QUALCOMM Incorporated — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended June 24, 2018; comparable periods ended June 25, 2017. Amounts are U.S. dollars unless noted. Financial statements are unaudited.
Business context
Qualcomm develops and licenses wireless technologies and sells integrated circuits. Its principal segments are QCT (semiconductors), QTL (technology licensing) and QSI (strategic investments). Management reported continued 3G/4G adoption and investment in 4G, 5G, RF front-end, automotive and IoT opportunities.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $5.599bn | $5.371bn | $16.928bn | $16.387bn |
| Operating income | $925m | $773m | $1.395bn | $2.281bn |
| Net income (loss) attributable to Qualcomm | $1.219bn | $866m | $(4.371)bn | $2.297bn |
| Diluted EPS | $0.82 | $0.58 | $(2.96) | $1.54 |
| Gross margin | 56% | 54% | 56% | 56% |
- Q3 revenue rose 4%; equipment and services were nearly flat at $4.110bn, while licensing revenue increased to $1.489bn from $1.250bn. Q3 net income included a $263m income-tax benefit.
- Nine-month revenue increased 3%, but operating income fell. The nine-month net loss primarily reflects $5.659bn of income-tax expense, including provisional Tax Cuts and Jobs Act charges; the filing reports a $5.73bn discrete charge related to tax reform in the first nine months.
- QCT revenue was $4.087bn in Q3 and $12.635bn year to date. QTL revenue was $1.465bn and $4.025bn, respectively. Q3 QTL revenue included a $500m partial payment from another licensee in dispute.
- Nine-month net cash from operating activities was $4.331bn, versus $2.577bn; investing activities provided $2.615bn, versus using $342m; financing activities used $6.337bn, versus providing $6.700bn. Capital expenditures were $625m.
Financial position and material changes
- At June 24, cash and cash equivalents were $35.619bn and marketable securities were $326m, for combined cash and securities of $35.945bn. The filing states $5.7bn was held by U.S. entities and $30.2bn by foreign entities.
- Total current assets were $44.318bn and current liabilities $16.212bn. Short-term debt was $7.103bn and long-term debt $15.378bn. Debt totals increased on a current basis in part because notes redeemed in July were classified as short-term at quarter-end.
- Cash and securities decreased $2.633bn from September 24, 2017. The decline reflected, among other items, $2.8bn deposited for July debt redemption, $2.6bn of dividends, $1.6bn of long-term debt repayment and $1.4bn of share repurchases, partly offset by operating cash flow and commercial-paper issuance.
- Q3 QCT results benefited from higher demand from OEMs in China, partly offset by lower modem sales to Apple. QTL results remained affected by the Apple and contract-manufacturer dispute; Qualcomm recorded no royalties on Apple product sales in the first nine months.
- Interest expense rose to $212m in Q3 and $561m year to date, primarily reflecting debt issued in May 2017. The company repurchased $1.4bn of shares and paid $2.6bn of dividends in the first nine months.
Outlook, risks and unusual items
- NXP transaction: The proposed $44bn acquisition remained subject to Chinese regulatory approval. Absent approval or other material developments, Qualcomm expected to terminate after July 25, 2018 and pay NXP a $2.0bn termination fee. If terminated, Qualcomm intended to replace its $10bn buyback authorization with a program of up to $30bn.
- Cost plan: Management targeted $1bn in annual cost reductions, excluding costs of any future acquisition, with savings expected to be fully captured in FY2019. Qualcomm recorded $422m of restructuring and related charges year to date and expected another $50m–$150m.
- Regulatory matters: A $1.18bn European Commission fine was charged in Q1 and approximately $1.17bn remained accrued at quarter-end while under appeal; the fine accrues interest at 1.50%. Approximately $708m remained payable on the Taiwan Fair Trade Commission fine. Qualcomm warned that adverse outcomes in antitrust, licensing and patent litigation could materially affect results, cash flows and business practices.
- Licensing and competition: Management cited unpaid or underreported royalties, disputes with Apple and other licensees, possible pressure on royalty terms, and expected further legal costs. It also warned that Apple was expected to use competitors’ modems in its next iPhone release, potentially reducing QCT modem revenue.
- Tax and accounting: The estimated FY2018 effective tax rate was approximately 264%, largely due to tax-reform charges and other discrete items. Tax reform accounting remained provisional. Qualcomm expected FY2019 adoption of new revenue-recognition rules to accelerate recognition of sales-based royalties, with later adjustments as actual licensee sales are reported.
- Management said cash, securities, expected operating cash flow and financing were expected to meet capital requirements for at least 12 months under current plans. It also noted that a large buyback could reduce liquidity and flexibility.
Important facts for investors to verify
- Whether the NXP deal was approved, terminated, or otherwise changed after the July 25, 2018 end date, and the resulting termination fee or capital-return plan.
- Developments in Apple-related royalty collections and other licensee disputes, including whether the $500m interim payment leads to a final agreement.
- Outcomes and potential financial or business-practice consequences of the EC, TFTC and other regulatory proceedings and litigation.
- Final tax-reform accounting, the estimated $2.7bn net Toll Charge cash payments, and the expected unusually high FY2018 effective tax rate.
- Progress toward the $1bn cost-reduction target and any effect of restructuring or repurchases on cash, debt and investment capacity.