QUALCOMM Incorporated — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 29, 2020. Figures are unaudited; amounts are in U.S. dollars. The quarter included 13 weeks.
Business context and results
Qualcomm earns revenue mainly from QCT, its semiconductor business, and QTL, its patent-licensing business; QSI makes strategic investments. COVID-19 reduced device demand and affected results, while 5G launches supported QCT product mix.
| Metric | Q2 FY2020 | Q2 FY2019 | First six months FY2020 | First six months FY2019 |
|---|---|---|---|---|
| Revenue | $5.216B | $4.982B | $10.292B | $9.824B |
| Operating income | $991M | $940M | $2.021B | $1.650B |
| Net income | $468M | $663M | $1.393B | $1.731B |
| Diluted EPS | $0.41 | $0.55 | $1.21 | $1.42 |
| Gross margin | 56% | 56% | 57% | 56% |
| Operating cash flow | Not separately provided for the quarter | $2.201B | $1.150B |
Financial position and cash flow
- Cash, cash equivalents and marketable securities totaled $9.979B at March 29, down from $12.260B at September 29, 2019. Current assets were $15.313B and current liabilities $9.774B.
- Short-term debt was $2.499B and long-term debt $13.449B. Qualcomm also reported $15.5B of principal debt, including $2.0B due in May 2020. No revolving-credit-facility borrowings were outstanding; $499M of commercial paper was outstanding.
- For the six months, operating cash flow was $2.201B, investing cash outflow $1.769B and financing cash outflow $3.868B. Cash and cash equivalents fell $3.436B to $8.403B.
- Cash uses included $2.340B for share repurchases, $1.415B in dividends and $641M in capital expenditures. Qualcomm suspended share repurchases after quarter-end, at least for the near term, citing COVID-19 and liquidity flexibility.
Material changes and operating drivers
- Quarterly revenue rose 5% year over year, but net income declined 29%. For the first six months, revenue increased 5%, while net income decreased 20%.
- QCT quarterly revenue increased 10% to $4.100B; segment EBT was $667M versus $542M. Growth reflected 5G product mix and RFFE launches, partly offset by COVID-related demand declines and lower modem sales to Apple. MSM shipments fell to 129M from 155M.
- QTL quarterly revenue declined to $1.072B from $1.122B, while six-month revenue increased to $2.477B from $2.141B. Apple royalties were included following the 2019 settlement; no Huawei consumer-device royalties were recorded in the first half. Huawei’s license had expired December 31, 2019, with no replacement agreement reached as of the filing.
- QSI reported a quarterly EBT loss of $208M, versus income of $17M a year earlier. Qualcomm recorded $265M of quarterly investment impairments, a significant portion related to its OneWeb investment after OneWeb filed for bankruptcy.
- Investment and other expense was $247M for the quarter, compared with $28M of income a year earlier, mainly reflecting investment impairments and deferred-compensation asset losses. Quarterly interest expense declined to $146M from $162M.
Outlook, risks and unusual items
- Management expected COVID-19 to increasingly pressure QCT and QTL revenue in the near term as demand for smartphones and other devices weakened. Its planning assumptions anticipated gradual recovery in China during the June quarter and recovery beginning in June elsewhere; management cautioned that duration and severity were uncertain.
- Management said it had not experienced, and did not then anticipate, a material adverse effect on its ability or suppliers’ ability to manufacture and deliver products. It nevertheless identified supply-chain, workforce, customer-payment and demand risks.
- Qualcomm expected to begin recording equipment revenue under its multi-year Apple chipset agreement in the second half of FY2020. It also signed new worldwide 3G/4G/5G patent license agreements with Oppo and vivo effective April 1, 2020; the companies agreed to pay amounts due under expired agreements according to schedules. Their royalties represented 26% of accounts receivable at quarter-end.
- Management estimated a 12% annual effective tax rate for FY2020; the quarter’s effective rate was 22%, partly due to discrete tax charges. It stated that available liquidity, operating cash flow and expected financing activities should meet requirements for at least 12 months.
- Material legal exposures remained. The Ninth Circuit had heard Qualcomm’s appeal of the FTC ruling but had not ruled; key portions of the injunction were stayed pending appeal. Appeals of European Commission fines were also pending. The two EC fines accrued with related foreign-exchange effects and interest totaled about $1.4B; financial guarantees were provided in lieu of cash payment. Qualcomm had not accrued losses for other specified legal matters because it considered them possible, but not probable, and could not reasonably estimate a loss range.
- Other notable items: a $23M favorable legal-settlement gain; $1.8B of unrecognized tax benefits, primarily related to a Korean withholding-tax refund claim; and $1.5B of remaining performance obligations, substantially related to QTL contracts.
Key facts for investors to verify
- Whether COVID-19 demand assumptions and the expected recovery pattern translated into subsequent QCT shipments, QTL royalties and cash flow.
- Collection and timing of Oppo and vivo receivables, and the status and recoverability of Huawei royalties.
- Progress and outcomes of the FTC appeal, EC fine appeals, Korean proceedings and other licensing disputes; potential financial or business-practice remedies.
- Debt refinancing or repayment for the $2.0B maturity due May 2020, subsequent borrowing, and liquidity following suspended repurchases and increased dividends.
- Whether 5G demand and product mix can offset lower shipment volumes, higher R&D spending and impairment or investment volatility.