10-QPeriod: Q1 FY2019

QUALCOMM INC/DE Quarterly Report for Q1 Ended Dec 30, 2018

Filed January 30, 2019For Securities:QCOM

Summary

Qualcomm Inc. (QCOM) reported its financial results for the first quarter of fiscal year 2019, ending December 30, 2018. Total revenues for the quarter were $4.84 billion, a decrease of 20% compared to the same period last year, primarily driven by lower equipment and services revenues from the QCT segment, significantly impacted by a reduced share of modem sales to Apple. Licensing revenues also declined year-over-year due to the ongoing dispute with Apple and its contract manufacturers, though an interim agreement with Huawei provided some royalty revenue. Despite the revenue decline, Qualcomm reported a net income of $1.07 billion for the quarter, a substantial improvement from a net loss in the prior year, largely due to a significant income tax benefit related to new tax legislation and restructuring actions. The company continues to invest in 5G technology and expand into adjacent markets like automotive and IoT, while actively managing its cost structure through a $1 billion cost reduction plan. Investors should closely monitor the resolution of ongoing legal disputes, particularly with Apple, and the impact of 5G technology adoption on future revenue growth.

Financial Highlights

49 data points
Beta

Revenue

$4.84B

54.8% Gross Margin

Net Income

$1.07B

22.1% Net Margin

EPS (Diluted)

$0.87

Total Assets

$34.25B

Cash & Equivalents

$10.07B

Free Cash Flow

$356.00M

Financial Statements
Beta
Revenue$4.84B
Cost of Revenue$2.19B
Gross Profit$2.65B
R&D Expenses$1.27B
SG&A Expenses$526.00M
Operating Expenses$4.13B
Operating Income$710.00M
Interest Expense$156.00M
Net Income$1.07B
EPS (Basic)$0.88
EPS (Diluted)$0.87
Shares Outstanding (Basic)1.21B
Shares Outstanding (Diluted)1.22B

Key Highlights

  • 1Total revenues decreased by 20% year-over-year to $4.84 billion, primarily due to lower QCT equipment and services revenues and QTL licensing revenues.
  • 2Net income improved significantly to $1.07 billion from a net loss of $5.98 billion in the prior year, largely driven by a $570 million tax benefit related to U.S. tax restructuring and a $180 million restructuring charge related to the Cost Plan.
  • 3The ongoing dispute with Apple and its contract manufacturers continued to negatively impact QTL licensing revenues, with no royalties recognized for Apple products.
  • 4Qualcomm adopted new revenue recognition guidance (ASC 606), accelerating the recognition of QTL royalties by one quarter, which is expected to improve revenue predictability but requires ongoing estimation.
  • 5The company is actively executing a $1 billion cost reduction plan, with a $180 million restructuring charge recorded in the quarter.
  • 6Investments in 5G technology development continue, with initial commercial deployments expected in 2019.
  • 7QCT segment revenues were down primarily due to a reduced share of modem sales to Apple, while QTL segment revenues were impacted by the Apple dispute and an interim agreement with Huawei providing $150 million in minimum royalties.

Frequently Asked Questions

The primary reason for the 20% year-over-year decline in total revenues to $4.84 billion is the significant decrease in equipment and services revenues from the QCT segment, largely due to a reduced share of modem sales to Apple. Additionally, licensing revenues from the QTL segment were negatively impacted by the ongoing dispute with Apple and its contract manufacturers.

The substantial increase in net income from a net loss in the prior year is largely attributable to a significant income tax benefit of $570 million recognized in the quarter, resulting from tax elections made by foreign subsidiaries as part of the U.S. Tax Cuts and Jobs Act implementation. Additionally, cost reduction initiatives and restructuring charges, while impacting expenses, were managed within the overall improved financial performance.

The dispute with Apple and its contract manufacturers significantly impacts Qualcomm's QTL segment. No royalties were recognized on sales of Apple products in the first quarter of fiscal 2019 or fiscal 2018, negatively affecting licensing revenues. Qualcomm has taken legal action to compel royalty payments. While this dispute has a material adverse effect on revenues, the company continues to invest in technology and pursue resolutions.

Qualcomm adopted new revenue recognition guidance (ASC 606) in the first quarter of fiscal 2019. This guidance requires the company to estimate and recognize sales-based royalty revenues in the period of associated sales, accelerating recognition by approximately one quarter compared to the previous method. While this leads to an upfront recognition of revenue, adjustments will be made in subsequent periods as actual royalty amounts are reported by licensees. This change is expected to improve revenue predictability.

Qualcomm views 5G as a transformative technology that will drive growth in smartphones and expand into new industries like automotive and IoT. The company is heavily investing in 5G technology development, standardization, and integrated circuit products. Initial commercial 5G deployments are expected in calendar 2019, and Qualcomm aims to be a leader in this transition to sustain and grow its business.