01—Abstract
Summary
Summary of the 10-K filed November 4, 2015. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2015 (ended September 27, 2015) was a year of margin compression and heavy capital return.
Revenue fell 5% to $25.3 billiona and net income attributable to Qualcomm fell 34% to $5.3 billion, with diluted EPS of $3.22 versus $4.65 in fiscal 2014. The decline was concentrated in QCT (chipsets), where revenue dropped 8% to $17.2 billion and segment EBT margin fell from 20% to 14%, driven by share shifts among premium-tier customers, a share decline at a large customer, and competitive pressure in China. QTL (licensing) was the profit engine: revenue rose 5% to $7.9 billion and EBT margin held at 87%, though licensee underreporting in China remains an open issue.
The year also included several one-time and strategic items. Qualcomm paid a $975 millionb fine to China's NDRC, took $1.3 billion in other expenses (including the fine, goodwill impairments, and $190 million in restructuring charges), and announced a Strategic Realignment Plan targeting about $1.1 billion in annual cost reductions by the end of fiscal 2016, plus a roughly 15% workforce reduction. It also closed the $2.3 billion cash acquisition of CSR plc in August 2015.
Management guided that QCT results would remain pressured into fiscal 2016. For capital allocation, Qualcomm returned $14.1 billionc to stockholders in fiscal 2015, including $11.2 billion of buybacks (including $5.0 billion of accelerated share repurchases) and $2.9 billion of dividends. This was funded in part by a $10 billion bond issuance and $1.0 billion of commercial paper.
Shares outstanding fell 9% to 1.52 billion, cash and marketable securities declined to $30.9 billiond, and total debt rose to about $11.0 billion. Management reaffirmed a commitment to return at least 75% of free cash flow, and the dividend was raised to $0.48 per quarter. Operating cash flow fell 38% to $5.5 billion, and the return of capital equaled 313% of free cash flow, which makes the pace of buybacks and dividends a key area for investors to monitor.
02—Key points
Key Highlights
- Revenue declined 5% to $25.3B; net income attributable to Qualcomm fell 34% to $5.3B and diluted EPS fell to $3.22 from $4.65.
- QCT revenue fell 8% to $17.2B and its EBT margin dropped from 20% to 14%, reflecting premium-tier share shifts, a large-customer share loss, and China competition, even as MSM shipments rose 8% to 932M units.
- QTL licensing revenue rose 5% to $8.2B (segment revenue $7.9B) with an 87% EBT margin, but licensee underreporting and unlicensed sales in China continue to weigh on results.
- A $975M NDRC anti-monopoly fine and $190M in restructuring charges were recorded; the Strategic Realignment Plan targets roughly $1.1B in annual cost cuts by end of fiscal 2016 and a ~15% workforce reduction.
- Capital return reached $14.1B in fiscal 2015 ($11.2B buybacks, $2.9B dividends), exceeding free cash flow of $4.5B; shares outstanding fell 9% to 1.52B.
- Balance sheet shifted toward debt: $10B of notes issued in May 2015 plus $1B of commercial paper, while cash and marketable securities fell to $30.9B.
- Operating cash flow fell 38% to $5.5B, partly due to a $950M prepayment for long-term supplier capacity; the CSR acquisition added $2.3B in cash outlay and the company is exposed to multiple open antitrust and regulatory probes (EU, KFTC, FTC, JFTC, SEC/DOJ FCPA).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Qualcomm Inc kept $0.21.
- Revenue$25.28B100.0%
- Cost of revenue−$10.38B41.1%
- Gross profit$14.90B58.9%
- Operating costs−$9.13B36.1%
- Operating income$5.78B22.8%
- Interest, other & tax−$505.0M2.0%
- Net income$5.27B20.8%
Where FY2015 revenue went
$25.28B- Cost of revenue: $10.38B, 41% of revenue
- R&D: $5.49B, 22% of revenue
- Net income: $5.27B, 21% of revenue
- SG&A: $2.34B, 9.3% of revenue
- Other operating costs: $1.29B, 5.1% of revenue
- Interest, other & tax: $505.0M, 2.0% of revenue
Kept 21% as net incomeInterest, other & tax $505.0M · 2.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed November 4, 2015Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $25.28B$26.49B | −4.6% |
| Cost of Revenue | $10.38B$10.69B | −2.9% |
| Gross Profit | $14.90B$15.80B | −5.7% |
| R&D Expenses | $5.49B$5.48B | +0.2% |
| SG&A Expenses | $2.34B$2.29B | +2.4% |
| Operating Expenses | $19.50B$18.94B | +3.0% |
| Operating Income | $5.78B$7.55B | −23.5% |
| Interest Expense | $104.00M$5.00M | +1980.0% |
| Net Income | $5.27B$7.97B | −33.8% |
| EPS (Basic) | $3.26$4.73 | −31.1% |
| EPS (Diluted) | $3.22$4.65 | −30.8% |
| Shares Outstanding (Basic) | 1.62B1.68B | −3.9% |
| Shares Outstanding (Diluted) | 1.64B1.71B | −4.4% |
05—Questions
Frequently Asked Questions
Why did Qualcomm's profits decline so sharply in fiscal 2015?
Net income attributable to Qualcomm fell 34% to $5.3B. The main drivers were a lower QCT chipset margin from premium-tier share shifts and a share loss at a large customer, a $975M one-time fine paid to China's NDRC, and $1.3B of total other expenses including goodwill impairments and restructuring charges. Investment income also fell from $1.2B to $815M.
Is Qualcomm's licensing business (QTL) still a reliable profit driver?
QTL generated $7.9B of segment revenue at an 87% EBT margin, and it accounts for most of the company's segment profit. Growth is supported by 3G/3G-4G multimode royalties and more than 155 LTE licensees, but risks remain: certain Chinese licensees underreport or delay reporting royalties, the new China royalty rates (5% for 3G, 3.5% for 4G, applied to 65% of net selling price) are lower than prior terms, and single-mode 4G royalty rates are lower still.
How is Qualcomm funding its large share buybacks and dividends?
Capital return ($14.1B) exceeded free cash flow ($4.5B) and was funded by $10B of new notes due 2018–2045, $1B of commercial paper, and existing cash. Management has committed to returning at least 75% of free cash flow over the long term and to completing a $10B repurchase commitment from March 2015 to March 2016, with $6.9B of authorization remaining at year-end. Investors should watch whether free cash flow recovers enough to sustain payouts without further debt.
What are the biggest risks investors should watch?
Key risks include customer concentration (Samsung and Apple's suppliers each exceeded 10% of revenue, and two customers accounted for 45% of revenue), competitive pressure in QCT and China, licensee royalty disputes and litigation, multiple open investigations (European Commission on predatory pricing and exclusivity, FTC, KFTC, JFTC, and SEC/DOJ FCPA), and the success of the Strategic Realignment Plan. Management also expects QCT pressure to continue into fiscal 2016.
06—Continue