QUALCOMM Incorporated — FY2017 Form 10-K
Reporting period: Fiscal year ended September 24, 2017 (52 weeks). The filing also reports unaudited fourth-quarter results. Qualcomm develops wireless semiconductor products and licenses intellectual property through QCT and QTL; QSI makes strategic investments. Amounts below are in U.S. dollars.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $22.291 billion | $23.554 billion | Down 5% |
| Equipment and services revenue | $16.647 billion | $15.467 billion | Up $1.180 billion |
| Licensing revenue | $5.644 billion | $8.087 billion | Down $2.443 billion |
| Gross margin | 56% | 59% | Down 3 percentage points |
| Operating income | $2.614 billion | $6.495 billion | Down 60% |
| Net income attributable to Qualcomm | $2.466 billion | $5.705 billion | Down 57% |
| Diluted EPS | $1.65 | $3.81 | Down 57% |
| Cash provided by operating activities | $4.693 billion | $7.400 billion | Down 37% |
| Capital expenditures | $690 million | $539 million | Up $151 million |
QCT revenue was $16.479 billion, versus $15.409 billion in FY2016; QCT earnings before tax (EBT) rose to $2.747 billion from $1.812 billion. QTL revenue declined to $6.445 billion from $7.664 billion, and QTL EBT fell to $5.175 billion from $6.528 billion. Qualcomm shipped approximately 804 million MSM integrated circuits, compared with 842 million in FY2016.
Fourth-quarter revenue was $5.905 billion, operating income $333 million, and net income attributable to Qualcomm $168 million; diluted EPS was $0.11. The quarter’s results included a $778 million charge related to the Taiwan Fair Trade Commission fine.
Liquidity, debt and capital allocation
- Cash, cash equivalents and marketable securities totaled $38.578 billion at year-end, up from $32.350 billion. Of the total, $29.4 billion was held by foreign entities; much of it was treated as indefinitely reinvested and could incur material tax effects if repatriated.
- Balance-sheet short-term debt was $2.495 billion and long-term debt was $19.398 billion. The company also reported $999 million of commercial paper outstanding and $21.0 billion principal amount of notes.
- Accounts receivable increased 64% to $3.632 billion; inventories increased 31% to $2.035 billion. Consolidated days sales outstanding rose to 56 days from 33, largely reflecting unpaid or short-paid royalties from Apple’s contract manufacturers.
- Operating cash flow fell partly because of the BlackBerry arbitration payment, the KFTC fine, working-capital changes and royalty disputes. Cash dividends paid were $3.252 billion; share repurchases were $1.342 billion, down from $3.923 billion in FY2016.
- Management said available liquidity, expected operating cash flow and financing were expected to cover working and other capital needs for at least 12 months, based on current plans.
Material changes and unusual items
- QCT’s growth reflected RF front-end products, including $676 million associated with the RF360 Holdings joint venture, and higher connectivity shipments. These gains were partly offset by lower modem and related shipments amid reduced Apple share.
- QTL was materially affected by Apple and its contract manufacturers’ royalty actions, a separate licensee dispute, and lower licensing revenue. A $940 million cash payment to BlackBerry followed an arbitration award; the filing reports a related revenue reduction of approximately $962 million in segment reconciliation.
- Other expense included a $927 million KFTC fine and a $778 million TFTC fine, as well as $37 million of restructuring-related charges. The TFTC fine was recorded in FY2017 and was due by November 7, 2017.
- Research and development expense was $5.485 billion, up from $5.151 billion, including increased investment in integrated-circuit, 5G and RFFE technologies. Selling, general and administrative expense rose to $2.658 billion, including acquisition, litigation and legal costs.
- Effective tax rate was 18%, compared with 17%. The non-deductible competition fines and changes in the geographic mix of earnings affected the rate.
Outlook, risks and contingencies
- Management expected continued demand for 3G/4G products and growth in automotive, IoT and networking applications, while continuing substantial investment in 4G, 5G, RFFE and related technologies. The filing does not provide a clear numerical earnings or revenue forecast.
- The proposed $38 billion cash acquisition of NXP remained subject to regulatory approvals and other closing conditions; Qualcomm anticipated closing by the end of calendar 2017, while acknowledging it could close in early 2018. Funding included $11 billion of notes, a committed $4 billion term loan and foreign-held cash. Failure to close could trigger a $2.0 billion termination fee payable by Qualcomm in specified circumstances.
- Qualcomm faced multiple government investigations and legal proceedings challenging its patent-licensing and chipset practices, including Apple litigation in several jurisdictions, the FTC case and the Korean and Taiwanese matters. The company disputed the allegations; adverse outcomes could require fines, licensing changes or other remedies and materially affect results.
- Royalty reporting and payment disputes, customer concentration, competition and declining premium-device share, reliance on third-party semiconductor suppliers, and execution and financing risks associated with NXP were significant exposures. The company also noted risks from foreign-currency movements, tax audits and its dependence on overseas earnings.
Important facts for investors to verify
- Progress and final cost, financing, regulatory approvals and integration risks for the NXP transaction, including the impact on liquidity and debt.
- Whether Apple’s contract manufacturers and the other disputed licensee report and pay royalties, and how these disputes affect QTL revenue and receivables.
- Outcomes and remedies in the KFTC, TFTC, FTC and other licensing-related proceedings, including any required changes to Qualcomm’s licensing model.
- Whether QCT can offset reduced Apple modem share through other customers and adjacent markets, while sustaining margins and managing inventory.
- The availability and tax cost of foreign-held cash, future cash generation, debt-service capacity and the sustainability of dividends and repurchases.