10-QPeriod: Q2 FY2016

QUALCOMM INC/DE Quarterly Report for Q2 Ended Mar 27, 2016

Filed April 20, 2016For Securities:QCOM

Summary

Qualcomm Inc. (QCOM) reported its second quarter fiscal year 2016 results, showing a significant year-over-year revenue decline of 19% to $5.6 billion, primarily driven by a 25% drop in QCT segment revenues due to shifts in customer share, lower demand for thin modem products, and competitive pressures in China. Despite the revenue decrease, net income attributable to Qualcomm increased by 11% to $1.2 billion, or $0.78 per diluted share. This was supported by a substantial reduction in 'Other' expenses, which included a significant charge in the prior year related to a China NDRC investigation. The company also saw positive developments, including a settlement with LG Electronics that will allow for the recognition of over $200 million in previously deferred royalty revenue starting in Q3 fiscal 2016. Looking ahead, Qualcomm anticipates continued growth opportunities from the 4G LTE rollout in China and emerging regions, though it faces ongoing challenges related to licensing compliance, competition, and regulatory investigations in various jurisdictions. The company continues to invest in new technologies, including IoT, automotive, and data center applications, and is advancing its Strategic Realignment Plan aimed at improving financial performance and driving profitable growth through cost reductions. Qualcomm also announced a 10% increase in its quarterly cash dividend, underscoring its commitment to returning capital to shareholders.

Financial Highlights

51 data points
Beta

Revenue

$5.55B

61.4% Gross Margin

Net Income

$1.16B

21.0% Net Margin

EPS (Diluted)

$0.78

Total Assets

$50.06B

Cash & Equivalents

$5.78B

Free Cash Flow

$737.00M

Financial Statements
Beta
Revenue$5.55B
Cost of Revenue$2.14B
Gross Profit$3.41B
R&D Expenses$1.30B
SG&A Expenses$619.00M
Operating Expenses$4.14B
Operating Income$1.42B
Interest Expense$72.00M
Net Income$1.16B
EPS (Basic)$0.78
EPS (Diluted)$0.78
Shares Outstanding (Basic)1.49B
Shares Outstanding (Diluted)1.50B

Key Highlights

  • 1Total revenues decreased by 19% to $5.6 billion for the second quarter of fiscal 2016 compared to the prior year.
  • 2Net income attributable to Qualcomm increased by 11% to $1.2 billion, or $0.78 per diluted share, supported by lower operating expenses.
  • 3QCT (Qualcomm CDMA Technologies) segment revenues declined 25% year-over-year due to competitive pressures, customer share shifts, and lower demand for certain products.
  • 4QTL (Qualcomm Technology Licensing) revenues decreased by 12% year-over-year, impacted by underreported royalties and a revenue deferral related to the LG Electronics arbitration.
  • 5LG Electronics arbitration settled, allowing Qualcomm to recognize over $200 million in previously deferred royalty revenue starting in Q3 FY16.
  • 6Company is progressing with its Strategic Realignment Plan, including cost reduction initiatives, with substantial implementation expected by the end of fiscal 2016.
  • 7Qualcomm announced a 10% increase in its quarterly cash dividend to $0.53 per share, effective after March 23, 2016.

Frequently Asked Questions

The primary driver of the revenue decline was a significant decrease in the QCT segment's revenue, down 25% year-over-year. This was attributed to factors such as shifts in customer share within the premium tier, decreased demand for thin modem products, a loss of share with a major customer, and intensified competition, particularly in China.

Qualcomm's net income increased by 11% year-over-year despite lower revenues due to a significant reduction in 'Other' expenses. This reduction was primarily driven by the absence of a large charge related to the China NDRC investigation that occurred in the prior year's comparable period, along with ongoing cost management initiatives under the Strategic Realignment Plan.

The settlement with LG Electronics resolves an arbitration related to royalty payments. Importantly, it allows Qualcomm to stop deferring royalty revenues from LG starting in the third quarter of fiscal 2016 and to recognize over $200 million in previously deferred revenues. This is a positive development for future revenue recognition.

Key future opportunities include continued growth driven by the 4G LTE rollout in China and emerging markets, and expansion into new technology areas like IoT, automotive, and data centers. However, Qualcomm faces ongoing challenges related to licensees' compliance with reporting and royalty payment obligations, intense competition, and active regulatory investigations in various international jurisdictions. The company is also strategically repositioning its QCT business to address industry dynamics.