Is Cost Of Sales The Key Driver Of Qualcomm’s Expenses And Profitability?

by Trefis Team
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Qualcomm’s (NASDAQ: QCOM) total expenses have remained roughly stagnant going from $19.81 billion in 2017 to $19.89 billion in 2019. As a percentage of total revenues, expenses dropped, going from 89% in 2017 to 81.9% in 2019.
Cost of sales is the biggest expense head for the company, with it being 56% of revenue in 2017, before rising to around 64.6% of revenue in 2019. Despite this, a growth in revenue and a simultaneous drop in operating expenses, has helped in bringing in almost an additional $2 in earnings per share between 2017 and 2019.
Also, despite an expected drop in revenue in 2020, cost of sales as % of revenue is expected to drop slightly, leading to a projected increase in net income margin from 18.1% in 2019 to 19.2% in 2020.
Further, by 2021, net income margin is set to cross 20%, and this projected growth has helped drive a ~80% rise in Qualcomm’s share price over the past year.
In our interactive dashboard How Does Qualcomm Spend Its Money?, we take a look at the key drivers of Qualcomm’s expenses and net margins.

Qualcomm’s Net Income Margins have remained volatile, dropping sharply from 11% in 2017 to -22% in 2018, before rising back to around 18% in 2019. Going forward, margins are expected to rise steadily, to 19.2% in 2020 and then 21% in 2021.

Additional details about how Qualcomm’s Revenues and Key Operating Metrics compare with that of Texas Instruments’ are available in our interactive dashboard.

Breakdown of Qualcomm’s Total Expenses

  • Cost of Goods Sold has dropped from $9.79 billion in 2017 to $8.6 billion in 2019, despite a growth in revenue. This has largely been due to a $4.7 billion settlement payment from Apple, which has pushed up licensing revenue. As a % of Revenue, Cost of Goods Sold has dropped from 44% to 35.4% over the same period. However, with the advent of 5G set to drive up chipset selling prices, and the new licensing deal with Apple to drive up licensing revenue, we expect this metric to only grow slightly to around 36.9% of revenue by 2021.
  • R&D Expense has remained more or less stagnant, going from $5.49 billion in 2017 to $5.4 billion in 2019. However, as a % of revenue, R&D expense dropped from 24.6% to 22.2% over the same period. Going forward, we expect this expense to rise to almost $6 billion by 2021, but a simultaneous growth in revenue means that it would still come in at around 22.3% of revenue.
  • SG & A Expense decreased from $2.66 billion in 2017 to about $2.19 billion in 2019 due to a drop in selling costs, with a simultaneous drop in chipset sales. As a % of Revenue, R&D expenses dropped from 11.9% to 9% during the same period. Despite an expected rise in chipset sales in 2020, we expect this metric to rise to only 9.6% as 5G chipsets are expected to be priced higher than the current 4G chips.
  • Other operating expenses went from $1.74 billion in 2017 to about $410 million in 2019. This metric primarily includes restructuring charges and other miscellaneous expenses. We expect this metric to come in at around 4% of total revenue in 2020 and 2021.
  • Non-Operating Expense (which is only net interest expense for Qualcomm) has increased from -$406 million in 2017 to $186 million in 2019. There was a rise in 2018 and 2019, as Qualcomm’s interest expense exceeded interest income. However, total debt has dropped from $21.89 billion in 2017 to $15.93 billion in 2019. Going forward, we expect non-operating expenses to grow to around $228 million by 2021.
  • Income Tax Expense has increased from $540 million in 2017 to $3.1 billion in 2019, with the Effective Tax rate rising from 18.2% to 41.4% during the same period. Effective tax rate is expected to be around 22.5% in the near term.

Per Trefis estimates, Qualcomm’s EPS for fiscal 2020 is likely to be $5.19. Taken together with a P/E of 16.5x, this works out to a fair value of $85.60 for Qualcomm, which is roughly 5% behind the current market price.

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