QUALCOMM Incorporated — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 29, 2015; comparisons are with the periods ended March 30, 2014, except balance-sheet comparisons, which are with September 28, 2014. The quarter and six-month periods each comprised 13 and 26 weeks, respectively. Figures are unaudited.
Business context
Qualcomm earns revenue mainly from integrated-circuit products and services through QCT and intellectual-property licensing through QTL; QSI makes strategic investments. QCT accounted for 64% of quarterly revenue and QTL 35%. The company reported approximately 233 million MSM integrated-circuit shipments, up 24% year over year, and licensees’ reported device sales of approximately $75.8 billion, up 14%.
Key financial metrics
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $6.894 billion | $6.367 billion | $13.993 billion | $12.989 billion |
| Operating income | $1.336 billion | $1.990 billion | $3.400 billion | $3.483 billion |
| Net income attributable to Qualcomm | $1.053 billion | $1.959 billion | $3.025 billion | $3.835 billion |
| Diluted EPS | $0.63 | $1.14 | $1.80 | $2.23 |
| Net cash from operating activities | Not separately stated | Not separately stated | $1.706 billion | $4.595 billion |
| Capital expenditures | Not separately stated | Not separately stated | $449 million | $797 million |
Quarterly revenue increased 8%, while operating income fell 33% and diluted EPS fell 45%. The reported second-quarter results include a $975 million NDRC fine recorded in other expense; the filing does not provide a directly comparable adjusted operating-income or EPS measure. Equipment-and-services cost was 60% of that revenue in Q2, versus 59% a year earlier. Segment EBT margins were 17% for QCT, unchanged, and 90% for QTL, versus 89%.
For the six-month period, continuing-operations income was $3.023 billion, compared with $3.403 billion. Prior-year net income also included $430 million from discontinued operations, so reported net income comparisons include that prior-year item.
Cash, debt and capital returns
- Cash and cash equivalents were $5.492 billion at March 29, down from $7.907 billion at fiscal year-end. Cash, cash equivalents and marketable securities totaled $29.6 billion, down $2.4 billion from September 28.
- Operating cash flow for the six months declined to $1.706 billion from $4.595 billion. Management attributed the decrease primarily to payment of the $975 million NDRC fine and a $950 million supplier-capacity prepayment. Cash flow less capital expenditures was approximately $1.257 billion.
- Commercial paper outstanding was $1.096 billion at a 0.14% weighted-average rate; the company also had an undrawn $4.0 billion revolving credit facility expiring in February 2020. Total liabilities were $9.339 billion. The filing reports no material off-balance-sheet arrangements.
- Approximately $26.2 billion of cash, cash equivalents and marketable securities was held by foreign entities and was generally treated as indefinitely reinvested. Management said U.S.-based liquidity was sufficient for U.S. needs and did not expect repatriation.
- Six-month share repurchases were $3.611 billion and dividends paid were $1.385 billion. Qualcomm authorized a new $15 billion repurchase program, intended to repurchase $10 billion of stock within approximately 12 months, and said it intended to return at least 75% of free cash flow through repurchases and dividends. The quarterly dividend was raised 14% to $0.48 per share.
Material changes and outlook
- QCT revenue rose 5% in Q2 and 9% for the six months, supported by shipment growth. Higher shipments were partly offset by lower average selling prices and lower-priced product mix; QCT gross margin also faced pressure from mix and higher excess-inventory charges.
- QTL revenue increased 17% in Q2 and 7% for the six months. Qualcomm said revenues were affected by licensees it believes underreported sales, unlicensed sales in China and foreign-exchange movements.
- Management expected QCT results to be adversely affected in the second half of FY2015 and into the next fiscal year by premium-tier customer share shifts, a decline in share at a large customer and competition in China. It said these factors were not believed to indicate a long-term change in QCT’s competitive position, and described a review of the cost structure to improve margins. No specific consolidated earnings guidance is provided in the supplied filing text.
- The NDRC resolution included a paid fine of 6.088 billion yuan (approximately $975 million) and changes to Chinese licensing practices. For qualifying branded devices sold for use in China from January 1, 2015, stated royalty rates are 5% for specified 3G devices and 3.5% for specified 4G devices, applied to 65% of net selling price.
- The proposed CSR acquisition, valued at approximately $2.3 billion, remained subject to conditions including Chinese regulatory clearance and was expected to close by the end of summer 2015. About $3.8 billion in securities and $24 million in cash equivalents had been set aside for the transaction.
Risks, contingencies and unusual items
- Other expenses included the $975 million NDRC fine; six-month expenses also included $104 million of goodwill impairment charges. The filing describes additional impairment charges related to goodwill and in-process research and development.
- Qualcomm reported ongoing or potential exposure involving ParkerVision and Nvidia patent litigation, and investigations by U.S. authorities concerning FCPA matters, the FTC, the European Commission and the Korean Fair Trade Commission. The NDRC matter was resolved. For the other described investigations, Qualcomm had not accrued contingent losses because it considered losses possible but not probable and could not reasonably estimate a range.
- Other risks highlighted include competition and pricing pressure, customer and licensee concentration, disputed or delayed royalty reporting and payment, regulatory challenges to licensing practices, reliance on third-party suppliers, foreign-exchange exposure, and the execution and integration risks of acquisitions.
- Management estimated an approximately 21% effective tax rate for FY2015. The Q2 rate was 32%, primarily reflecting the nondeductible NDRC fine, partly offset by a $61 million favorable tax audit settlement. A $101 million tax benefit related to the reinstated federal R&D credit was recorded in Q1.
Important facts for investors to verify
- Whether Chinese licensees adopt the revised NDRC terms, report all covered sales and pay royalties, and how those changes affect QTL revenue.
- Whether the anticipated QCT share and product-mix pressures materialize in the second half of FY2015 and FY2016, and their effect on margins.
- Progress and outcomes in the patent cases and regulatory investigations, including potential changes to licensing practices or financial exposure.
- Completion timing, regulatory clearance and funding requirements for the CSR acquisition.
- Execution of the planned $10 billion repurchase and 75% free-cash-flow return intentions, including any additional borrowing and the effects of foreign-held liquidity.