01—Abstract
Summary
Summary of the 10-K filed November 1, 2017. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2017 10-K (year ended September 24, 2017) shows a company under significant financial and legal pressure.
Revenue fell 5% to $22.3 billiona and net income attributable to Qualcomm dropped 57% to $2.5 billion, reflecting lower licensing revenue (down 30% to $5.6 billion) and a $940 million BlackBerry arbitration payment recorded as a revenue reduction. Operating income fell to $2.6 billion from $6.5 billion, weighed down by a $927 million Korean Fair Trade Commission fine and a $778 million Taiwan Fair Trade Commission fine. Diluted EPS was $1.65 versus $3.81 a year earlier.
QTL licensing was hurt by Apple's contract manufacturers underpaying royalties and another licensee's non-payment, while QCT revenue rose 7% to $16.5 billionb on RF360 Holdings and adjacent-market growth, partially offset by reduced Apple modem share. The balance sheet changed materially. Cash, equivalents and marketable securities rose to $38.6 billion, but this was largely funded by $11.0 billion of new notes issued in May 2017, which lifted long-term debt to $19.4 billion.
These proceeds and cash are earmarked for the pending $38 billionc NXP Semiconductors acquisition, which management now expects to close by the end of calendar 2017 or in early 2018. The deal carries a $2.0 billion reverse termination fee exposure and a $1.25 billion fee payable to Qualcomm if NXP terminates. Days sales outstanding rose to 56 from 33, driven by unpaid Apple-related royalties.
The filing also details a heavy and growing litigation and regulatory docket, including Apple's lawsuits in the U.S., China, UK, Japan and Taiwan, the FTC antitrust suit (trial set for January 2019), EU Commission investigations, and consumer and securities class actions. Management states that, other than the TFTC fine, no loss accrual is recorded because losses, while possible, are not probable. The company continued its quarterly dividend, raising it to $0.57d per share, and repurchased $1.3 billion of stock during the year.
02—Key points
Key Highlights
- Revenue declined 5% to $22.3B and net income attributable to Qualcomm fell 57% to $2.5B; diluted EPS was $1.65 vs. $3.81 in FY2016.
- Licensing (QTL) revenue fell 30% to $6.4B segment revenue, driven by Apple contract manufacturer underpayments, another licensee's non-payment, and the $940M BlackBerry arbitration reduction to revenue.
- QCT revenue rose 7% to $16.5B on RF360 Holdings RFFE revenue ($676M), connectivity growth in adjacent markets, and cost reductions, partially offset by lower Apple modem share.
- Regulatory charges totaled roughly $1.7B in operating expense: $927M KFTC fine (paid) and $778M TFTC fine (due November 7, 2017).
- Pending $38B NXP acquisition is funded by $11.0B of May 2017 notes and a $4.0B term loan; long-term debt rose to $19.4B and cash ballooned to $38.6B, with the NXP deal expected to absorb a large share of liquidity.
- Extensive litigation with Apple, its suppliers, and regulators (FTC, EC, KFTC, JFTC, China) and private class actions; management expects no accrual beyond the TFTC fine as losses are not deemed probable.
- Quarterly dividend increased to $0.57 per share ($2.20 annualized) and $1.3B was spent on share repurchases, with $1.6B remaining under the $15B authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Qualcomm Inc kept $0.11.
- Revenue$22.26B100.0%
- Cost of revenue−$9.79B44.0%
- Gross profit$12.47B56.0%
- Operating costs−$9.88B44.4%
- Operating income$2.58B11.6%
- Interest, other & tax−$136.0M0.6%
- Net income$2.44B11.0%
Where FY2017 revenue went
$22.26B- Cost of revenue: $9.79B, 44% of revenue
- R&D: $5.49B, 25% of revenue
- Net income: $2.44B, 11% of revenue
- SG&A: $2.66B, 12% of revenue
- Other operating costs: $1.74B, 7.8% of revenue
- Interest, other & tax: $136.0M, 0.6% of revenue
Kept 11% as net incomeInterest, other & tax $136.0M · 0.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed November 1, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $22.26B$23.55B | −5.5% |
| Cost of Revenue | $9.79B$9.75B | +0.4% |
| Gross Profit | $12.47B$13.80B | −9.7% |
| R&D Expenses | $5.49B$5.15B | +6.5% |
| SG&A Expenses | $2.66B$2.38B | +11.4% |
| Operating Expenses | $19.68B$17.06B | +15.3% |
| Operating Income | $2.58B$6.50B | −60.3% |
| Interest Expense | $494.00M$297.00M | +66.3% |
| Net Income | $2.44B$5.71B | −57.1% |
| EPS (Basic) | $1.66$3.84 | −56.8% |
| EPS (Diluted) | $1.64$3.81 | −57.0% |
| Shares Outstanding (Basic) | 1.48B1.48B | −0.5% |
| Shares Outstanding (Diluted) | 1.49B1.50B | −0.5% |
05—Questions
Frequently Asked Questions
Why did Qualcomm's net income fall so sharply in fiscal 2017?
Net income attributable to Qualcomm fell 57% to $2.5 billion, mainly because licensing revenue dropped $2.4 billion. Causes included Apple's contract manufacturers not paying royalties for part of the year, another licensee failing to pay, and a $940 million BlackBerry arbitration payment recorded as a revenue reduction. Operating income was also hit by $927 million and $778 million fines from Korean and Taiwanese regulators.
What is the status of the NXP acquisition and what are the financing risks?
The $38 billion NXP deal is subject to regulatory approvals and other conditions, and management expects it to close by the end of calendar 2017 or possibly in early 2018. It is funded by $11.0 billion of notes issued in May 2017 and a $4.0 billion term loan, with the remainder from foreign cash. Qualcomm would owe a $2.0 billion termination fee if the deal fails for regulatory reasons, and $4.0 billion of the May 2017 notes carry a special mandatory redemption at 101% if the deal terminates.
How large is Qualcomm's legal and regulatory exposure?
Exposure is substantial and spans multiple fronts, including Apple's lawsuits across several countries, the FTC antitrust case, EU Commission investigations, Korean and Japanese proceedings, and private consumer and securities class actions. Apart from the $778 million Taiwan fine, management has not accrued for these matters, saying losses are possible but not probable and cannot be reasonably estimated. Unfavorable outcomes could materially affect royalty practices and results.
Is Qualcomm's dividend at risk given the earnings decline and acquisition spending?
Management raised the quarterly dividend to $0.57 per share, announced in October 2017, and says it intends to continue quarterly dividends subject to capital availability. However, the filing warns that future dividends may be affected by capital needs for the NXP deal, licensee withholding of royalties, regulatory fines and legal outcomes. Dividends paid in fiscal 2017 totaled $3.3 billion, which is a significant cash commitment relative to the decline in operating cash flow to $4.7 billion.
What is driving the shift in revenue mix between QCT and QTL?
QCT (chips) grew to 74% of revenue from 65% a year earlier, driven by RF360 Holdings, connectivity products for automotive and IoT, and cost reductions. QTL (licensing) fell to 29% of revenue from 33%, reflecting Apple-related royalty underpayments and lower unearned fee recognition. The shift matters because licensing carries higher margins, with QTL segment EBT at 80% of revenue versus 17% for QCT, so the mix change pressured overall profitability.
06—Continue