QUALCOMM Incorporated — FY2018 Form 10-K
Business context and reporting period. Qualcomm develops wireless semiconductor products and licenses intellectual property through QCT and QTL; QSI makes strategic investments. Fiscal 2018 ended September 30, 2018 and included 53 weeks, versus 52 weeks in fiscal 2017. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $22.732 billion | $22.291 billion |
| Gross margin | 55% | 56% |
| Operating income | $742 million | $2.614 billion |
| Net income attributable to Qualcomm | Loss of $4.864 billion | Income of $2.466 billion |
| Diluted earnings per share | Loss of $3.32 | Earnings of $1.65 |
| Cash from operating activities | $3.895 billion | $5.001 billion |
| Cash, cash equivalents and marketable securities | $12.123 billion | $38.578 billion |
| Total debt at year-end | $16.370 billion | $21.893 billion |
FY2018 Q4 revenue was $5.803 billion, operating loss was $654 million, net loss was $493 million, and diluted loss per share was $0.35. Year-end current assets were $17.384 billion and current liabilities were $11.236 billion.
- Revenue mix: Equipment and services revenue was $17.400 billion, up $753 million; licensing revenue was $5.332 billion, down $312 million. QCT segment revenue was $17.282 billion and QTL segment revenue was $5.163 billion.
- Segment earnings before taxes: QCT $2.966 billion, up from $2.747 billion; QTL $3.525 billion, down from $5.175 billion; QSI $24 million, down from $65 million.
- Cash use and capital returns: Financing activities used $31.487 billion, including $22.580 billion for share repurchases and $3.466 billion in dividends. Cash and marketable securities fell $26.455 billion year over year. Capital expenditures were $784 million.
- Debt and liquidity: Year-end debt comprised $1.005 billion short-term and $15.365 billion long-term. Qualcomm had $1.0 billion of commercial paper outstanding and no borrowings under its $5.0 billion revolving credit facility.
Material changes and unusual items
- Revenue rose 2% year over year, but operating income fell substantially and the company moved from net income to a net loss.
- QTL licensing revenue declined $1.282 billion, primarily amid disputes with Apple and its contract manufacturers and another licensee. Qualcomm recorded no FY2018 royalties on Apple product sales. QCT growth, including higher RFFE revenue and demand from Chinese OEMs, partly offset this weakness; lower prices and product mix were headwinds.
- Net loss included a $5.7 billion income tax charge related to U.S. tax reform, including a provisional $5.2 billion repatriation-tax charge and $438 million from deferred-tax remeasurement.
- Other expenses included a $2.0 billion NXP termination fee, a $1.2 billion European Commission fine, and $629 million of Cost Plan restructuring and related charges. A $676 million benefit followed settlement of the Taiwan Fair Trade Commission matter.
- Qualcomm terminated its proposed NXP acquisition after Chinese regulatory approval was not obtained by the contractual deadline. It paid NXP the $2.0 billion termination fee.
- The company launched a stock repurchase authorization of up to $30 billion. It repurchased $5.1 billion of shares through a tender offer and entered into $16.0 billion of accelerated repurchase agreements in September.
Outlook, commentary and risks
- Management expected initial commercial 5G network deployments and device launches to begin in calendar 2019, with continued investment in 5G and adjacent markets including automotive, IoT and networking.
- The Cost Plan targets $1 billion in annual cost reductions, expected to be fully captured in FY2019; Qualcomm expected up to $100 million of additional related charges.
- Management said QCT would remain exposed to Apple’s use of competing modems; Apple was using competitors’ modems exclusively in its 2018 iPhone release. QTL licensing revenue is not dependent on whether a device uses Qualcomm chipsets.
- Qualcomm expects future QTL revenue to be affected by more standard-essential-patent-only agreements and a reduced smartphone royalty cap, which management said would negatively affect royalties.
- Major risks include ongoing antitrust and licensing litigation and investigations, royalty underreporting or nonpayment, customer and geographic concentration, intense chip competition, supplier concentration, trade tensions, and uncertainty around tax and regulatory outcomes. The EC fine was under appeal and secured by financial guarantees.
- Management believed available liquidity, expected operating cash flow and financing activities would meet working and other capital requirements for at least 12 months. It also cautioned that buybacks reduce cash available for operations, R&D, acquisitions and other uses.
Important facts for investors to verify
- Progress and financial impact of the Apple and other licensee disputes, including collection of royalties and the status of the approximately $960 million Apple-related receivable and corresponding customer liability.
- Outcomes of the EC fine appeal and other significant antitrust, patent and licensing proceedings, and any resulting changes to licensing practices.
- Whether the $1 billion Cost Plan savings are achieved in FY2019 and how restructuring costs affect margins.
- Cash, debt and liquidity after the large repurchases, and the final settlement terms and share count for the $16.0 billion accelerated repurchase agreements.
- Actual tax payments and subsequent adjustments to the provisional tax-reform accounting, including expected tax benefits from fiscal 2019 elections.
- QCT performance as Apple shifts modem sourcing, and whether growth in Chinese OEMs, RFFE and emerging markets offsets pricing and concentration pressures.