QUALCOMM Incorporated — Q2 FY2021 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 28, 2021. Comparisons are with the periods ended March 29, 2020 unless noted. Amounts are in U.S. dollars.
Business context and results
Qualcomm generates revenue principally from QCT semiconductor products and QTL intellectual-property licensing. QSI makes strategic investments. Second-quarter revenue rose 52% to $7.935 billion; management attributed growth chiefly to 5G-related demand and recovery in device sales from COVID-19 effects.
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $7.935 billion | $5.216 billion | $16.170 billion | $10.292 billion |
| Operating income | $2.166 billion | $991 million | $4.692 billion | $2.021 billion |
| Net income | $1.762 billion | $468 million | $4.217 billion | $1.393 billion |
| Diluted EPS | $1.53 | $0.41 | $3.66 | $1.21 |
| Gross margin | 57% | 56% | 57% | 57% |
| Operating cash flow | Not presented separately for quarter | $6.086 billion | $2.201 billion |
Revenue mix and material changes
- QCT revenue was $6.281 billion for the quarter, up 53%; QCT segment EBT was $1.584 billion, versus $667 million. Handsets revenue was $4.065 billion, RFFE $903 million, IoT $1.073 billion and automotive $240 million.
- QTL licensing revenue was $1.614 billion, up from $1.072 billion; QTL EBT increased to $1.191 billion from $671 million. Total licensing revenue in the consolidated statements was $1.696 billion.
- Management cited higher 5G chipset shipments, including demand from Apple and other major OEMs, greater RFFE sales, and growth in automotive and IoT. QTL benefited mainly from higher estimated multimode-device sales as markets recovered from COVID-19 effects, as well as the Huawei license agreement and favorable OEM mix.
- Six-month growth also reflected Huawei royalty revenue recognized under the license agreement; Qualcomm recorded no Huawei consumer-device royalties in the comparable prior-year period.
- QSI EBT improved to $98 million for the quarter from a $208 million loss, mainly reflecting lower investment impairment losses and higher investment gains. Investment and other income was $104 million for Q2, compared with a $247 million expense a year earlier; six-month figures were income of $323 million versus an expense of $182 million.
Cash, debt and capital allocation
- At March 28, cash and cash equivalents were $6.000 billion and marketable securities were $5.526 billion, totaling $11.561 billion in cash, cash equivalents and marketable securities. Total current assets were $18.299 billion and current liabilities $9.070 billion.
- Carrying amounts of short- and long-term debt totaled $15.735 billion; the company separately reported $15.5 billion principal outstanding. Debt maturities run from 2022 through 2050. A $4.5 billion revolving credit facility had no borrowings; $500 million of commercial paper was outstanding.
- Six-month operating cash flow was $6.086 billion. Investing used $3.034 billion, including $952 million in capital expenditures and $1.236 billion for acquisitions and other investments. Financing used $3.788 billion, including $1.965 billion for repurchases and $1.473 billion for dividends. Cash declined $707 million from fiscal year-end to $6.000 billion.
- Qualcomm repurchased 14 million shares for $2.0 billion in the first six months; $2.6 billion remained authorized. It raised its quarterly dividend 5%, from $0.65 to $0.68 per share, effective for dividends payable after March 25, 2021.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expected QCT revenue to remain favorably affected by Apple shipments and demand for connected devices, and expected commercial 5G deployments and device launches to continue through 2021 and beyond.
- Management said semiconductor demand exceeded industry capacity. It expected supply capacity to improve by calendar year-end 2021 but did not expect to capture the full benefit of increased demand before then. Long-term supplier capacity commitments are expected to increase operating cash outflows.
- Research and development expense was expected to rise year over year, primarily for 5G, application processors and other long-term initiatives. Management expected continued intense competition, particularly in China. It did not expect a significant future COVID-19 impact at that time, while emphasizing uncertainty.
- Qualcomm completed its $1.1 billion net-of-cash acquisition of NUVIA on March 16, 2021. NUVIA’s processor technologies are expected to be integrated into certain QCT products; development was expected to complete in fiscal 2023. Purchase-price allocation remained preliminary.
- Key risks include customer and licensee concentration, potential customer vertical integration (including Apple’s modem development), China and U.S.-China trade tensions, semiconductor supply constraints, cyclicality, COVID-19 uncertainty, and challenges to Qualcomm’s licensing model.
- Legal matters remain material to monitor. The FTC case ended after the Ninth Circuit reversed the district court and the FTC’s deadline to seek Supreme Court review expired on March 26, 2021. Appeals concerning European Commission fines remained pending: approximately €242 million in the Icera matter and €997 million in the Apple exclusivity matter; related liabilities were recorded. The Korea Supreme Court had not ruled on cross-appeals concerning the KFTC decision and its approximately $927 million fine, which Qualcomm paid in 2017. A separate KFTC investigation concerning RFFE practices was ongoing. Qualcomm said it had not accrued losses for other antitrust matters because losses were not considered probable and amounts could not be reasonably estimated.
- The company estimated a 12% annual effective tax rate for FY2021; Q2’s effective rate was 17%, including $87 million of discrete net tax charges. Unrecognized tax benefits were $2.0 billion at quarter-end, primarily related to a Korean withholding-tax refund claim.
Most important facts for investors to verify
- Whether supply capacity improves as management expected, and how constraints affect shipments, revenue and margins.
- How much growth depends on a limited number of customers, Apple product cycles, Chinese OEMs and Huawei-related collections or royalties.
- Status and financial exposure of pending legal and regulatory matters, including the EC fines, KFTC proceedings and other licensing disputes.
- Whether 5G, RFFE, automotive, IoT and NUVIA investments deliver expected growth and returns alongside rising R&D expense.
- Cash generation and capital returns relative to debt, supplier capacity commitments, the $1.9 billion remaining U.S. repatriation-tax payments, and the $2.0 billion of unrecognized tax benefits.