 million, or $0.46 per diluted share. Income tax expense of $5.926 billion largely reflected provisional U.S. tax-reform charges, including a $5.3 billion repatriation tax estimate and $562 million from deferred-tax remeasurement; the filing says the accounting was not finalized.
- Cash flow: Operating cash flow was $1.762 billion, compared with $1.586 billion. Investing activities used $3.261 billion and financing activities used $165 million. Cash and cash equivalents decreased $1.667 billion during the quarter to $33.362 billion.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $39.850 billion at quarter-end. Short-term debt was $3.465 billion and long-term debt $19.381 billion. The company had $2.0 billion of commercial paper outstanding and no borrowings under its $5.0 billion revolving facility or $4.0 billion NXP term-loan facility.
- Shareholder returns: Cash dividends paid were $844 million; the announced dividend was $0.57 per share. Qualcomm repurchased $225 million of stock during the quarter.
Material changes versus the prior year
- QCT growth, including higher modem shipments associated with the new iPhone launch and revenue from the RF360 joint venture, was more than offset at the licensing line by lower QTL revenue. Qualcomm recorded no first-quarter royalties on Apple or another disputed licensee’s product sales; the comparable prior-year revenue from those products was approximately $740 million.
- Net results swung to a substantial loss, primarily because of the tax-reform charge and the $1.183 billion EC fine. The prior-year quarter included an $868 million KFTC fine.
- Interest expense increased to $170 million from $90 million, primarily following the May 2017 issuance of $11.0 billion in notes.
- Cash and cash equivalents were $33.362 billion versus $35.029 billion at September 24, 2017; total cash and marketable securities were $39.850 billion versus $38.578 billion.
Outlook, commentary and risks
- Management expected continuing demand growth for 3G/4G and expansion into 5G, automotive, IoT and networking. It did not provide specific near-term revenue or earnings guidance in the supplied filing text.
- On January 16, 2018, Qualcomm announced a plan to reduce annual costs by $1 billion, excluding costs of future acquisitions, with savings expected to be fully captured in fiscal 2019. The plan and associated restructuring costs were still being finalized.
- The proposed $38 billion NXP acquisition was expected to close in early 2018, subject to regulatory approvals and other conditions. Funding included cash, $11.0 billion of notes and a planned $4.0 billion term-loan draw; the deal could use a substantial portion of liquidity. Failure to close could trigger a $2.0 billion termination fee in certain circumstances.
- Broadcom’s unsolicited $70-per-share takeover proposal had been rejected by Qualcomm’s board as undervaluing the company. Broadcom was pursuing a proxy contest, which management said could divert resources and attention.
- Legal and regulatory exposure remains material. Qualcomm intended to appeal the approximately $1.2 billion EC fine. It had also accrued a $781 million Taiwan Fair Trade Commission fine, payable in installments, and faced extensive Apple-related litigation, consumer class actions, and other competition and licensing proceedings. The company said outcomes were uncertain and unfavorable resolutions could materially affect results, cash flows or business practices.
- QTL revenue and cash collection remain exposed to royalty underreporting and nonpayment disputes, particularly involving Apple’s contract manufacturers and other licensees. QCT faces customer concentration, competition, possible use of competing or internally developed chips, and smartphone replacement-cycle risks.
- The estimated $3.3 billion net cash Toll Charge was payable over eight years beginning January 15, 2019; tax estimates could change materially during the measurement period. Management stated that available liquidity, expected operating cash flow and financing should meet capital needs for at least 12 months under current plans.
Most important facts for investors to verify
- Whether and when the NXP acquisition closed, its final funding mix, regulatory conditions and any resulting debt or liquidity changes.
- Subsequent developments in Apple and other licensee royalty disputes, including reported royalties, collections and effects on QTL revenue.
- Appeal outcomes, payment or guarantee requirements, and potential business-practice remedies related to EC, TFTC, KFTC and other proceedings.
- Final tax-reform accounting and cash tax payments, including the Toll Charge and effects of other tax provisions.
- Execution, timing, costs and realized savings from the $1 billion annual cost-reduction plan, alongside changes in QCT margins and customer demand.