10-QPeriod: Q2 FY2019

QUALCOMM INC/DE Quarterly Report for Q2 Ended Mar 31, 2019

Filed May 1, 2019For Securities:QCOM

Summary

Qualcomm Inc./DE (QCOM) reported its financial results for the quarter and six months ending March 31, 2019. The company saw a decrease in total revenues, primarily driven by lower equipment and services revenues from its QCT segment and lower licensing revenues from its QTL segment. Despite the revenue decline, Qualcomm experienced a significant increase in net income for the quarter compared to the prior year, largely due to a substantial tax benefit related to establishing new U.S. net deferred tax assets. Notably, the company announced a significant settlement with Apple and its contract manufacturers, resolving all outstanding litigation and entering into new license and supply agreements. This resolution is expected to have a positive financial impact in the upcoming quarter, including a substantial revenue recognition from the settlement payment. The company's financial performance was impacted by ongoing industry dynamics, including a decline in modem sales to Apple and the adoption of new revenue recognition accounting guidance. Qualcomm continues to invest in 5G technologies and other growth areas like automotive and IoT, while managing its cost structure through its Cost Plan.

Financial Highlights

49 data points
Beta

Revenue

$4.98B

56.3% Gross Margin

Net Income

$663.00M

13.3% Net Margin

EPS (Diluted)

$0.55

Total Assets

$34.02B

Cash & Equivalents

$10.13B

Free Cash Flow

$794.00M

Financial Statements
Beta
Revenue$4.98B
Cost of Revenue$2.18B
Gross Profit$2.80B
R&D Expenses$1.31B
SG&A Expenses$573.00M
Operating Expenses$4.04B
Operating Income$940.00M
Interest Expense$162.00M
Net Income$663.00M
EPS (Basic)$0.55
EPS (Diluted)$0.55
Shares Outstanding (Basic)1.21B
Shares Outstanding (Diluted)1.22B

Key Highlights

  • 1Total revenues decreased by 4.6% to $5.0 billion for the three months ended March 31, 2019, compared to $5.2 billion for the same period in fiscal 2018.
  • 2Net income for the three months ended March 31, 2019, increased significantly by 101% to $663 million compared to $330 million in the prior year quarter, driven largely by a substantial tax benefit.
  • 3The company entered into comprehensive settlement agreements with Apple and its contract manufacturers on April 16, 2019, resolving all outstanding litigation and establishing new global patent license and multi-year chipset supply agreements.
  • 4QCT (Qualcomm CDMA Technologies) segment revenues decreased by $175 million to $3.7 billion, impacted by lower unit shipments and average selling prices, particularly due to a decline in share at Apple.
  • 5QTL (Qualcomm Technology Licensing) segment revenues decreased by $97 million to $1.1 billion, primarily due to lower estimated revenues per unit and a decrease in estimated sales of CDMA-based products, partially offset by an interim agreement with Huawei.
  • 6The company's stock repurchase program had $7.8 billion remaining authorization at March 31, 2019, and $1.0 billion in shares were repurchased in the six months ended March 31, 2019.
  • 7Cash and cash equivalents, and marketable securities decreased by 14% to $10.4 billion from $12.1 billion as of September 30, 2018, primarily due to cash dividends paid and share repurchases.

Frequently Asked Questions

The significant increase in net income for the quarter was primarily driven by a substantial tax benefit of $570 million, recorded in the first quarter of fiscal 2019, related to establishing new U.S. net deferred tax assets as a result of certain foreign subsidiaries making tax elections to be treated as U.S. branches for federal income tax purposes. This benefit offset a portion of the income tax expense for the period.

The settlement with Apple, which includes a global patent license agreement and a multi-year chipset supply agreement, is expected to have a significant positive financial impact. Qualcomm anticipates recognizing revenues of $4.5 billion to $4.7 billion in the third quarter of fiscal 2019 from the settlement payment and the release of certain liabilities. Additionally, royalty revenues from Apple products will commence in the third quarter of fiscal 2019 for sales made on or after April 1, 2019. Litigation costs are also expected to decrease.

The adoption of ASC 606, effective in the first quarter of fiscal 2019, has accelerated the recognition of QTL (Qualcomm Technology Licensing) royalties. Instead of recognizing them when reported by licensees, Qualcomm now estimates and recognizes them in the period associated sales occur. This has resulted in an acceleration of revenue recognition by approximately one quarter. It also led to an increase in unbilled receivables, which are now included in accounts receivable, net.

The QCT segment faces challenges including lower modem sales to Apple due to a decline in share, as Apple transitioned to using competitor modems in recent iPhone models. The company expects QCT revenues from modem sales for iPhones to remain impacted until the new chipset agreement with Apple begins contributing in the second half of fiscal 2020. Additionally, intense competition, particularly in China, and pricing pressures are ongoing concerns.