QUALCOMM Incorporated — Q1 Fiscal 2022 Form 10-Q
Reporting period: Three months ended December 26, 2021 (13 weeks), compared with the three months ended December 27, 2020. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $10.705 billion | $8.235 billion | Up 30% |
| Operating income | $3.864 billion | $2.526 billion | Up 53% |
| Net income | $3.399 billion | $2.455 billion | Up 38% |
| Diluted EPS | $2.98 | $2.12 | Up 41% |
| Gross margin | 60% | 58% | Up 2 percentage points |
| Operating cash flow | $2.057 billion | $3.175 billion | Down $1.118 billion |
Equipment and services revenue was $8.682 billion, up $2.240 billion; licensing revenue was $2.023 billion, up $230 million. The company attributed improved gross margin primarily to higher QCT gross margin, partly offset by a lower proportion of higher-margin QTL licensing revenue.
Segments: QCT revenue was $8.847 billion, up 35%, and segment earnings before tax (EBT) were $3.114 billion, versus $1.919 billion. QTL licensing revenue was $1.818 billion, up 10%, and EBT was $1.406 billion, versus $1.270 billion. QSI revenue was $8 million; EBT was $122 million, down from $158 million, primarily due to lower investment gains.
Cash, debt and liquidity
Cash and cash equivalents were $6.607 billion at quarter-end, down from $7.116 billion at fiscal year-end; marketable securities were $4.703 billion. Combined cash, cash equivalents and marketable securities were $11.310 billion, down $1.104 billion from September 26, 2021. Current assets were $20.222 billion and current liabilities were $12.273 billion.
Operating cash flow was $2.057 billion. The company cited $1.4 billion of advance payments to suppliers under capacity commitments and working-capital changes, including higher inventory, as cash-flow factors. Investing activities used $112 million, including $583 million in capital expenditures; financing activities used $2.446 billion, including $1.178 billion for share repurchases and $765 million for dividends.
At quarter-end, the company reported $15.5 billion of principal floating- and fixed-rate notes outstanding, including $1.5 billion maturing in May 2022, and $500 million of commercial paper outstanding. Balance-sheet short- and long-term debt totaled $15.750 billion. No amounts were outstanding under its $4.5 billion revolving credit facility. Management stated available liquidity, expected operating cash flow and financing activities should meet working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future.
Material changes and capital allocation
- QCT growth reflected higher handset revenue, especially higher average selling prices and a favorable mix toward higher-tier 5G products, as well as growth in IoT, RFFE and automotive.
- QTL growth was primarily attributed to higher estimated revenue per unit and favorable mix, including 5G.
- Research and development expense rose to $1.930 billion from $1.653 billion, driven mainly by wireless and integrated-circuit development costs and share-based compensation.
- On October 12, 2021, Qualcomm announced a new $10 billion repurchase authorization. It repurchased 8.183 million shares for approximately $1.2 billion during the quarter; $10.1 billion remained authorized at quarter-end.
- Cash dividends paid were $765 million. A $0.68-per-share dividend was announced in January 2022, payable in March 2022.
Outlook, risks and contingencies
Management expected QCT revenue to remain favorably affected versus the prior year across handsets, RFFE, automotive and IoT, and expected continued 5G network deployments and device launches. It also expected higher R&D spending, continued intense competition—particularly in China—and persistent semiconductor capacity constraints. The filing gives no specific numerical revenue or earnings guidance for the next quarter.
Qualcomm had entered into multi-year supplier capacity commitments and made $1.4 billion in related advance payments during the quarter. Management said supply-chain constraints continued to prevent the company from fully meeting customer demand. Other principal risks include revenue concentration among a small number of customers and licensees, customer vertical integration, U.S.–China trade and national-security tensions, licensing challenges, competition, and COVID-19-related uncertainty. The company said it did not then expect a significant future impact from COVID-19, while noting uncertainty remained.
The company and SSW Partners agreed to acquire Veoneer for estimated total cash consideration of approximately $4.5 billion, with Qualcomm to acquire Veoneer’s Arriver business after closing. The transaction was expected to close in 2022 subject to conditions. Qualcomm paid a $110 million termination fee on Veoneer’s behalf and agreed to a conditional financing facility of up to $480 million.
Significant legal matters include appeals of European Commission fines: approximately $242 million related to a predatory-pricing decision and 997 million euros related to an Apple exclusivity decision. The related liabilities, including interest and currency effects, were $283 million and $1.2 billion, respectively, at quarter-end. Other antitrust and securities matters remained unresolved. Apart from the EC fines, Qualcomm had not accrued losses for the cited matters because it considered losses reasonably possible but not probable; it said potential losses could not be reasonably estimated. Management warned an unfavorable outcome could materially affect the business, results, financial condition or cash flows.
The company estimated a 14% effective tax rate for fiscal 2022; Q1’s rate was 12%, including $103 million of discrete net tax benefits. Unrecognized tax benefits were $2.1 billion, primarily associated with a Korean withholding-tax refund claim. The filing also noted proposed U.S. tax changes that could adversely affect taxes and results if enacted.
Important facts for investors to verify
- Whether semiconductor supply constraints ease enough to convert customer demand into shipments and revenue, and how capacity commitments affect cash, inventory and margins.
- Whether handset and premium-tier customer concentration, customer product launches, or customers’ in-house chip development change QCT revenue and profitability.
- Progress, funding and closing conditions for the Veoneer/Arriver transaction, including the potential financing obligations.
- Developments in licensing disputes and regulatory proceedings, including the EC appeals, Korean proceedings and other unresolved litigation; potential outcomes are not reliably quantifiable in the filing.
- Cash generation and capital allocation, including repurchases, dividends, supplier advances and the May 2022 note maturity.
- Tax developments affecting the estimated 14% fiscal-year rate, FDII benefits and the Korean tax refund claim.