10-QPeriod: Q2 FY2020

QUALCOMM INC/DE Quarterly Report for Q2 Ended Mar 29, 2020

Filed April 29, 2020For Securities:QCOM

Summary

Qualcomm Inc. (QCOM) reported revenues of $5.22 billion for the second quarter of fiscal year 2020, a 5% increase year-over-year. However, net income decreased by 29% to $468 million compared to the same period last year. The company highlighted that the COVID-19 pandemic began to impact consumer demand, though its own supply chain operations remained largely unaffected. Significant events during the quarter included the adoption of new lease accounting standards (ASC 842) and the continuation of substantial investment in R&D, particularly related to 5G technologies. The company also made progress on resolving past licensing disputes, notably with significant Chinese licensees Oppo and Vivo, and received royalties from Apple for sales made during the quarter, a positive development following their prior dispute. While the company's core QCT (semiconductor) segment saw revenue growth driven by 5G product mix, the QTL (licensing) segment experienced a revenue decline primarily due to the expiration of an interim agreement with Huawei and changes in royalty calculations for new 5G multimode licenses. The QSI (strategic investments) segment was heavily impacted by impairment losses, notably a full write-off of its investment in OneWeb, due to the pandemic's effect on certain investee companies. Qualcomm also announced a 5% increase in its quarterly dividend and, despite suspending share repurchases in light of COVID-19, reiterated its commitment to returning capital to shareholders.

Financial Highlights

46 data points
Beta

Revenue

$5.22B

56.0% Gross Margin

Net Income

$468.00M

9.0% Net Margin

EPS (Diluted)

$0.41

Total Assets

$31.94B

Cash & Equivalents

$8.40B

Free Cash Flow

$1.08B

Financial Statements
Beta
Revenue$5.22B
Cost of Revenue$2.30B
Gross Profit$2.92B
R&D Expenses$1.47B
SG&A Expenses$483.00M
Operating Expenses$4.22B
Operating Income$991.00M
Interest Expense$146.00M
Net Income$468.00M
EPS (Basic)$0.41
EPS (Diluted)$0.41
Shares Outstanding (Basic)1.14B
Shares Outstanding (Diluted)1.15B

Key Highlights

  • 1Total revenues increased 5% year-over-year to $5.22 billion, driven by the QCT segment's 10% growth, largely due to 5G product adoption.
  • 2Net income decreased 29% year-over-year to $468 million, impacted by significant impairment losses in the QSI segment related to investments affected by COVID-19.
  • 3Research and Development expenses increased by $160 million for the six-month period, reflecting continued investment in 5G and other wireless technologies.
  • 4The company entered into new long-term licensing agreements with key Chinese licensees Oppo and Vivo, effective April 1, 2020, and secured payment for outstanding amounts.
  • 5QTL licensing revenues decreased $50 million year-over-year in the quarter, primarily due to the expiration of an interim agreement with Huawei and changes in royalty calculations for 5G multimode licenses.
  • 6QSI segment reported a significant decrease in EBT, largely due to $265 million in non-marketable investment impairments, including a full write-off of its investment in OneWeb.
  • 7Qualcomm suspended its stock repurchase program in light of COVID-19 but announced a 5% increase in its quarterly dividend, signaling continued capital return to shareholders.

Frequently Asked Questions

Qualcomm stated that the rapid global spread of COVID-19 negatively impacted consumer demand for devices incorporating its products and intellectual property, affecting QCT equipment and QTL licensing revenues. However, the company noted that its own ability to fulfill customer orders and its supply chain operations were minimally impacted. The pandemic also led to significant impairment losses on certain non-marketable investments within the QSI segment.

Qualcomm entered into new long-term, worldwide patent license agreements with Oppo and Vivo, effective April 1, 2020. These agreements also included provisions for the payment of amounts due under previously expired license agreements. While these agreements are effective for future periods, the resolution of past disputes and the securing of payments for prior periods are positive developments. The QCT segment's accounts receivable increased, partly due to the timing of integrated circuit shipments and a decrease in customer incentive arrangements, which may be related to the resolution of these agreements.

Qualcomm continues to defend itself in several significant legal and regulatory proceedings, including antitrust investigations by the FTC and European Commission, and various class-action lawsuits. The company believes its business practices do not violate competition laws and is appealing adverse rulings where applicable. The company has not recorded accruals for contingent losses in most of these matters, citing that losses are not probable or cannot be reasonably estimated, but acknowledges that unfavorable resolutions could materially affect its business.

Qualcomm anticipates that demand for 3G/4G products will decline as 5G adoption ramps up globally. The company sees significant growth opportunities in emerging device categories and industries beyond traditional cellular, such as automotive, IoT, and networking. Qualcomm expects commercial 5G network deployments and device launches to continue and believes it is crucial to maintain its leadership in 5G technology development and integrated circuit supply to sustain long-term business growth.