01—Abstract
Summary
Summary of the 10-K filed November 6, 2019. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2019 (ended September 29, 2019) was a year of two sharply different halves.
Reported revenue rose 7% to $24.3 billion and net income swung to $4.4 billiona from a $5.0 billion loss in fiscal 2018. That headline recovery is largely driven by a one-time $4.7 billion licensing settlement with Apple and its contract manufacturers, recognized in Q3. Underneath, the core business weakened: QCT (chip) revenue fell 15% to $14.6 billion on lower modem sales to Apple and softer demand from Chinese OEMs, and QTL (licensing) royalties fell 9% to $4.6 billion.
Operating income of $7.7 billionb is inflated by the settlement, and income tax expense of $3.1 billion includes a $2.5 billion non-cash charge tied to derecognizing a deferred tax asset. The filing also highlights significant forward risks. The FTC lawsuit produced a May 2019 ruling against the company, with injunctive relief partly stayed by the Ninth Circuit pending appeal.
The EC fined the company about 242 million euros over predatory pricing claims, and roughly $1.4 billionc in EC fines is accrued and under appeal. A second interim agreement with Huawei ended without a final license deal, so no Huawei royalties were recognized in Q4. Management expects smartphone unit demand to remain weak into calendar 2020 as replacement cycles lengthen during the 5G transition, and it noted that Apple now uses a competitor's modem in its latest iPhone, with new chipset revenue from Apple not expected until the second half of fiscal 2020.
Capital allocation remains aggressive. The company returned about $4.8 billiond to shareholders in fiscal 2019 through buybacks and dividends, paid down debt, and kept $12.3 billion in cash and marketable securities.
Total stockholders' equity fell to $4.9 billion from $0.8 billion a year earlier, reflecting the large repurchase program authorized in 2018. Investors should therefore weigh the reported earnings rebound against the one-time nature of the Apple settlement, ongoing regulatory exposure to the licensing model, and the cyclical pressure on chip volumes.
02—Key points
Key Highlights
- Revenue rose 7% to $24.3B, but this includes $4.7B of one-time licensing revenue from the Apple settlement; excluding it, revenue would have declined.
- Net income of $4.4B versus a $5.0B loss in fiscal 2018, though it was reduced by a $2.5B non-cash tax charge from derecognizing a deferred tax asset on distributed IP.
- QCT revenue fell 15% to $14.6B on lower Apple modem sales and weaker China OEM demand; QTL licensing revenue fell 9% to $4.6B, partly due to lower per-unit royalty caps.
- FTC v. QUALCOMM: a May 2019 district court order found monopolization and imposed injunctive relief; the Ninth Circuit partially stayed the remedies pending appeal, with oral argument expected February 2020.
- EC fines of roughly 242M euros (2019) and 997M euros (2018) are under appeal; about $1.4B is accrued, and financial guarantees were provided in lieu of cash payment.
- Huawei: a $450M minimum royalty payment under a second interim agreement concluded in Q3, with no Q4 royalties recognized and no final license agreement reached.
- Returned about $4.8B to shareholders in fiscal 2019 ($1.8B buybacks, $3.0B dividends); $7.1B remains authorized, and the quarterly dividend was announced at $0.62 per share.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Qualcomm Inc kept $0.18.
- Revenue$24.27B100.0%
- Cost of revenue−$8.60B35.4%
- Gross profit$15.67B64.6%
- Operating costs−$8.01B33.0%
- Operating income$7.67B31.6%
- Interest, other & tax−$3.28B13.5%
- Net income$4.39B18.1%
Where FY2019 revenue went
$24.27B- Cost of revenue: $8.60B, 35% of revenue
- R&D: $5.40B, 22% of revenue
- Net income: $4.39B, 18% of revenue
- Interest, other & tax: $3.28B, 14% of revenue
- SG&A: $2.19B, 9.0% of revenue
- Other operating costs: $414.0M, 1.7% of revenue
Kept 18% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed November 6, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $24.27B$22.61B | +7.4% |
| Cost of Revenue | $8.60B$10.24B | −16.1% |
| Gross Profit | $15.67B$12.37B | +26.7% |
| R&D Expenses | $5.40B$5.63B | −4.0% |
| SG&A Expenses | $2.19B$2.99B | −26.5% |
| Operating Expenses | $16.61B$21.99B | −24.5% |
| Operating Income | $7.67B$621.00M | +1134.6% |
| Interest Expense | $627.00M$768.00M | −18.4% |
| Net Income | $4.39B-$4.96B | +188.4% |
| EPS (Basic) | $3.63$-3.39 | +207.1% |
| EPS (Diluted) | $3.59$-3.39 | +205.9% |
| Shares Outstanding (Basic) | 1.21B1.46B | −17.3% |
| Shares Outstanding (Diluted) | 1.22B1.46B | −16.6% |
05—Questions
Frequently Asked Questions
How much of fiscal 2019's revenue growth came from the one-time Apple settlement?
The $4.7 billion licensing revenue recognized in Q3 fiscal 2019 from the Apple settlement accounts for nearly all of the $1.7 billion total revenue increase. Excluding it, revenue fell by roughly $3 billion, driven mainly by the $2.7 billion decline in QCT equipment and services revenue and the $451 million decline in QTL licensing revenue.
Is the company's licensing model under legal threat, and what is the exposure?
Yes. The FTC court found that QUALCOMM's licensing practices were anticompetitive and ordered injunctive relief, which the Ninth Circuit partially stayed pending appeal. Remedies could include lower royalty rates, a reduced royalty base, and required licenses to rival chipmakers. Management says the May 2019 ruling had no material impact on fiscal 2019 licensing revenue, but it warns that an unsuccessful appeal could have a material adverse effect on the business.
What does the Apple relationship look like going forward?
The settlement resolved all outstanding litigation, and Apple signed a six-year global patent license plus a multi-year chipset supply agreement. However, Apple is solely using a competitor's modem in its 2019 iPhone, and QUALCOMM does not expect to record chipset revenue under the new agreement until the second half of fiscal 2020. Royalty revenue from Apple's contract manufacturers continues in the interim.
Why did total stockholders' equity fall so sharply, and is the balance sheet under strain?
Equity fell to $4.9B from $0.8B in 2018 after it had been $30.7B in 2017, primarily reflecting the $16B accelerated share repurchase and $5.1B tender offer completed under the $30B buyback program. Total liabilities are $28.0B against $33.0B in assets. Long-term debt is $13.4B plus $2.5B short-term debt, cash and marketable securities total $12.3B, and the company is in compliance with its revolving credit covenant.
06—Continue