01—Abstract
Summary
Summary of the 10-K filed November 7, 2018. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2018 10-K (fiscal year ended September 30, 2018, a 53-week year) shows a sharp swing to a net loss of $4.9 billiona, versus net income of $2.5 billion in fiscal 2017, even though revenue rose 2% to $22.7 billion.
The loss is driven mainly by a one-time $5.7 billionb income tax charge from U.S. tax reform (the Toll Charge plus deferred tax remeasurement), a $2.0 billion NXP termination fee, a $1.2 billion European Commission fine, and $629 million in Cost Plan restructuring charges. Operating income fell to $742 million from $2.6 billion, and gross margin slipped to 55%. Excluding one-time items, the core businesses look steadier: QCT revenue grew 5% on higher China OEM demand and RF360 contributions, while QTL licensing revenue fell 20% to $5.2 billion because royalties from Apple's contract manufacturers stopped being recorded and another licensee is in dispute.
The balance sheet and capital allocation changed dramatically. Cash and marketable securities dropped 69% to $12.1 billionc after a $30 billion buyback authorization, including a $16.0 billion accelerated share repurchase and a $5.1 billion tender offer, along with $5.5 billion in debt repayment. Total stockholders' equity fell to $928 million from $30.7 billion, and long-term debt is $15.4 billion.
Management expects a $1 billiond annual cost reduction to be fully realized in fiscal 2019, and the company faces a $2.5 billion Toll Charge payment schedule and an upcoming change in revenue recognition (ASC 606) that will accelerate royalty recognition. The main risks for investors are the ongoing Apple dispute, which has cut off royalty revenue and modem sales, the antitrust and patent-licensing investigations in multiple jurisdictions (including the FTC case and the Chinese and European proceedings), customer concentration in Chinese OEMs and Samsung, and the company's shift toward 5G and adjacent markets such as automotive and IoT. Management says 5G commercial launches are expected in calendar 2019.
02—Key points
Key Highlights
- Revenue rose 2% to $22.7B, but GAAP net loss of $4.9B (EPS -$3.32) reflects a $5.7B one-time tax reform charge, a $2.0B NXP termination fee, and a $1.2B EC fine.
- QCT revenue grew 5% to $17.3B on higher China OEM demand and RF360 RFFE products, while lower Apple modem sales offset part of the gain.
- QTL licensing revenue fell 20% to $5.2B; no revenue was recorded for Apple contract manufacturer royalties in fiscal 2018, and a partial $600M payment came from another disputed licensee.
- Operating income fell 72% to $742M and gross margin dropped to 55% from 56%, with litigation costs rising to $554M.
- Cash and marketable securities fell 69% to $12.1B after a $30B buyback program ($22.6B repurchased in fiscal 2018, including a $16B ASR) and $5.5B of debt repayment; equity dropped to $928M.
- Cost Plan targets $1B in annual cost reductions to be fully captured in fiscal 2019, and the company expects 5G commercial launches in calendar 2019.
- Revenue recognition changes under ASC 606 starting in fiscal 2019 will accelerate QTL royalty recognition and add an estimated $800M-$1.0B to opening retained earnings, while the Toll Charge (about $2.5B net) is payable over eight years.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2018, Qualcomm Inc lost $0.22.
- Revenue$22.61B100.0%
- Cost of revenue−$10.24B45.3%
- Gross profit$12.37B54.7%
- Operating costs−$11.75B51.9%
- Operating income$621.0M2.7%
- Interest, other & tax−$5.58B24.7%
- Net income−$4.96B22.0%
Where FY2018 revenue went
$22.61B- Cost of revenue: $10.24B, 45% of revenue
- R&D: $5.63B, 25% of revenue
- Other operating costs: $3.13B, 14% of revenue
- SG&A: $2.99B, 13% of revenue
- Operating income: $621.0M, 2.7% of revenue
Kept 2.7% as operating incomeOperating income $621.0M · 2.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed November 7, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $22.61B$22.26B | +1.6% |
| Cost of Revenue | $10.24B$9.79B | +4.6% |
| Gross Profit | $12.37B$12.47B | −0.8% |
| R&D Expenses | $5.63B$5.49B | +2.6% |
| SG&A Expenses | $2.99B$2.66B | +12.3% |
| Operating Expenses | $21.99B$19.68B | +11.8% |
| Operating Income | $621.00M$2.58B | −75.9% |
| Interest Expense | $768.00M$494.00M | +55.5% |
| Net Income | -$4.96B$2.44B | −303.0% |
| EPS (Basic) | $-3.39$1.66 | −304.2% |
| EPS (Diluted) | $-3.39$1.64 | −306.7% |
| Shares Outstanding (Basic) | 1.46B1.48B | −0.9% |
| Shares Outstanding (Diluted) | 1.46B1.49B | −1.8% |
05—Questions
Frequently Asked Questions
Why did QUALCOMM swing from a $2.5 billion profit to a $4.9 billion loss?
Most of the swing comes from non-operating and one-time items. The U.S. Tax Cuts and Jobs Act added a $5.7B income tax charge ($5.2B Toll Charge on deemed repatriated earnings plus $438M in deferred tax remeasurement). The company also recorded a $2.0B NXP termination fee and a $1.2B EC fine. Operating income was $742M versus $2.6B in fiscal 2017.
What is the status of the Apple dispute and how much revenue is at stake?
QUALCOMM recorded no revenue in fiscal 2018 for royalties on Apple products because Apple's contract manufacturers stopped paying. The company has sued Apple and its contract manufacturers in multiple countries, and some hearings and ITC decisions are pending. Royalties from Apple's contract manufacturers were about $1.7B in fiscal 2017, so resolution is a major swing factor for QTL. Apple also moved most of its modem sourcing to competitors, which is expected to reduce QCT modem revenue further in fiscal 2019.
How strong is the balance sheet after the share repurchases?
Liquidity is much lower than before. Cash and marketable securities fell to $12.1B from $38.6B, short-term debt is $1.0B, and long-term debt is $15.4B. Stockholders' equity fell to $928M from $30.7B because of the buybacks. The company still had $8.9B of buyback authorization remaining at fiscal year-end, and it reaffirmed a quarterly dividend of $0.62 per share, which totaled $3.5B in fiscal 2018.
What are the key regulatory and legal risks to the licensing model?
QUALCOMM faces multiple antitrust and patent-licensing proceedings. These include the FTC lawsuit (on November 6, 2018, the court granted the FTC partial summary judgment), the EC predatory pricing matter, the Korea and Taiwan investigations (Taiwan settled in August 2018), and Chinese proceedings brought by Apple. Consumer class actions in the U.S. and Canada are also pending. The company says it does not expect material losses in most of these matters, but it has not accrued for most of them, and remedies could include royalty reductions or changes to licensing practices.
What should investors expect from fiscal 2019?
Management expects Cost Plan savings of $1B to be fully realized in fiscal 2019, along with $525M–$575M in tax benefits from check-the-box elections. The company also expects the ASC 606 change to accelerate QTL royalty revenue recognition, and it expects 5G device launches in calendar 2019. Headwinds include lower Apple modem revenue, a roughly $500M reallocation of R&D costs from QCT to QTL, and continued dispute-related pressure on licensing revenue.
06—Continue