01—Abstract
Summary
Summary of the 10-K filed November 5, 2014. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2014 (ended September 28, 2014) was a strong year on the top and bottom line.
Revenues rose 7% to $26.5 billiona and net income attributable to Qualcomm rose 16% to $8.0 billion, with diluted EPS of $4.65. Growth was driven by QCT (Qualcomm CDMA Technologies), whose revenues increased 12% to $18.7 billion on higher MSM chip shipments (approximately 861 million units, up 20%), largely from 4G LTE adoption in China. QTL (licensing) revenues were flat at $7.6 billion, and reported licensee device sales rose about 5% to $243.6 billion.
Operating income increased 4% to $7.55 billionb, though QCT gross margin compressed on lower average selling prices and product mix, and the company took $607 million of impairment charges on its QMT display unit as it shifts to an IP licensing model. The main investor concerns are regulatory and legal rather than financial. The China NDRC antitrust investigation is ongoing, and the company has stated that a loss there is probable but cannot yet be estimated.
Other open matters include an SEC FCPA enforcement recommendation (Wells Notice), a European Commission investigation into baseband chip pricing and rebates, an FTC investigation of FRAND licensing practices, and a Japanese cease-and-desist order. Management also flagged that some Chinese licensees are underreporting royalty-bearing device sales. Capital return remained strong: $7.1 billionc (93% of free cash flow) was returned through buybacks and dividends, and the quarterly dividend was raised to $0.42.
The pending $2.5 billiond CSR acquisition, expected to close in summer 2015, adds automotive and IoT exposure. Overall, the filing shows a profitable, cash-rich company (cash and marketable securities of $32.0 billion) whose growth depends on continued 4G/LTE migration in China and on defending its licensing model against regulators and litigants.
02—Key points
Key Highlights
- Revenue grew 7% to $26.5B; net income attributable to Qualcomm rose 16% to $8.0B (diluted EPS $4.65, up from $3.91).
- QCT revenue rose 12% to $18.7B, driven by about 861M MSM chip shipments (+20% YoY), mainly from LTE adoption in China; QCT EBT margin improved to 20%, while gross margin declined.
- QTL licensing revenue was flat at $7.6B, with EBT margin of 87%; management cited underreporting by some Chinese licensees and a licensee dispute.
- $607M impairment charges on the QMT display division (plus other charges) as the company transitions to licensing its IMOD display technology.
- Capital returns totaled $7.1B (93% of free cash flow) via $4.5B of buybacks and $2.6B of dividends; quarterly dividend raised to $0.42; $5.3B remaining on the buyback authorization.
- Significant legal and regulatory overhang: China NDRC antitrust probe (loss deemed probable, unestimable), SEC FCPA Wells Notice, EU Commission investigation, FTC investigation, ParkerVision and Nvidia patent litigation.
- Pending ~$2.5B acquisition of CSR plc (auto infotainment and IoT), expected to close by summer 2015, subject to regulatory and shareholder approval.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Qualcomm Inc kept $0.30.
- Revenue$26.49B100.0%
- Cost of revenue−$10.69B40.3%
- Gross profit$15.80B59.7%
- Operating costs−$8.25B31.2%
- Operating income$7.55B28.5%
- Interest, other & tax$417.0M1.6%
- Net income$7.97B30.1%
Where FY2014 revenue went
$26.49B- Cost of revenue: $10.69B, 40% of revenue
- Operating income: $7.55B, 29% of revenue
- R&D: $5.48B, 21% of revenue
- SG&A: $2.29B, 8.6% of revenue
- Other operating costs: $484.0M, 1.8% of revenue
Kept 29% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed November 5, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $26.49B$24.87B | +6.5% |
| Cost of Revenue | $10.69B$9.82B | +8.8% |
| Gross Profit | $15.80B$15.05B | +5.0% |
| R&D Expenses | $5.48B$4.97B | +10.3% |
| SG&A Expenses | $2.29B$2.52B | −9.1% |
| Operating Expenses | $18.94B$17.64B | +7.4% |
| Operating Income | $7.55B$7.23B | +4.4% |
| Interest Expense | $5.00M$23.00M | −78.3% |
| Net Income | $7.97B$6.85B | +16.3% |
| EPS (Basic) | $4.73$3.99 | +18.5% |
| EPS (Diluted) | $4.65$3.91 | +18.9% |
| Shares Outstanding (Basic) | 1.68B1.72B | −1.9% |
| Shares Outstanding (Diluted) | 1.71B1.75B | −2.3% |
05—Questions
Frequently Asked Questions
What drove the growth in fiscal 2014 results?
Revenue growth came mainly from QCT, where MSM chip unit shipments rose about 20% to roughly 861 million, largely from 4G LTE multimode devices in China and 3G/4G growth in emerging regions. Equipment and services revenue rose 10% to $18.6B, while licensing was flat at $7.9B. Lower average selling prices partly offset volume gains.
How serious are the China and regulatory risks?
They are material. The NDRC antitrust investigation concerns Qualcomm's licensing and chipset practices, and the company believes a loss is probable but cannot estimate the range; remedies could include fines of 1% to 10% of prior-year revenue and changes to business practices. In addition, the SEC has recommended an FCPA enforcement action tied to benefits given to individuals at Chinese state-owned companies (aggregate value under $250,000). China also accounted for 50% of fiscal 2014 revenue, and the company says some licensees are underreporting royalty-bearing sales.
Is the dividend and buyback program sustainable?
Management has committed to returning 75% of free cash flow to stockholders over the foreseeable future. In fiscal 2014 it returned 93% of free cash flow ($7.1B). Free cash flow was $7.7B (operating cash flow $8.9B less $1.2B capex). Cash and marketable securities were $32.0B, but $26.2B of that is held abroad, and management said it may borrow in fiscal 2015 to fund U.S. returns. The $0.42 quarterly dividend is a 20% increase from the prior $0.35.
What is the impact of the CSR acquisition and the QMT impairments?
The CSR deal (about £1.6B, or roughly $2.5B) is expected to be funded with existing cash and to add automotive infotainment and Internet of Everything products and customers. It remains subject to U.S. and other regulatory approvals and CSR shareholder approval. The QMT impairments ($607M) reflect a lower outlook for the MEMS display business as it shifts to licensing IMOD technology, and they weighed on nonreportable segment results, which posted losses of $1.4B before taxes.
06—Continue