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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2007
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 0-19528
QUALCOMM Incorporated
(Exact name of registrant as specified in its charter)
| Delaware | 95-3685934 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 5775 Morehouse Drive | ||
| San Diego, California | 92121-1714 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (858) 587-1121
Securities registered pursuant to section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common stock, $0.0001 par value | NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
YES o NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant as of March 30, 2007 was $68,727,571,532.*
The
number of shares outstanding of the registrant’s common stock
was 1,636,486,963 as of November 6,
2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the registrant’s 2008 Annual Meeting of Stockholders,
to be filed subsequent to the date hereof, are incorporated by reference into Part III of this
Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission
not later than 120 days after the conclusion of the registrant’s fiscal year ended September 30,
2007.
| * | Excludes the Common Stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the Common Stock outstanding at March 30, 2007. This calculation does not reflect a determination that such persons are affiliates for any other purposes. |
QUALCOMM INCORPORATED
Form 10-K
For the Fiscal Year Ended September 30, 2007
Index
Form 10-K
For the Fiscal Year Ended September 30, 2007
Index
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TRADEMARKS AND TRADE NAMES
QUALCOMM®, QUALCOMM Wireless Business SolutionsÒ, OmniTRACS®, OmniVision™, GlobalTRACS™,
T2™, T2 Untethered TrailerTRACS™, TrailerTRACS®, TruckMAIL™, OmniExpress®, QConnectÒ,
QCT-Ò, MSM™, CSM™, Snapdragon™, Wireless Reach™, gpsOne™, SnapTrackÒ, BREWÒ, BREW
SDKÒ, BINARY RUNTIME ENVIRONMENT FOR WIRELESSÒ, MediaFLO USA™, MediaFLO™, FLO™,
FLASH-OFDM®, RadioRouter®, deliveryOne™, QPoint™, uiOne™, FlarionÒ, BerkanaÒ and QChat®
are trademarks and/or service marks of QUALCOMM Incorporated. QUALCOMM, QUALCOMM Wireless Business
Solutions, QWBS, QUALCOMM Enterprise Solutions, QES, QUALCOMM CDMA Technologies, QCT, QUALCOMM
Technology Licensing, QTL, QUALCOMM Wireless Systems, QWS, QUALCOMM Wireless & Internet, QUALCOMM
Wireless & Internet Group, QWI, QUALCOMM Internet Services, QIS, QUALCOMM Government Technologies,
QGOV, QUALCOMM MEMS Technologies, QMT, QUALCOMM Technologies & Ventures, QUALCOMM MediaFLO
Technologies, QUALCOMM Flarion Technologies, QUALCOMM Global Development, QUALCOMM Global Trading,
QGT, QUALCOMM Strategic Initiatives, QSI, MediaFLO USA, Spike, SnapTrack are trade names of
QUALCOMM Incorporated.
cdmaOne® is a trademark of the CDMA Development Group, Inc. CDMA2000® is a registered
trademark and certification mark of the Telecommunications Industry Association. Globalstar™ and
Globalstar® are a trademark and service mark, respectively, of Globalstar, Inc.
All other trademarks, service marks and/or trade names appearing in this document are the
property of their respective holders.
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In this document, the words “Qualcomm,” “we,” “our,” “ours” and “us” refer only to QUALCOMM
Incorporated and not any other person or entity.
PART I
Item 1. Business
This Annual Report (including the following section regarding Management’s Discussion and
Analysis of Financial Condition and Results of Operations) contains forward-looking statements
regarding our business, financial condition, results of operations and prospects. Words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar
expressions or variations of such words are intended to identify forward-looking statements, but
are not the exclusive means of identifying forward-looking statements in this Annual Report.
Additionally, statements concerning future matters such as the development of new products,
enhancements or technologies, sales levels, expense levels and other statements regarding matters
that are not historical are forward-looking statements.
Although forward-looking statements in this Annual Report reflect our good faith judgment,
such statements can only be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and uncertainties and actual results and
outcomes may differ materially from the results and outcomes discussed in or anticipated by the
forward-looking statements. Factors that could cause or contribute to such differences in results
and outcomes include without limitation those discussed under the heading “Risk Factors” below, as
well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue
reliance on these forward-looking statements, which speak only as of the date of this Annual
Report. We undertake no obligation to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this Annual Report. Readers are
urged to carefully review and consider the various disclosures made in this Annual Report, which
attempt to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
We incorporated in 1985 under the laws of the state of California. In 1991, we reincorporated
in the state of Delaware. We operate and report using a 52-53 week fiscal year ending the last
Sunday in September. Our 52-week fiscal years consist of four equal quarters of 13 weeks each, and
our 53-week fiscal years consist of three 13-week fiscal quarters and one 14-week fiscal quarter.
The financial results for our 53-week fiscal years and our 14-week fiscal quarters will not be
exactly comparable to our 52-week fiscal years and our 13-week fiscal quarters. The fiscal year
ended September 30, 2007 includes 53 weeks. Both of the fiscal years ended September 24, 2006 and
September 25, 2005 include 52 weeks.
Overview
In 1989, we publicly introduced the concept that a digital communication technique called CDMA
could be commercially successful in wireless communication applications. CDMA stands for Code
Division Multiple Access and is one of the main technologies currently used in digital wireless
communications networks (also known as wireless networks). CDMA and GSM (which is a form of TDMA
and stands for Global System for Mobile Communications) are the primary digital technologies used
to transmit a wireless device user’s voice or data over radio waves using the wireless network.
Because we led, and continue to lead, the development and commercialization of CDMA
technology, we own significant intellectual property, including patents, patent applications and
trade secrets, which applies to all versions of CDMA and portions of which we license to other
companies and implement in our own products. The wireless communications industry generally
recognizes that a company seeking to develop, manufacture and/or sell products that use CDMA
technology will require a patent license from us.
There are several versions of CDMA technology recognized worldwide as public cellular
standards. The first version, known as cdmaOne, is a second generation (2G) cellular technology
that was first commercially deployed in the mid-1990s. The other subsequent versions of CDMA are
popularly referred to as third generation (3G) technologies known commonly throughout the wireless
industry as:
| • | CDMA2000, including 1X, 1xEV-DO (EV-DO, or Evolution Data Optimized), EV-DO Revision A and EV-DO Revision B; |
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| • | Wideband CDMA (WCDMA), also known as Universal Mobile Telecommunications Systems (UMTS), including High Speed Download Packet Access (HSDPA), High Speed Uplink Packet Access (HSUPA) and High Speed Packet Access Plus (HSPA+); and | ||
| • | CDMA Time Division Duplex (TDD), of which there are currently two versions, Time Division Duplex CDMA (TD-CDMA) and Time Division Synchronous-CDMA (TD-SCDMA). |
CDMA2000 and WCDMA are deployed today in wireless networks throughout the world. In addition
to increasing voice capacity, these 3G CDMA technologies enable greater data capacity at higher
data rates. In the future, we expect a broader range of airlinks will be utilized depending on the
spectrum availability and applications offered by each wireless network operator (also known as
wireless operator). These include WCDMA upgrades beyond HSPA+ (called Long Term Evolution (LTE)),
CDMA2000 upgrades beyond 1xEV-DO Revisions A and B (called Ultra Mobile Broadband (UMB)), an
Orthogonal Frequency Division Multiplexing Access (OFDMA)/CDMA upgrade path for ultra mobile
broadband data rates using up to 20 MHz channels in new spectrum and other OFDMA-based
air-interfaces. EV-DO Revision A, Revision B and future enhancements will allow operators to
introduce Voice over Internet Protocol (VoIP), multi-megabit-per-second speeds, multimedia and
broadcast capabilities in the coming years.
WCDMA has been commercially deployed by more than 180 operators worldwide, as reported by the
Global mobile Suppliers Association (GSA), an international organization of WCDMA and GSM
suppliers, in its October 2007 reports. The WCDMA family includes HSDPA, part of 3rd
Generation Partnership Project (3GPP) Release 5, which was first deployed commercially in December
2005 in the United States using our chipsets; as well as, HSUPA, part of 3GPP Release 6, which was
deployed commercially in 2007. We expect enhancements in future revisions of the 3GPP
specifications will further increase performance capacity and data speeds. We expect many WCDMA
operators to eventually upgrade their networks to HSUPA. More than 140 operators have launched
commercial HSDPA networks and 19 operators have launched HSUPA, as reported by the GSA in October
2007. Another 3G technology, TD-SCDMA, is being deployed in China along with CDMA2000, and WCDMA is
being considered for deployment.
The industry is considering moving to an OFDMA-based technology for fourth generation
applications requiring high bandwidth data communications. 3GPP is specifying an OFDMA system
called LTE, and 3rd Generation Partnership Project 2 (3GPP2) has adopted the UMB
standard. Other standards, specified by the IEEE, include 802.16 (WiMax) and 802.20. We have been
actively pursuing research and development of commercial OFDMA-based wireless communication
technologies and have filed over 1,400 United States and 5,300 foreign patent applications related
to these technologies. We expect that each of these standards, when adopted, will incorporate our
patented technologies. Thus far, we have licensed seven companies under our patent portfolio for use
in single mode OFDMA products. Multimode products, that implement both OFDMA and CDMA
technologies, will in most cases be licensed under our existing license agreements for CDMA.
Our Revenues. We generate revenues by licensing portions of our intellectual property to
manufacturers of wireless products (such as wireless phones and other devices and the
infrastructure required to establish and operate a wireless network). We receive licensing fees and
royalties on products sold by our licensees that incorporate our patented technologies. We also
sell and license products and services, which include:
| • | CDMA-based integrated circuits (also known as chips) and Radio Frequency (RF) and Power Management (PM) chips and system software used in mobile devices (also known as subscriber units and handsets) and in wireless networks; | ||
| • | Equipment, software and services used by companies, including those in the transportation industry, and governments to wirelessly connect with their assets, products and workforce; | ||
| • | Software products and services related to BREW (Binary Runtime Environment for Wireless), a package of products that enable software developers to create applications, or programs, and wireless operators to deliver content to mobile devices; | ||
| • | Services to wireless operators delivering multimedia content, including live TV, in the United States; | ||
| • | Software and hardware development services; and | ||
| • | Network products based on OFDMA technology to wireless device service providers. |
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Our Engineering Resources. We have significant engineering resources, including engineers with
substantial expertise in CDMA, OFDMA and a broad range of other technologies. Using these
engineering resources, we expect to continue to develop new versions of CDMA, OFDMA and other
technologies, develop alternative technologies for certain specialized applications (including
multicast), participate in the formulation of new wireless telecommunications standards and
technologies and assist in deploying wireless voice and data communications networks around the
world.
Our Integrated Circuits Business. We develop and supply CDMA-based integrated circuits and
system software for wireless voice and data communications, multimedia functions and global
positioning system products. We also design and create multimode and multiband integrated circuits
incorporating other wireless standards for roaming in global roaming markets. Our integrated
circuit products and system software are used in wireless devices, particularly mobile phones,
laptops, data modules, handheld wireless computers, data cards and infrastructure equipment. The
integrated circuits for wireless devices include the baseband Mobile Station Modem (MSM), RF and PM
devices, as well as the system software which enables the other device components to interface with
the integrated circuit products and is the foundation software enabling device manufacturers to
develop handsets utilizing the functionality within the integrated circuits. These integrated
circuits for wireless devices and system software perform voice and data communication, multimedia
and global positioning functions, radio conversion between RF and baseband signals and power
management. Our infrastructure equipment Cell Site Modem (CSM) integrated circuits and system
software perform the core baseband CDMA modem functionality in the wireless operator’s base station
equipment providing wireless standards-compliant processing of voice and data signals to and from
wireless devices. Because of our broad and unique experience in designing and developing CDMA-based
products, we not only design the baseband integrated circuit, but the supporting system as well,
including the RF devices, PM devices and accompanying software products. This approach enables us
to optimize the performance of the wireless device with improved product features, as well as the
integration and performance of the network system. Our design of the system allows CDMA systems and
devices manufactured by our customers to come to market faster. We provide our integrated circuits
and system software, including reference designs and tools, to many of the world’s leading wireless
device and infrastructure equipment manufacturers. We also provide support to enable our customers
to reduce the time required to design their products and bring their products to market faster. We
plan to add additional features and capabilities to our integrated circuit products to help our
customers reduce the costs and size of their products, to simplify our customers’ design processes
and to enable more wireless devices and services.
Our Wireless Device Software and Related Services Business. We provide our BREW products and
services to support the development of over-the-air and pre-loaded wireless applications and
services. We provide BREW to wireless network operators, handset manufacturers and software
developers. The BREW products and services include the BREW software development kit (SDK) for
developers; the BREW applications platform (i.e. software programs) and interface tools for device
manufacturers; the uiOne customized user interface product and services; and the deliveryOne
Content Distribution System enabling the distribution of content and applications to the market by
wireless operators, while also providing the settlement of billing and payment processes. The BREW
platform is a software application that provides an open, standard platform for wireless devices,
which means that BREW can be made to interface with many software applications, including those
developed by others. We make the BREW SDK available, free of charge, to any qualified person or
company interested in developing a new software application for wireless communications. BREW
leverages the capabilities available in integrated circuits and system software, enabling our
customers to develop feature-rich applications and content while reducing memory and enhancing
system performance of the wireless device itself. In addition to CDMA2000, BREW can be used on
wireless devices that support other wireless technologies, such as GSM, General Packet Radio System
(GPRS), Enhanced Data Rates for GSM Evolution (EDGE) and WCDMA. We also provide QChat, which
enables virtually instantaneous push-to-talk functionality on CDMA-based wireless devices, and
QPoint, which enables operators to offer enhanced 911 (E-911) wireless emergency and other
location-based applications and services.
Our Asset Tracking and Messaging Business. We design, manufacture and sell equipment, sell
software and provide services to our customers to enable them to connect wirelessly with their
assets, products and workforce. We offer satellite- and terrestrial-based two-way wireless
connectivity and position location services to
transportation and logistics fleets, construction contractors, original equipment
manufacturers and other enterprise companies to enable our customers to track the location and
monitor performance of their assets, communicate with their personnel and collect data.
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Our MediaFLO Business. Our subsidiary, MediaFLO USA, Inc. (MediaFLO USA), began offering
services over our nationwide multicast network based on our MediaFLO Media Distribution System
(MDS) and Forward Link Only (FLO) technology in the second quarter of fiscal 2007. This network is
utilized as a shared resource for wireless operators and their customers in the United States. The
commercial availability of the MediaFLO USA network and service on wireless devices will continue
to be determined by our wireless operator partners. MediaFLO USA’s network uses the 700 megahertz
(MHz) spectrum for which we hold licenses nationwide. Additionally, MediaFLO USA has and will
continue to procure, aggregate and distribute content in service packages which we will make
available on a wholesale basis to our wireless operator customers (whether they operate on CDMA or
GSM/WCDMA networks) in the United States.
MediaFLO USA continues to expand the availability of its commercial service. The initial phase
of its network launch includes several major markets. Verizon Wireless began offering the MediaFLO
service in fiscal 2007, and MediaFLO USA expects AT&T Mobility to begin offering the service in
fiscal 2008. In addition, MediaFLO USA is actively engaged in discussions with other domestic
wireless operators on how they might utilize the MediaFLO USA service.
In fiscal 2007, Verizon Wireless began offering the MediaFLO USA service, and we supported
AT&T’s impending offering of MediaFLO service. We increased the global market awareness of MediaFLO
technology through successful trials with British Sky Broadcasting (BSkyB) in the U.K., China
Network Systems (CNS) in Taiwan, together with Taiwan Television Enterprise Ltd. (TTV) in Taiwan,
PCCW Limited in Hong Kong and Maxis Communications Berhad and ASTRO All Asia Networks plc, in
Malaysia. In addition, we are pursuing numerous other international opportunities to market and
deploy MediaFLO. We continue to maintain a joint venture with KDDI to explore the deployment of
MediaFLO services in Japan. FLO technology is now established as a global open standard with the
publication of five new Telecommunications Industry Association (TIA) specifications.
Further Investments in New Products, Services and Technologies. We continue to invest heavily
in research and development in a variety of ways, to grow our earnings and extend the market for
our products and services.
We continue to develop and commercialize third generation CDMA-based technologies, such as
CDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA, HSDPA (3GPP Release 5), HSUPA
(3GPP Release 6), HSPA+ (3GPP Release 7) and other future standards. These technologies support
more efficient voice communications, broadband access to the Internet, multimedia services, VoIP
and other delay sensitive applications (including video telephony, push-to-talk and multiplayer
gaming) and other revenue-generating services, in turn accelerating the growth of CDMA. At the same
time, we are working to fulfill the growing demand for affordable, voice-centric CDMA wireless
devices within the emerging entry-level market through various efforts including the introduction
of Single Chip (SC) solutions, streamlined test and certification processes and the aggregation of
device procurements. With regard to our 1xEV-DO technology, we have improved its value, performance
and economics with EV-DO Revision A, which provides a number of enhancements, including greater
spectral efficiency, faster reverse-link data rates, lower latency and optimized quality of
service. EV-DO Revision B enables CDMA operators to utilize a software upgrade to allow multiple RF
operators to transmit to a single device and hence significantly increase the user data rates (e.g.
three times in a 5 MHz bandwidth) and reduce latency for bursty applications.
We also continue to develop and commercialize multimode, multiband and multinetwork products
that embody technologies such as GSM, GPRS, EDGE, Bluetooth, Wireless Fidelity (Wi-Fi), Universal
Serial Bus (USB), FLO, Orthogonal Frequency Division Multiplexing (OFDM), Global System for Mobile
Communications-Mobile Application Port (GSM-MAP), American National Standards Institute 41
(ANSI-41) and Internet Protocol-based (IP-based) core networks. We continue to support multiple
mobile client software environments in our multimedia and convergence chipsets, such as BREW, Java,
Windows Mobile, PalmOS, Linux and the recently announced Open Handset
Alliance.
We continue to develop on our own, and with our partners, new innovations that are integrated
into our product portfolio to further expand the market and enhance the value of our products and
services. At the same time, we are active within many industry bodies, including 3rd
Generation Partnership Project (3GPP), 3rd Generation
Partnership Project 2 (3GPP2), Institute for Electrical and Electronic Engineers (IEEE) and
Open Mobile Alliance (OMA), to encourage the (1) universal implementation of these innovations to
support economies of scale and (2) interoperability of these innovations with existing and future
mobile communication services to preserve ongoing investments.
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In particular, we continue to contribute to 3GPP2 and 3GPP standards to enable the next level
of mobile broadband data services. In April 2007, 3GPP2 published the first version of UMB (Ultra
Mobile Broadband), an OFDMA-based specification. UMB is a broadband air interface using primarily
OFDMA, but also incorporating CDMA, providing data rates up to 152 Mbps on the downlink with and 75
Mbps on the uplink with two base station antennas and two handset antennas using the 20 MHz
bandwidth. With the same bandwidths and with four antennas at both the base station and device,
downlink rates greater than 288 Mpbs can be obtained. The data rates will be less with lower
bandwidths. 3GPP standards are also evolving beyond current HSDPA and HSUPA through Release 7 and
Release 8 to offer Evolved HSPA (High Speed Packet Access), also known as HSPA+, technologies to
enable much higher broadband data rates and higher capacity voice services. In parallel, 3GPP is
also introducing an OFDMA-based air-interface through its LTE standard to deliver higher mobile
broadband data rates using channel bandwidths up to 20 MHz. These standards also enable end-to-end
Internet Protocol (IP) transport using advanced IP Multimedia Subsystem (IMS) platform to deliver
voice (VoIP), multimedia and other broadband data services cost effectively.
UMB and LTE have been proposed to be part of the International Telecommunications Union
IMT-2000 specification as part of the normal update process. WiMax has been proposed to be
the sixth air interface in the IMT-2000 family. Initial systems utilizing 802.16e WiMax standard
are expected to be commercialized in the 2008 time frame. These systems are targeted at TDD
spectrum and higher frequency bands (e.g. 2.5 and 3.5 GHz). Similarly, WiBRO, a variant of WiMax,
has been deployed in South Korea at 2.3 GHz with limited commercial success. Since the WiMax family
of standards has evolved from a wire line legacy, we believe that, in the near future, the
efficiency and mobility are not expected to be as robust as those technologies that were designed
from the ground up for mobile broadband (i.e. UMB and LTE). Furthermore, the 3G economies of scale
greatly improve the availability and cost structure of 3GPP and 3GPP2 evolved technologies. The
OFDMA family of standards is expected to be complementary with 3G services, and Qualcomm expects to
provide multimode chipsets capable of operating across multiple technology deployment scenarios.
These innovations are expected to enable our customers to improve the performance or value of
their existing services, offer these services more affordably, and introduce revenue-generating
broadband data services ahead of their competition. Our patented technologies, resulting from our
strong investment in fundamental system research and development, have been and are expected to
continue to play a significant role in each of these future standards.
Wireless Local Area Networks (WLAN), such as Wi-Fi, are complementary to Wide Area Networks
(WAN), such as CDMA2000 and WCDMA. They both provide affordable high-speed wireless access to the
Internet. The limited coverage offered by Wi-Fi is well suited for private networks (e.g.
enterprises, campuses and homes) and certain public “hot spots” (e.g. airports, conference halls
and coffee shops) where data usage is high in a limited portable and stationary environment. 3G
CDMA networks, on the other hand, are ideally suited for geographically diverse voice and data
coverage (e.g. cities, highways and neighborhoods) and in environments where public access to the
Wi-Fi network is blocked due to a firewall (e.g. a client’s enterprise). We may incorporate WLAN
technology into our future multimode 3G CDMA chipsets as we continue to identify and integrate
other complementary wireless technologies into our chipsets.
We are developing our MediaFLO MDS and OFDM-based FLO technology to optimize the low cost
delivery of multimedia content to multiple wireless subscribers simultaneously, otherwise known as
multicasting. As part of the standardization of FLO technology, the FLO Forum (www.floforum.org)
was established in May 2005. To date, more than 85 companies have joined the FLO Forum. In 2005,
the TIA established a Committee to develop standards for Terrestrial Mobile Multimedia Multicast.
In August 2006, TIA published the Standard Forward Link Only Air Interface Specification based upon
the FLO Forum’s submissions, thus standardizing the lower layers of the FLO air interface. The TIA
has published a total of five standards relating to the MediaFLO MDS technology and several other
standards are currently in development.
We
are also developing our interferometric modulator (IMOD) display technology based on a
micro-electro-mechanical-systems (MEMS) structure combined with thin film optics. The IMOD display
technology may be included in the full range of consumer-targeted mobile products and is expected
to provide performance, power consumption and cost benefits as compared to current display
technologies.
Consistent with our strategic approach over the past fifteen years, we intend to continue our
active support of CDMA-based technologies, products and network operations to grow our royalty
revenues and integrated circuit
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and software revenues. From time to time, we may also make acquisitions to meet certain technology needs, to obtain development resources or to pursue new
business opportunities.
We plan to continue to make strategic investments in start-up companies that we believe open
new markets for our technology, support the design and introduction of new products and services
and/or possess unique capabilities or technology. Most of our strategic investments entail a high
degree of risk and will not become liquid until more than one year from the date of investment, if
at all. To the extent that such investments become liquid and meet our strategic objectives, we
intend to make regular periodic sales of our interests in these investments that are recognized in
investment income (expense). In some cases, we make strategic investments in early-stage companies,
which require us to consolidate or record our equity in losses of those companies. These losses
will adversely affect our financial results until we exit from or reduce our exposure to these
investments.
Corporate Responsibility. At Qualcomm, we realize we have a significant role to play as a
partner in our communities. We also believe that participating in community organizations is an
important avenue for our employees to develop as professionals and as citizens.
| • | Community Involvement. Qualcomm’s spirit of innovation is at the heart of our commitment to corporate citizenship. Our creativity, talent and technology are strong tools that energize and empower our global communities. | ||
| • | Diversity. We strongly believe in fostering a diverse environment and are committed to advancing opportunities for minorities and encouraging diversity through the workforce. | ||
| • | Environmental Health and Safety. We take a proactive approach to programs and techniques that contribute to a better environment for our local communities as well as our employees. | ||
| • | Wireless Reach. We believe access to advanced wireless voice and data services improves people’s lives. Qualcomm’s Wireless Reach initiative supports programs and solutions that bring the benefits of connectivity to developing communities globally. By working with partners, Wireless Reach projects create new ways for people to communicate, learn, access healthcare and reach global markets. |
Wireless Telecommunications Market
Use of wireless telecommunications devices has increased dramatically in the past decade.
According to forecasts made in July 2007 by Strategy Analytics, the number of worldwide mobile
subscribers is expected to reach approximately 3.6 billion by the end of 2008 and almost 4.6
billion in 2012, including approximately 3.5 billion unique users, equivalent to a penetration rate
of 67%. Growth in the market for wireless telecommunications services has traditionally been fueled
by demand for voice communications. There have been several factors responsible for the increasing
demand for wireless voice services, including:
| • | lower cost of wireless handsets, joined with an increasing selection of appealing mobile devices; | ||
| • | lower cost of service, including flat-rate and bundled long-distance calling plans; | ||
| • | prepaid services, particularly popular in developing countries; | ||
| • | increased coverage, roaming, privacy, reliability and call clarity of voice transmissions; | ||
| • | wireless networks becoming the primary communications infrastructure in developing countries due to the higher costs of and longer time required for installing wireline networks; and | ||
| • | regulatory environments worldwide favoring increased competition in wireless telecommunications. |
In addition to the tremendous demand for wireless voice services, wireless service providers
are increasingly focused on providing broadband wireless access to the Internet, as well as
multimedia entertainment, messaging, mobile commerce and position location services. These services
have been aided by the development and commercialization of 3G wireless networks and 3G handsets
which are capable of supporting higher data rates that
incorporate an ever-increasing array of new features and functionality, such as assisted
GPS-based position location, digital cameras with flash and zoom capabilities, internet browsers,
email, interactive games, music and video downloads and software download capability (e.g. our BREW
platform). In October 2007, the Yankee Group, a global market intelligence and advisory firm in the
technology and telecommunications industries, estimated that more than 2.5 billion people will be
using mobile data services by 2011 and the revenue produced from these services will account for
23% of total service revenue worldwide. We believe the growing availability of 3G-enabled handsets
capable of performing a wide variety of consumer and enterprise applications will accelerate the
demand for many wireless data services on a global basis and thus lead to an increased replacement
rate of mobile
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devices to those using our technologies and integrated circuits. Affordable wireless
broadband data connectivity is important to the consumer and enterprise, and its demand will
continue to drive the evolution of wireless standards.
The adoption of wireless standards for mobile communications within individual countries is
generally determined by the telecommunication service providers operating in those countries and,
in some instances, local government regulations. Such determinations are typically based on
economic criteria and the service provider’s evaluation of each technology’s ability to provide the
features and functionality required for its business plan. More than a decade and a half ago, the
European Community developed regulations requiring the use of a telecommunication standard known as
Global System for Mobile Communications, commonly referred to as GSM, a TDMA-based technology.
According to Wireless Intelligence, the use of this second generation wireless standard has spread
throughout the world and is currently the basis for approximately 80% of the digital mobile
communications in use. With the deployment of WCDMA, a third generation CDMA-based technology, by
GSM operators, many of the current 2.5 billion GSM subscribers are expected to upgrade to third
generation wireless services and are enjoying the added features and functionality available with
3G systems. For instance, a worldwide forecast published by Strategy Analytics in July 2007
indicated that the total number of WCDMA (UMTS) subscribers will grow from 190 million at the end
of 2007 to over 1 billion by the beginning of 2012.
Wireless Technologies
The significant growth in the use of wireless devices worldwide and demand for enhanced
network functionality requires constant innovation to further improve network reliability, expand
capacity and introduce new types of services. To meet these requirements, progressive generations
of wireless telecommunications technology standards have evolved.
Second Generation. Compared to first generation analog systems, second generation digital
technology provided for significantly enhanced efficiency within a fixed spectrum resulting in
greatly increased voice capacity. Second generation technologies also enabled numerous enhanced
services, including paging, e-mail, facsimile, connections to computer networks, greater privacy,
lower prices, a greater number of service options and greater fraud protection. However, data
services (email, fax, computer connections) were generally limited to low speed transmission rates.
The main second-generation digital cellular technologies are called cdmaOne or IS-95A/B, a
technology we developed and patented, North American TDMA, PDC (Personal Digital Cellular—a
variant of North American TDMA), and GSM, also a form of TDMA. At
this time, sales of North American TDMA
and PDC phones have been discontinued with subscribers being moved to GSM or 3G technologies. Many
operators have plans to shut down usage of these second generation systems. Similarly, analog
systems have been shut down in many places. In the United States, the FCC is permitting operators
to shut down the analog system beginning in 2008.
Third Generation. As a result of demand for wireless networks that simultaneously carry both
high speed data and voice traffic, in May 2000, the International Telecommunications Union (ITU), a
standards setting organization, adopted the 3G standard known as IMT-2000, which encompasses five
terrestrial operating radio interfaces, three of them based on our CDMA intellectual property. The
other two are TDMA-based.
Some of the advantages of 3G CDMA technology over both analog and TDMA- and GSM-based
technologies include increased network capacity, network flexibility, compatibility with internet
protocols, higher capacity for data and faster access to data
(Internet) and higher data throughput
rates. GSM has the benefits of roaming due to its wider worldwide
deployment Once considered an advantage of GSM, several low priced handsets of
approximately $30 or less are available today for CDMA, further enabling wireless CDMA growth in
developing regions.
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The
current commercial versions of CDMA2000, CDMA2000 1X and 1xEV-DO, provide both voice and high-speed wireless data communications. CDMA2000 1X and 1xEV-DO utilize the
same standard channel bandwidth as existing cdmaOne systems and, as a result, are compatible with
wireless telecommunications operators’ existing network equipment, making the migration to 3G
simple and affordable. We believe CDMA2000 1X provides approximately twice the voice capacity of
cdmaOne and six to eight times that of TDMA-based networks. Position location technology,
accomplished through a hybrid approach that utilizes signals from both the GPS satellite
constellation and CDMA cell sites, enables CDMA system operators to meet the Federal Communications
Commission (FCC) mandate requiring wireless operators to implement E911 wireless emergency location
services and offer other commercial location-based services. In the future, updates of CDMA2000 1X
and 1xEV-DO are expected to further increase performance. Other enhancements, such as multicast
services, higher-resolution displays, longer battery life, push-to-talk services and VoIP are
becoming available to improve the user experience and operator profitability. The price
differential between low-end third generation CDMA2000 handsets and GSM handsets is diminishing.
GSM operators around the world, including those in the European Community and AT&T in the
United States, have focused primarily on the UTRA-FDD radio interface of the IMT-2000 standard,
known as WCDMA, which is based on our underlying CDMA technology and incorporates many of our
patented inventions (as are all of the CDMA radio interfaces of the IMT-2000 Standard). The
majority of the world’s leading wireless device and infrastructure manufacturers (more than 85)
have licensed our technology for use in WCDMA products, enabling them to utilize this WCDMA mode of
the 3G technology.
A number of GSM operators deployed 2.5G mobile packet data technologies, such
as GPRS and EDGE (Enhanced Data Rates for GSM Evolution) in areas serviced by GSM, as a bridging
technology, while they waited for 3G WCDMA devices to become more readily available and affordable
so they can justify the expense of upgrading their GSM system to provide WCDMA service. In some
regions of the world, regulatory restrictions have prevented deploying WCDMA in the lower frequency
bands used by GSM, thus requiring more cell sites for WCDMA to provide coverage. As a result, in
less dense areas, some operators have not deployed
WCDMA. From a technological perspective, we do not believe that GPRS and EDGE effectively
compete with 3G CDMA-based packet data services, either on a cost per bit or transmitted
performance basis. The European Union permitted IMT-2000 technologies, which include WCDMA, to be
deployed in the lower frequency 900 MHz band. This is called UMTS900. As a result, commercial
deployments are expected, and there have been announcements from vendors indicating they will
provide UMTS900 equipment.
The three ITU 3G CDMA radio interfaces are all based on the underlying core principles of CDMA
technology; however, the CDMA2000 mode enables a direct and more economical conversion for current
cdmaOne networks. While the WCDMA wireless air interface does use CDMA technology for
communications between the wireless device and the network, the infrastructure backhaul network has
been specifically designed to be compatible with the GSM backhaul network, which is why GSM
operators will migrate to WCDMA rather than to CDMA2000. Our intellectual property rights include a
valuable patent portfolio essential to implementation of each of the 3G CDMA alternative standards
and patents that are useful for commercially successful product implementations. Generally, we have
licensed substantially all of our patents to our CDMA subscriber and
infrastructure equipment licensees. Under each of our existing license
agreements covering multiple CDMA standards, the royalty rate paid to us for sales of licensed 3G
CDMA (regardless of whether it is CDMA2000, WCDMA, TD-CDMA or TD-SCDMA) subscriber products is no
less than the rate that such licensee pays for its licensed second generation cdmaOne subscriber
products.
These 3G CDMA versions (CDMA2000, WCDMA, TD-CDMA and TD-SCDMA) from a technological
perspective require separate implementations and are not interchangeable. While the fundamental
core technologies are derived from CDMA and, in addition to other features and functionality, are
covered by our patents, they each require unique infrastructure products, network design and
management. However, subscriber roaming amongst systems using different air interfaces is made
possible through multimode wireless devices.
Operating Segments
Consolidated revenues from international customers and licensees as a percentage of total
revenues were 87% in both fiscal 2007 and 2006 and 82% in fiscal 2005. During fiscal 2007, 31%, 21%
and 17% of our revenues were from customers and licensees based in South Korea, China and Japan,
respectively, as compared to 32%, 17% and 21% during fiscal 2006, respectively, and 37%, 11% and
21% during fiscal 2005, respectively. Revenues from
three customers, LG Electronics, Motorola Inc. and Samsung Electronics Company, constituted a
significant portion (each more than 10%) of consolidated revenues in fiscal 2007, 2006 and 2005.
Risks related to our conducting business with customers and licensees outside of the United
States are described in Risk Factors — “We, and our licensees, are subject to the risks of
conducting business outside of the United States.” Additional information regarding our operating
segments is provided in the notes to our consolidated financial statements. See “Notes to
Consolidated Financial Statements, Note 10 — Segment Information.”
Qualcomm CDMA Technologies Segment (QCT)
QCT is a leading developer and supplier of CDMA-based integrated circuits and system software
for wireless voice and data communications, multimedia functions and global positioning system
products. QCT’s integrated circuit products and system software are used in wireless devices,
particularly mobile phones, data cards and infrastructure equipment. These products provide
customers with advanced wireless technology, enhanced
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component integration and interoperability, and reduced time-to-market. QCT markets and sells products in the United States through a sales
force based in San Diego, California, and internationally through a direct sales force based in
China, Germany, India, Italy, Japan, South Korea, Taiwan and the United Kingdom. QCT products are
sold to many of the world’s leading wireless handset, data card and infrastructure manufacturers.
In fiscal 2007, QCT shipped approximately 253 million MSM integrated circuits for CDMA wireless
devices worldwide. QCT revenues comprised 59%, 58% and 58% of total consolidated revenues in fiscal
2007, 2006 and 2005, respectively.
QCT utilizes a fabless production business model, which means that we do not own or operate
foundries for the production of silicon wafers from which our integrated circuits are made.
Integrated circuits are die, cut from silicon wafers, that have completed the assembly and final
test manufacturing processes. Die, cut from silicon wafers, are the essential components of all of
our integrated circuits and a significant portion of the total integrated circuit cost. We rely on
independent third party suppliers to perform the manufacturing and assembly, and most of the
testing, of our integrated circuits. Our suppliers are also responsible for the procurement of most
of the raw materials used in the production of our integrated circuits. We employ both turnkey and
two-stage manufacturing business models to purchase our integrated circuits. Turnkey is when our
foundry suppliers are responsible for delivering fully assembled and tested integrated circuits.
Under the two-stage manufacturing business model, we purchase completed die directly from
semiconductor manufacturing foundries and contract directly with third party manufacturers for
back-end assembly and test services. We refer to this two-stage manufacturing business model as
Integrated Fabless Manufacturing (IFM). Our fabless model provides us the flexibility to select
suppliers that offer advanced process technologies to manufacture, assemble and test our integrated
circuits at a competitive price.
IBM, Samsung Electronics Co., Taiwan Semiconductor Manufacturing Company, Ltd. and United
Microelectronics Corporation are the primary foundry suppliers for our family of baseband
integrated circuits. Atmel Corporation, Chartered Semiconductor Manufacturing Ltd., Freescale
Semiconductor, Inc., IBM and Semiconductor Manufacturing International Corporation are the primary
foundry suppliers for our family of analog, radio frequency and power management integrated
circuits. Advanced Semiconductor Engineering Inc., Amkor Technology Inc., and STATSChipPAC Ltd. are
the primary back-end semiconductor assembly and test (SAT) suppliers under our IFM model.
QCT offers a broad portfolio of products, including both wireless device and infrastructure
integrated circuits, in support of 1xEV-DO as well as the EV-DO Revision A, EV-DO Revision B, and
UMB evolutions of CDMA 2000 technology. Leveraging our expertise in CDMA, we have also developed
integrated circuits for manufacturers and operators deploying the WCDMA version of 3G. More than 30
device manufacturers have selected our WCDMA products that support GSM/GPRS, WCDMA, HSDPA and HSUPA
for their devices. We have not commercially sold a CSM integrated circuit product for WCDMA base
station equipment.
Our gpsOne position-location technology is in more than 300 million gpsOne-enabled handsets
sold worldwide. Compatible with all major air interfaces, our gpsOne technology is the industry’s
only fully-integrated wireless baseband and assisted-GPS product, and has enabled CDMA system
operators to cost-effectively meet the FCC’s E911 mandate.
Our MSM integrated circuit products are offered on four distinct platforms (Value, Multimedia,
Enhanced Multimedia and Convergence) in order to address specific market segments and offer
products tailored to the needs of users in those various market segments. The Value Platform addresses entry-level markets
and enables voice-centric and basic data wireless devices. The Value Platform includes our Qualcomm
Single Chip (QSC) product family, the industry’s first single-chip CDMA2000 1X products targeted at
lowering overall handset costs and driving the broader adoption of high-speed data services in
emerging markets. The Multimedia and Enhanced Multimedia Platforms are designed to facilitate the
rapid adoption of high-speed wireless data applications. Features from the Multimedia and Enhanced
Multimedia Platforms include support for multi-megapixel cameras, videotelephony, streaming
multimedia, audio, 3D graphics and advanced position-location capabilities. The Convergence
Platform enables portable business, high-fidelity entertainment, interactive 3D gaming and other
advanced multimedia, connectivity and position location applications.
The new Snapdragon platform of chipset products is designed to enable computing-centric
devices that also offer a full range of wireless connectivity capabilities. Based on the Scorpion
microprocessor, the Snapdragon platform expands Qualcomm’s reach beyond the traditional wireless
market into computing and consumer electronics.
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Our Universal Broadcast Modem integrated circuit supports our FLO technology, as well as
Digital Video Broadcasting-Handheld (DVB-H) and one-segment Integrated Services Digital
Broadcasting-Terrestrial (ISDB-T), creating a common platform that handset manufacturers can
leverage to address multiple standards. The Universal Broadcast Modem product will interface with
integrated circuits from the Enhanced Multimedia and Convergence Platforms for both CDMA2000 and
WCDMA networks.
The markets in which our QCT segment operates are intensely competitive. QCT competes
worldwide with a number of United States and international semiconductor designers and
manufacturers in the United States and internationally. As a result of the trend toward a larger
CDMA wireless market, global expansion by foreign and domestic competitors and technological
changes, we anticipate that additional competitors will enter this market. We believe that the
principal competitive factors for CDMA integrated circuit providers to our addressed markets are
product performance, level of integration, quality, compliance with industry standards, price,
time-to-market, system cost, design and engineering capabilities, new product innovation and
customer support. The specific bases on which we compete against alternative CDMA integrated
circuit providers vary by product platform. We also compete in both single and dual-mode
environments against alternative wireless communications technologies including, but not limited
to, GSM/GPRS/EDGE, TDMA, WiMax and analog.
QCT’s current competitors include major semiconductor companies such as Freescale, Infineon,
NEC, Philips, STMicroelectronics, Texas Instruments and VIA Telecom, as well as major
telecommunication equipment companies such as Ericsson, Matsushita, Motorola, Nokia and Samsung,
who design their own integrated circuits and software for certain products. QCT also faces
competition from some start-up ventures. Our competitors may devote significantly greater amounts
of their financial, technical and other resources to market competitive telecommunications systems
or to develop and adopt competitive digital cellular technologies, and those efforts may materially
and adversely affect QCT. Moreover, competitors may offer more attractive product pricing or
financing terms than we do as a means of gaining access to the wireless telecommunications markets
or to new customers.
We have entered into agreements with certain companies, including EoNex Technologies,
Infineon, Lucent, Motorola, NEC, Philips, Texas Instruments and VIA Telecom. These agreements
permit the licensees to manufacture CDMA-based integrated circuits using certain of our
intellectual property for sale to CDMA-based wireless device manufacturers. In exchange for these
rights, we are entitled to receive fees, royalties (determined as a percentage of the selling price
of the integrated circuits) and/or royalty-free cross-licenses, which allow us to use these
companies’ CDMA and, in some cases, non-CDMA intellectual property for specified purposes. In every
case, the wireless device manufacturers’ sales of CDMA-based wireless subscriber devices are
subject to the payment of royalties to us on the products into which the integrated circuits are
incorporated in accordance with the manufacturers’ separate licensing arrangements with us. We make
available our essential CDMA intellectual property to the competitors of our QCT segment to support
the deployment of CDMA-based systems and technologies worldwide in order to grow our royalty
revenues from customers licensed to sell CDMA wireless devices and equipment. We believe that, if
CDMA-based systems expand sufficiently, QCT’s business will also grow, even if we lose market
share. To date, most cdmaOne and CDMA2000 wireless device manufacturer licensees have elected to
purchase their CDMA-based integrated circuits from us.
Qualcomm Technology Licensing Segment (QTL)
QTL grants licenses to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of certain wireless
products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD
and/or OFDMA (including WiMax) standards and their derivatives. QTL receives revenue from license
fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating
or using our intellectual property. License fees are fixed amounts paid in one or more
installments. Ongoing royalties are generally based upon a percentage of the wholesale selling
price of licensed products, net of certain permissible deductions (e.g. certain shipping costs,
packing costs, VAT, etc.). Revenues generated from royalties are subject to quarterly and annual
fluctuations. QTL revenues comprised 31%, 33% and 30% of total consolidated revenues in fiscal
2007, 2006 and 2005, respectively.
As part of our strategy to generate new and ongoing licensing revenues and expand the
marketplace, significant resources are allocated to develop leading edge technology for the
telecommunications industry. In addition to licensing manufacturers of subscriber and network
equipment, we have made our essential CDMA patents available to competitors of our QCT segment. We
face competition in the development of intellectual property for future generations of digital
wireless communications technology and services.
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On a worldwide basis, we currently compete primarily with the GSM/GPRS/EDGE digital wireless
telecommunications technologies. GSM has been utilized extensively in Europe, much of Asia other
than Japan and South Korea, and certain other markets. To date, GSM has been more widely adopted
than CDMA, however, CDMA technologies have been adopted for all third generation wireless systems.
In addition, most GSM operators have deployed GPRS, a packet data technology, as a 2.5G bridge
technology, and a number of GSM operators have deployed or are expected to deploy EDGE, while
waiting for third generation WCDMA to become available and/or more cost effective for their system.
A limited number of operators have started testing OFDMA technology, a multi-carrier transmission
technique not based on CDMA technology, which divides the available spectrum into many carriers,
with each carrier being modulated at a low data rate relative to the combined rate for all
carriers. We have invested in the development of our own OFDMA technology and intellectual property
and have acquired Flarion, a major developer and patent holder of OFDMA technology.
Qualcomm Wireless & Internet Segment (QWI)
QWI revenues comprised 9%, 10% and 12% of total consolidated revenues in fiscal 2007, 2006 and
2005, respectively. The three divisions aggregated into QWI are:
Qualcomm Internet Services (QIS). The QIS division provides technology to support and
accelerate the growth of the wireless data market. The BREW products and services facilitate the
delivery of data services. QIS offers a comprehensive set of BREW offerings (uiOne, deliveryOne,
QPoint and Senses) to meet the distinct needs of companies delivering mobile products and services
around the world. The BREW platform is part of a complete package of products for wireless
applications development, device configuration, application distribution and billing and payment.
The QIS division develops and sells business-to-business products and services to companies
worldwide. The sales and marketing team is headquartered in San Diego with offices worldwide. The
QIS sales and marketing strategy is to enter into agreements with companies in target markets by
providing comprehensive technology and services that combine wireless Internet, data and voice
capabilities.
In October 2006, we announced an agreement with Sprint for the continued development and use
of our QChat product, a next-generation push-to-talk technology designed to deliver advanced
walkie-talkie services optimized for EV-DO Revision A wireless networks, as well as
interoperability with the Nextel National Network which uses Integrated Dispatch Enhance Network
(iDen) technology. QChat enables one-to-one (private) and one-to-many (group) calls over 3G CDMA
networks. The technology also allows over-the-air upgrades of handset software, management of group
membership by subscribers and ad-hoc creation of chat groups. QChat uses VoIP technologies, thereby
sending voice information in digital form over IP-based data networks (including CDMA) in discrete
packets rather than the traditional circuit-switched protocols of the public switched telephone
network.
We have numerous competitors for each of our BREW products and services. These competitors are
continuing to develop their products with a focus on client provisioning, user interface, content
distribution and billing products and services. Competitors are attempting to offer value added
products and services similar, in many cases, to our existing or developing BREW technologies. In
some cases, competitors attempt to displace only
certain components or areas of the greater BREW offering, such as only the runtime
client/device environment portion of BREW. Certain competitors in the computing and device
manufacturing industries are attempting to replicate the entire BREW system offering, including
both runtime device environments and billing/distribution systems. Similarly, some operators are
developing their own products by piecing together both internal and external components. Emergence
of these and other new competitors may adversely impact our margins and market share.
Qualcomm Enterprise Services (QES). The QES division (formerly known as Qualcomm Wireless
Business Solutions, or QWBS) provides equipment, software and services to enable companies to
wirelessly connect with their assets, products and workforce. QES offers satellite- and
terrestrial-based two-way wireless connectivity and position location services to transportation
and logistics fleets, construction contractors, original equipment manufacturers and other
enterprise companies that permit customers to track the location and monitor performance of their
assets, communicate with their personnel and collect data. QES also sells products that operate on
the Globalstar low-Earth-orbit satellite-based telecommunications systems and provides related
services. QES will begin offering mobile-commerce (mCommerce) services in fiscal 2008 to allow
consumers to communicate and conduct mobile financial service transactions via mobile devices. The
QES division markets and sells products through a sales force, partnerships and distributors based
in the United States, Europe, the Middle East, Argentina, Brazil, Canada, China, Japan, South Korea
and Mexico. Through September 2007, we have shipped approximately 1,192,000 satellite- and
terrestrial-based mobile communications systems, which currently operate in 40 countries.
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Wireless transmissions and position tracking for satellite-based systems are provided by using leased
transponders on commercially available geostationary Earth orbit satellites. The terrestrial-based
systems use wireless digital and analog terrestrial networks for messaging transmission and the GPS
constellation for position tracking. We generate revenues from license fees, sales of network
products and terminals, and information and location-based service fees.
In the United States and Mexico, we manufacture mobile communications equipment, sell related
software packages and provide ongoing messaging and maintenance services. Message transmissions for
operations in the United States are formatted and processed at our Network Management Center in San
Diego, California, with a fully-redundant backup Network Management Center located in Las Vegas,
Nevada.
Existing competitors of our QES division offering alternatives to our products are
aggressively pricing their products and services and could continue to do so in the future. In our
domestic markets, we face over ten key competitors to our OmniVision, OmniTRACS, TruckMAIL,
OmniExpress, T2 Untethered TrailerTRACS and QConnect products and services, as well as over six key
competitors to our GlobalTRACS system. Internationally, we face several key competitors in Europe
and Mexico. These competitors are offering new value-added products and services similar in many
cases to our existing or developing technologies. Emergence of new competitors, particularly those
offering low cost terrestrial-based products and current as well as future satellite-based systems,
may impact margins and intensify competition in new markets. Similarly, some original equipment
manufacturers of trucks and truck components are beginning to offer built-in, on-board
communications and position location reporting systems that may impact our margins and intensify
competition in our current and new markets. We are currently in discussions with some trucking
manufacturers about using our products as their embedded solution.
Qualcomm Government Technologies (QGOV). The QGOV division provides development, hardware and
analytical expertise involving wireless communications technologies to United States government
(USG) agencies. In fiscal 2007, QGOV adapted, integrated and shipped CDMA2000 1X deployable base
stations to the USG and also developed an EV-DO version of the deployable base station. We have also
continued to ship second generation CDMA secure wireless terrestrial phones for the USG that
operate in enhanced security modes (referred to as Type 1) and incorporate end-to-end encryption.
Additionally, OmniTRACS products and services are used for USG worldwide applications and were sold
to the USG during fiscal 2007. Based on the percentage of QGOV revenues to our total consolidated
revenues, the USG is not a major customer.
Qualcomm Strategic Initiatives Segment (QSI)
We make strategic investments to promote the worldwide adoption of CDMA-based products and
services for wireless voice and internet data communications, including CDMA operators, licensed
device manufacturers and companies that support the design and introduction of new CDMA-based
products or possess unique capabilities or technology. We make strategic investments in early-stage companies and, from time to time,
venture funds to support the adoption of CDMA and the use of the wireless Internet.
Our MediaFLO USA subsidiary operates a nationwide multicast network in the United States based
on our MDS and FLO technology. MediaFLO USA uses 700 MHz spectrum for which we hold licenses
nationwide to deliver high-quality video and audio programming to wireless subscribers.
Additionally, MediaFLO USA procures, aggregates and distributes content in service packages which
we make available on a wholesale basis to our wireless operator customers (whether they operate on
CDMA or GSM/WCDMA networks) in the United States. The commercial availability of the MediaFLO
network and service is determined by our wireless operator partners.
MediaFLO USA’s Broadcast Operations Center and Network Operations Center are based in San
Diego, California. Verizon Wireless began offering the MediaFLO USA service during fiscal 2007, and
MediaFLO USA expects AT&T Mobility to begin offering the services in fiscal 2008. In addition,
MediaFLO USA is actively engaged in discussions with other domestic wireless operators on how they
might utilize the MediaFLO USA service.
We are developing our MediaFLO MDS and FLO technology to enable MediaFLO USA and potentially
other international operators to optimize the low cost delivery of multimedia content to multiple
wireless subscribers simultaneously. Our efforts to sell this technology internationally are being
conducted by a nonreportable segment, and not by QSI, as we do not intend to exit this business.
The MDS will provide wireless network operators the ability to enhance their multimedia service
offering capabilities via efficient scheduling and delivery of multimedia content. Wireless network
operators can utilize the MDS with their current unicast networks and with multicast
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networks, which are soon to be available, operating on CDMA2000 1xEV-DO or WCDMA. The MDS is not air
interface specific and thus can be utilized by CDMA2000, WCDMA and FLO technology operators alike.
FLO is a multicast air interface technology specifically designed for markets where dedicated
spectrum is available and where regulations permit high-power transmission, thereby reducing the
number of towers and related infrastructure required to provide market coverage. MediaFLO MDS and
FLO technology are complementary to existing wireless networks because interactive services are
supported within the mobile device using the CDMA2000 1X, 1xEV-DO or WCDMA wireless link.
Furthermore, the MediaFLO MDS can seamlessly integrate multicasting services provided over 3G
operator networks with such services provided over a stand-alone FLO network.
As part of our strategic investment activities, we intend to pursue various exit strategies at
some point in the future, which may include distribution of our ownership interest in MediaFLO USA
to our stockholders in a spin-off transaction.
Other Businesses
Qualcomm MEMS Technologies (QMT). QMT is developing display technology for the full range of
consumer-targeted mobile products. QMT’s IMOD display technology, based on a MEMS structure
combined with thin film optics, is expected to provide performance, power consumption and cost
benefits as compared to current display technologies. With the inclusion of color displays in all
types of wireless devices, including models at the low end of the market, the cost of the display
has become an even more significant factor in the overall cost of the handset. An IMOD display
should cost less to manufacture than a comparable liquid crystal display because it requires fewer
components and processing steps, thus supporting advanced multimedia capabilities on all tiers of
mobile devices.
Qualcomm Flarion Technologies (QFT). QFT is the developer and provider of FLASH-OFDM, the
wireless industry’s first and only fully mobile OFDMA offering. FLASH-OFDM is an air interface
technology designed for the delivery of advanced internet services in the mobile environment.
Through FLASH-OFDM, QFT created an end-to-end network offering for mobile operators, which includes
the RadioRouter base station product line, wireless modems, embedded chipsets and system software.
The all-IP wireless network supports both broadband data and packetized voice applications. QFT is
leveraging its considerable experience with OFDMA technology and products to develop the 3GPP2/UMB
reference design and chipsets for infrastructure and test equipment vendors. UMB is the next
generation air interface and is expected to deliver the mobility, high data rates and low latency
necessary for a superior broadband user experience. The reference design provides a path for
equipment manufacturers to introduce new UMB base stations and gain a foothold in the high-speed
mobile broadband market. Using this design, both large and small
equipment manufacturers are able to leverage our extensive research
and development experience with OFDMA-based technologies, reducing typical barriers to market entry.
MediaFLO Technologies (MFT). MFT is developing our MediaFLO MDS and FLO technology and
marketing MediaFLO for deployment outside of the United States.
Research and Development
The wireless telecommunications industry is characterized by rapid technological change,
requiring a continuous effort to enhance existing products and develop new products and
technologies. Our research and development team has a demonstrated track record of innovation in
wireless communications technologies. Our research and development expenditures in fiscal 2007,
2006 and 2005 totaled approximately $1.8 billion, $1.5 billion and $1.0 billion, respectively.
Research and development expenditures were primarily related to integrated circuit products, next
generation CDMA and OFDMA technologies, the expansion of our intellectual property portfolio and
other initiatives to support the acceleration of advanced wireless products and services, including
lower cost devices, the integration of wireless with consumer electronics and computing, the
convergence of multiband, multimode, multinetwork products and technologies, third party operating
systems and services platforms. The technologies supporting these initiatives may include CDMA2000
1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA (including GSM/GPRS/EDGE), HSDPA, HSUPA and
OFDMA. Research and development expenditures were also incurred related to the development of our
FLO technology, MediaFLO MDS and IMOD display products using MEMS technology.
We have research and development centers in various locations throughout the world that
support our global development activities and ongoing efforts to advance CDMA and a broad range of
other technologies. We continue to use our substantial engineering resources and expertise to
develop new technologies, applications and services
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and make them available to licensees to help grow the wireless telecommunications market and generate new or expanded licensing opportunities.
In addition to internally sponsored research and development, we perform contract research and
development for various government agencies and commercial contractors.
Sales and Marketing
Sales and marketing activities of our operating segments are discussed under Operating
Segments in Item 1. Other marketing activities include public relations, web-marketing,
participation in technical conferences and trade shows, development of business cases and white
papers, competitive analyses, market intelligence and other marketing programs. Corporate Marketing
provides company information on our internet website and through other media regarding our
products, strategies and technology to industry analysts and for publications.
Competition
Competition to our operating segments is discussed under Operating Segments in Item 1.
Competition in the telecommunications industry throughout the world continues to increase at a
rapid pace as businesses and governments realize the market potential of wireless
telecommunications products and services. We have facilitated competition in the CDMA market by
licensing a large number of manufacturers. Although we have attained a major position in the
industry, many of our current and potential competitors may have advantages over us, including:
| • | longer operating histories and presence in key markets; | ||
| • | greater name recognition; | ||
| • | access to larger customer bases; and | ||
| • | greater sales and marketing, manufacturing, distribution, technical and other resources. |
These competitors may have more established relationships and greater technical, marketing,
sales and distribution capabilities and greater access to channels in markets not currently
deploying wireless communications technology or markets primarily deploying 2G wireless
communications technology. These competitors also have established or may establish financial or
strategic relationships among themselves or with our existing or potential customers, resellers or
other third parties. These relationships may affect customers’ decisions to purchase products or
license technology from us or to use alternative technologies. Accordingly, new competitors or
alliances among competitors could emerge and rapidly acquire significant market share to our
detriment. In addition, many of these
companies are licensees of our technologies and have established market positions, trade
names, trademarks, patents, copyrights, intellectual property rights and substantial technological
capabilities. We may face competition throughout the world with new technologies and services
introduced in the future as additional competitors enter the marketplace for products based on 3G
standards or other wireless technologies. Although we intend to continue to develop improvements to
existing technologies, as well as potential new technologies, there may be a continuing competitive
threat from companies introducing alternative versions of wireless technologies. We also expect
that the price we charge for our products and services may continue to decline as competition
intensifies.
Patents, Trademarks and Trade Secrets
We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary
information to maintain and enhance our competitive position. We have filed approximately 6,500
United States patent applications, of which approximately 2,300 patents have been issued. The vast
majority of such patents and patent applications relate to digital wireless communications
technologies, including patents that are essential or may be relevant to CDMA2000, UMTS, TD-SCDMA,
TD-CDMA and OFDMA products. We also have and will continue to file actively for broad patent
protection outside the United States. We have filed approximately 32,800 foreign patent
applications, of which approximately 10,100 patents have been issued, with broad coverage
throughout most of the world, including China, Japan, South Korea, Europe, Brazil, India and
elsewhere.
Standards bodies have been informed that we hold patents that might be essential for all 3G
standards that are based on CDMA. We have committed to such standards bodies that we will offer to
license our essential patents for these CDMA standards on a fair and reasonable basis free from
unfair discrimination. We have also informed standards bodies that we may hold essential
intellectual property rights for certain standards that are based on OFDMA technology, e.g.
802.16e, 802.20, UMB and LTE.
Since our founding in 1985, we have focused heavily on technology development and innovation.
These efforts have resulted in a leading intellectual property portfolio related to wireless
technology. Because all commercially
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deployed forms of CDMA and their derivatives require the use
of our patents, our patent portfolio is the most widely and extensively licensed portfolio in the
industry with over 140 licensees. Over the years a number of companies have challenged our patent
position but at this time most, if not all, companies recognize that any company seeking to
develop, manufacture and/or sell products that use CDMA technologies will require a patent license
from us. Notwithstanding the strength of this intellectual property position, we have succeeded in
licensing our technologies to interested companies on terms that are fair, reasonable and free from
unfair discrimination. Unlike some other companies in our industry that hold back certain key
technologies, we offer interested companies the opportunity to license essentially our entire
patent portfolio for use in subscriber devices and cell site infrastructure equipment. Our broad
licensing strategy has been a catalyst for industry growth, helping to enable a wide range of
companies offering a broad array of wireless products and features while driving down average and
low-end selling prices for 3G handsets and other wireless devices. By licensing a wide range of
equipment manufacturers, encouraging innovative applications, supporting equipment manufacturers
with a total chipset and software solution, and focusing on improving the efficiency of the airlink
for operators, we have helped 3G CDMA evolve, grow, and reduce handset pricing all at a faster pace
than the second generation technologies that preceded it (e.g. GSM).
Under our license agreements, licensees are generally required to pay us a license fee as well
as ongoing royalties based on a percentage of the wholesale selling price, net of certain
permissible deductions (e.g. certain shipping costs, packing costs, VAT, etc.), of subscriber and
infrastructure equipment. License fees are paid in one or more installments, while royalties
generally continue throughout the life of the licensed patents. We believe that our royalty rates
are reasonable and fair to the companies that benefit from our intellectual property and provide
significant incentives for others to invest in CDMA (including WCDMA) applications, as evidenced by
the significant growth in the CDMA portion of the wireless industry and the number of CDMA
participants. Our license agreements generally provide us rights to use certain of our licensees’
technology and intellectual property rights to manufacture and sell certain products, e.g. ASICs
and related software, subscriber units and/or infrastructure equipment. In most cases, our use of
our licensees’ technology and intellectual property is royalty free. However, under some of the
licenses, if we incorporate certain of the licensed technology or intellectual property into
certain products, we are obligated to pay royalties on the sale of such products. Under their
existing agreements with us, two entities were entitled to share in a percentage of the royalty
revenues that we receive from third parties for their sale of certain CDMA products. Our sharing obligation under one of
these arrangements expired in fiscal 2005, and the other sharing obligation expired in fiscal 2006.
As part of our strategy to generate licensing revenues and support worldwide adoption of our
CDMA technology, we license to other companies, including the competitors of our QCT segment, the
rights to design, manufacture and sell products utilizing certain portions of our CDMA intellectual
property. Our current publicly announced CDMA licensees are listed on our internet website
(www.qualcomm.com).
Employees
As of September 30, 2007, we employed approximately 12,800 full-time, part-time and temporary
employees. During fiscal 2007, the number of employees increased by approximately 1,600 primarily
due to increases in engineering resources.
Available Information
Our internet address is www.qualcomm.com. There we make available, free of charge, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be
accessed through the investor relations section of our internet website. The information found on
our internet website is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC’s Public
Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-202-551-8090. The
SEC also maintains electronic versions of our reports on its website at www.sec.gov.
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Executive Officers
Our executive officers (and their ages as of September 30, 2007) are as follows:
Paul E. Jacobs, age 44, has served as a director since June 2005 and as our Chief Executive
Officer since July 2005. He served as Group President of the Qualcomm Wireless & Internet Group
from July 2001 to June 2005. In addition, he served as an Executive Vice President from February
2000 to June 2005. Dr. Jacobs holds a B.S. degree in Electrical Engineering and Computer Science, a
M.S. degree in Electrical Engineering and a Ph.D. degree in Electrical Engineering and Computer
Science from the University of California, Berkeley. Dr. Paul Jacobs is the son of Dr. Irwin Mark
Jacobs, Chairman of our Board of Directors, and the brother of Jeffrey A. Jacobs, President of
Qualcomm Global Development.
Steven R. Altman, age 46, has served as our President since July 2005. He served as an
Executive Vice President from November 1997 to June 2005 and as President of QTL from September
1995 to April 2005. Mr. Altman currently serves on the board of Amylin Pharmaceuticals, Inc. He
received a B.S. degree from Northern Arizona University and a J.D. from the University of San
Diego.
Irwin Mark Jacobs, age 73, one of the founders of the Company, has served as Chairman of the
Board of Directors since it began operations in July 1985. He also served as our Chief Executive
Officer from July 1985 to June 2005. Dr. Jacobs received a B.S. degree in Electrical Engineering
from Cornell University and M.S. and Sc.D. degrees from the Massachusetts Institute of Technology.
Dr. Irwin Jacobs is the father of Dr. Paul E. Jacobs, our Chief Executive Officer, and Jeffrey A.
Jacobs, President of Qualcomm Global Development.
Sanjay K. Jha, age 44, has served as Chief Operating Officer since December 2006 and as
Executive Vice President since December 2003. Additionally, he leads QCT as Group President. He has
led QCT since January 2003, first as Senior Vice President and President, and then as Group
President from 2004. Prior to his appointment as President of QCT, he served as Senior Vice
President and General Manager of Qualcomm Technologies & Ventures from March 2002 to January 2003
and as a Senior Vice President, Engineering from July 1998 to March 2002. Dr. Jha holds a Ph.D. in
Electronic and Electrical Engineering from Strathclyde University, Scotland and a B.S. degree in
Engineering from the University of Liverpool, England.
William E. Keitel, age 54, has served as an Executive Vice President since December 2003 and
as our Chief Financial Officer since February 2002. He previously served as a Senior Vice President
and as our Corporate Controller from May 1999 to February 2002. Mr. Keitel received a M.B.A. from Arizona State
University and a B.A. degree in Business Administration from the University of Wisconsin.
Marvin Blecker, age 60, has served as an Executive Vice President since December 2006 and as
President of QTL since April 2005. From November 2001 to April 2005, he served as General Manager
of QTL, as well as Senior Vice President of that division from October 1995 to November 2001. He
holds B.S. and M.S. degrees in Mathematics and a M.S. degree in Electrical Engineering-Systems
Science from the Polytechnic Institute of Brooklyn, New York (now Polytechnic University).
Jeffrey A. Jacobs, age 41, has served as an Executive Vice President since December 2006 and
as President of Qualcomm Global Development since May 2001. He served as Senior Vice President of
Business Development from June 1999 to May 2001. Mr. Jacobs holds a B.A. degree in International
Economics from the University of California, Berkeley. Mr. Jeffrey Jacobs is the son of Dr. Irwin
Mark Jacobs, Chairman of our Board of Directors, and the brother of Dr. Paul E. Jacobs, a member of
our Board of Directors and our Chief Executive Officer.
Margaret “Peggy” L. Johnson, age 45, has served as an Executive Vice President since December
2006, as President of QIS since July 2001 and as President of Qualcomm MediaFLO Technologies since
December 2005. She served as Senior Vice President and General Manager of QIS from September 2000
to July 2001. Ms. Johnson holds a B.S. degree in Electrical Engineering from San Diego State
University.
Len J. Lauer, age 50, has served as Executive Vice President and Group President since
December 2006. He was Chief Operating Officer of Sprint Nextel from August 2005 to December 2006.
Mr. Lauer was President and COO of Sprint Corporation from September 2003 until the Sprint-Nextel
merger in August 2005. Prior to that, he was President-Sprint PCS from October 2002 until October
2004, and was President-Long Distance (formerly the Global Markets Group) from September 2000 until
October 2002. Mr. Lauer also served in several executive positions at Bell Atlantic Corp. from 1992
to 1998. Mr. Lauer currently serves on the board of H&R Block. He holds a B.S. degree in Managerial
Economics from the University of California, San Diego.
Roberto Padovani, age 53, has served as an Executive Vice President and our Chief Technology
Officer since January 2002. He previously served as Senior Vice President from July 1996 to July
2001 and as Executive Vice President from July 2001 to January 2002 of our Corporate Research and
Development. Dr. Padovani received a
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Laureate degree from the University of Padova, Italy and M.S.
and Ph.D. degrees from the University of Massachusetts, Amherst, all in Electrical and Computer
Engineering.
Donald J. Rosenberg, age 56, has served as Executive Vice President, General Counsel and
Corporate Secretary since October 2007. He served as Senior Vice President, General Counsel and
Corporate Secretary for Apple Computer, Inc. from December 2006 to October 2007. From May 1975 to
November 2006, Mr. Rosenberg held numerous positions at IBM Corporation, including Senior Vice
President and General Counsel. He earned his B.S. degree from the State University of New York at
Stony Brook and his J.D. from St. John’s University School of Law.
Daniel L. Sullivan, age 56, has served as Executive Vice President of Human Resources since
August 2001. He served as Senior Vice President of Human Resources from February 1996 to July 2001.
Dr. Sullivan holds a Ph.D. in Organization Communication from the University of Nebraska. He also
holds B.S and M.A. degrees in Communication from Illinois State University and West Virginia
University, respectively.
Item 1A. Risk Factors
You should consider each of the following factors as well as the other information in this
Annual Report in evaluating our business and our prospects. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us
or that we currently consider immaterial may also impair our business operations. If any of the
following risks actually occur, our business and financial results could be harmed. In that case,
the trading price of our common stock could decline. You should also refer to the other information
set forth in this Annual Report, including our financial statements and the related notes.
Risks Related to Our Businesses
If deployment of our technologies does not expand as expected, our revenues may not grow as
anticipated.
We focus our business primarily on developing, patenting and commercializing CDMA technology
for wireless telecommunications applications. In addition, with the acquisition of Flarion, we have
increased our emphasis on developing, patenting and commercializing OFDMA technology. Other digital
wireless communications technologies, particularly GSM technology, have been more widely deployed
than CDMA technology. OFDMA has not been widely deployed commercially. Notwithstanding our
portfolio of OFDM/OFDMA intellectual property, technology and products, if CDMA technology does not
become the preferred wireless communications industry standard in the countries where our products
and those of our customers and licensees are sold, our business and financial results could suffer.
If GSM wireless operators do not select CDMA for their networks or update their current networks to
any CDMA-based third generation (3G) technology, our business and financial results could suffer
since we generally have not generated revenues from GSM product sales. Further, if OFDMA technology
is not adopted and deployed commercially, our investments in OFDMA technology may not provide us an
adequate return.
Our business and the deployment of our technologies, products and services are dependent on
the success of our customers, licensees and CDMA-based wireless operators, as well as the timing of
their deployment of new services. Our licensees and CDMA-based wireless operators may incur lower
operating margins on products or services based on our technologies than on products using
alternative technologies as a result of greater competition in the relevant market or other
factors. If CDMA-based wireless operators, wireless device and/or infrastructure manufacturers exit
the CDMA-based markets, the deployment of CDMA technology could be negatively affected, and our
business could suffer.
We are dependent on the commercial deployment of 3G wireless communications equipment, products and
services to increase our revenues, and our business may be harmed if wireless networks deploy other
technologies.
To increase our revenues in future periods, we are dependent upon the commercial deployment of
3G wireless communications equipment, products and services based on our CDMA technology. Although
wireless network operators have commercially deployed CDMA2000 and WCDMA, we cannot predict the
timing or success of further commercial deployments or expansions of CDMA2000, WCDMA or other CDMA
systems. If existing deployments are not commercially successful or do not continue to grow their
subscriber base, or if new commercial deployments of CDMA2000, WCDMA or other CDMA-based systems
are delayed or unsuccessful, our business and financial results may be harmed. In addition, our
business could be harmed if wireless network operators deploy other technologies or switch existing
networks from CDMA to GSM without upgrading to WCDMA or if wireless
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network operators introduce new technologies. A limited number of operators have started testing OFDMA technology, but OFDMA might
not be adopted or deployed commercially and we might not be successful in developing and marketing
OFDMA products.
Our patent portfolio may not be as successful in generating licensing income with respect to other
technologies as it has been for CDMA-based technologies.
Although we own a very strong portfolio of issued and pending patents related to GPRS, EDGE,
OFDM, OFDMA and MIMO technologies, our patent portfolio licensing program in these areas is less
established and might not be as successful in generating licensing income as our CDMA portfolio
licensing program. Sprint Nextel has indicated that it is planning to deploy WiMax (an OFDMA-based
technology) in its 2.5 GHz spectrum, also known as the Broadband Radio Services band. Other
operators are investigating deployment of WiMax. Other operators are considering LTE, being
standardized by 3GPP, or UMB, being standardized by 3GPP2, as next generation technologies for
deployment in existing or future spectrum bands. Although we believe that our patented technology
is essential and useful to implementation of the WiMax, LTE or UMB standards, we might not achieve
the same royalty revenue on such WiMax, LTE or UMB deployments as on CDMA/WCDMA, and we might not
achieve the same chipset market shares within a WiMax, LTE or UMB network.
Our three largest customers accounted for 41% of consolidated revenues in fiscal 2007 and 39% in
fiscal 2006 and 2005. The loss of any one of our major customers or any reduction in the demand for
devices utilizing our CDMA technology could reduce our revenues and harm our ability to achieve or
sustain desired levels of operating results.
The loss of any one of our QCT segment’s significant customers or the delay, even if only
temporary, or cancellation of significant orders from any of these customers would reduce our
revenues in the period of the cancellation or deferral and harm our ability to achieve or sustain
expected levels of operating results. We derive a significant portion of our QCT segment revenues from three major customers. Accordingly,
unless and until our QCT segment diversifies and expands its customer base, our future success will
significantly depend upon the timing and size of any future purchase orders from these customers.
Factors that may impact the size and timing of orders from customers of our QCT segment include,
among others, the following:
| • | the product requirements of our customers and the network operators; | ||
| • | the financial and operational success of our customers; | ||
| • | the success of our customers’ products that incorporate our products; | ||
| • | changes in wireless penetration growth rates; | ||
| • | value added features which drive replacement rates; | ||
| • | shortages of key products and components; | ||
| • | fluctuations in channel inventory levels; | ||
| • | the success of products sold to our customers by competitors; | ||
| • | the rate of deployment of new technology by the wireless network operators and the rate of adoption of new technology by the end consumers; | ||
| • | the extent to which certain customers successfully develop and produce CDMA-based integrated circuits and system software to meet their own needs or source such products from other suppliers; | ||
| • | general economic conditions; | ||
| • | changes in governmental regulations in countries where we or our customers currently operate or plan to operate; and | ||
| • | widespread illness. |
We derive a significant portion of our royalty revenues in our QTL segment from a limited number of
licensees and our future success depends on the ability of our licensees to obtain market
acceptance for their products.
Our QTL segment derives royalty revenues primarily from sales of CDMA products by our
licensees. Although we have more than 140 licensees, we derive a significant portion of our royalty
revenue from a limited
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number of licensees. Our future success depends upon the ability of our
licensees to develop, introduce and deliver high-volume products that achieve and sustain market
acceptance. We have little or no control over the sales efforts of our licensees, and our licensees
might not be successful. Reductions in the average selling price of wireless communications devices
utilizing our CDMA technology, without a comparable increase in the volumes of such devices sold,
could have a material adverse effect on our business.
We may not be able to modify some of our license agreements to license later patents without
modifying some of the other material terms and conditions of such license agreements, and such
modifications may impact our revenues.
The licenses granted to and from us under a number of our license agreements include only
patents that are either filed or issued prior to a certain date, and, in a small number of
agreements, royalties are payable on those patents for a specified time period. As a result, there
are agreements with some licensees where later patents are not licensed by or to us under our
license agreements. In order to license any such later patents, we will need to extend or modify
our license agreements or enter into new license agreements with such licensees. We might not be
able to modify such license agreements in the future to license any such later patents or extend
such date(s) to incorporate later patents without affecting the material terms and conditions of
our license agreements with such licensees. In particular, we are party to an ongoing arbitration
with Nokia Corp. relating to Nokia’s continued sales after April 9, 2007 of products that
incorporate certain Qualcomm patents. One of our contentions in that proceeding (which Nokia
disputes) is that such use of our patents resulted in an extension of the license agreement, which
also extends our rights to sell integrated circuits under Nokia’s patents. We might not prevail in
such arbitration. If we do not prevail, Nokia’s right to sell certain subscriber products (such as
cellular phones, wireless personal digital assistant and other devices) under most of our patents
(including many that we have declared as potentially essential to the CDMA, WCDMA and other standards), and therefore Nokia’s
obligation to pay royalties to us under the terms of the current agreement, may both cease, and our
rights under certain of Nokia’s patents to sell integrated circuits under the terms of the current
agreement may likewise cease. If we do not prevail, and the arbitration panel does not find Nokia
to have extended the license agreement, the above rights could be extended if Nokia expressly
elects to extend the agreement beyond April 9, 2007, a right that is exercisable through December
31, 2008 unless earlier terminated.
Efforts by some telecommunications equipment manufacturers and component suppliers to avoid paying
fair and reasonable royalties for the use of our intellectual property may create uncertainty about
our future business prospects, may require the investment of substantial management time and
financial resources, and may result in legal decisions and/or political actions by foreign
governments that harm our business.
A small number of companies have initiated various strategies in an attempt to renegotiate,
mitigate and/or eliminate their need to pay royalties to us for the use of our intellectual
property in order to negatively affect our business model and that of our other licensees. These
strategies have included (i) litigation, often alleging infringement of patents held by such
companies or unfair competition of some variety, (ii) taking questionable positions on the
interpretation of contracts with us, with royalty reduction as the likely true motive, (iii)
appeals to governmental authorities, such as the complaints filed with the European Commission (EC)
during the fourth calendar quarter of 2005 and with the Korea Fair Trade Commission (KFTC) and the
Japan Fair Trade Commission (JFTC) during 2006, and (iv) lobbying with governmental regulators and
elected officials for the purpose of seeking the imposition of some form of compulsory licensing
and/or to weaken a patent holder’s ability to enforce its rights or obtain a fair return for such
rights. A number of these strategies are purportedly based on
interpretations of the polices of certain standards development
organizations concerning the licensing of patents that are or may be
essential to industry standards and our alleged failure to abide by
these policies.
We were notified by the Competition Directorate of the EC that six companies (Nokia, Ericsson,
Panasonic, Texas Instruments, Broadcom and NEC) submitted separate formal complaints accusing our
business practices, with respect to licensing of patents and sales of chipsets, to be in violation
of Article 82 of the EC treaty. We received the complaints, have submitted a response and have
cooperated with the EC in its investigation. On October 1, 2007, the EC announced that it has
initiated a proceeding though it has not decided to issue a Statement
of Objections, and it has not made any conclusions as to the merits
of the complaints. While this action does not indicate that the EC has found any evidence of a
violation by us and we believe that none of our business practices violate the legal requirements
of Article 82 of the EC treaty, if the EC determines liability as to any of the alleged violations,
it could impose fines and/or require us to modify our practices. Further, the continuation of this
investigation could be expensive and time consuming to address, divert management attention from
our business and harm our reputation. Although such potential adverse findings may be appealed
within the EC legal system, an adverse final determination could have a significant negative impact
on our revenues and/or earnings. We also understand that 1) two U.S. companies (Texas Instruments
and Broadcom) and two South Korean companies (Nextreaming Corp. and THINmultimedia Inc.) have filed
complaints with the KFTC alleging that our business practices are, in some way, a violation of
South Korean
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competition laws and 2) unnamed parties filed a complaint with the JFTC allegedly
claiming that our business practices are, in some way a violation of the Japanese competition laws.
While we have not seen any of these complaints in South Korea or Japan, we believe that none of our
business practices violate the legal requirements of South Korean competition law or Japanese
competition law. However, we have cooperated with the investigations of these complaints in South
Korea and Japan, and any continuation or expansion of these investigations could be expensive and
time consuming to address, divert management attention from our business and harm our reputation.
An adverse final determination on these charges could have a significant negative impact on our
business, including our revenues and/or earnings.
Although we believe that these challenges are without merit, and we will continue to
vigorously defend our intellectual property rights and our right to continue to receive a fair
return for our innovations, the distractions caused by challenges to our business model and
licensing program are undesirable and the legal and other costs associated with defending our
position have been and continue to be significant. We assume, as should investors, that such
challenges will continue into the foreseeable future and may require the investment of substantial
management time and financial resources to explain and defend our position.
The enforcement and protection of our intellectual property rights may be expensive and could
divert our valuable resources.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as
nondisclosure and confidentiality agreements and other methods, to protect our proprietary
information, technologies and processes, including our patent portfolio. Policing unauthorized use of our products and technologies is
difficult and time consuming. We cannot be certain that the steps we have taken will prevent the
misappropriation or unauthorized use of our proprietary information and technologies, particularly
in foreign countries where the laws may not protect our proprietary rights as fully or as readily
as United States laws. We cannot be certain that the laws and policies of any country, including
the United States, or the practices of any of the standards bodies, foreign or domestic, with
respect to intellectual property enforcement or licensing, issuance of wireless licenses or the
adoption of standards, will not be changed in a way detrimental to our licensing program or to the
sale or use of our products or technology. Recent decisions from the United States courts relating
to patents may affect the ability to enforce patent rights. Within the United States Senate and
House of Representatives, committee work has progressed to draft a “patent reform law,” with the
House and Senate committees each having reported a different draft bill to the full House and
Senate, respectively. The full House has adopted its committee’s draft bill. The end product of
such work could be new patent legislation detrimental to our licensing program or to the sale or
use of our products or technology. Any efforts we make to inform and educate policymakers about the
effects of such potential changes may absorb significant management time and attention, which, in
turn, could negatively impact our operating results.
The vast majority of our patents and patent applications relate to our wireless communications
technology and much of the remainder of our patents and patent applications relate to our other
technologies and products. We may need to litigate to enforce our intellectual property rights,
protect our trade secrets or determine the validity and scope of proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights to one or more patents or incur
substantial unexpected operating costs. Any action we take to enforce our intellectual property
rights could be costly and could absorb significant management time and attention, which, in turn,
could negatively impact our operating results. In addition, failure to protect our trademark rights
could impair our brand identity.
Claims by other companies that we infringe their intellectual property, that patents on which we
rely are invalid, or that our business practices are in some way unlawful could adversely affect
our business.
From time to time, companies have asserted, and may again assert, patent, copyright and other
intellectual proprietary rights against our products or products using our technologies or other
technologies used in our industry. These claims have resulted and may again result in our
involvement in litigation. We may not prevail in such litigation given the complex technical issues
and inherent uncertainties in intellectual property litigation. If any of our products were found
to infringe on another company’s intellectual property rights, we could be required to redesign our
products, which could be costly, or license such rights and/or pay damages or other compensation to
such other company. If we were unable to redesign our products or license such intellectual
property rights used in our products, we could be prohibited from making and selling such products.
We expect that we will continue to be involved in litigation and may have to appear in front
of administrative bodies (such as the U.S. International Trade Commission) to defend against patent
assertions against our products
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by companies, some of whom are attempting to gain competitive
advantage or negotiating leverage in licensing negotiations. We may not be successful and, if we
are not, the range of possible outcomes includes everything from a royalty payment to an injunction
on the sale of certain of our chipsets (and on the sale of our customers’ handsets using our
chipsets) and the imposition of royalty payments that might make sales of our chipsets uneconomic.
Any such litigation could severely disrupt the business of our chipset customers and their wireless
customers, which in turn could hurt our relationships with our chipset customers and wireless
operators and could result in a decline in our chipset market share and/or a reduction in our
licensees’ sales to wireless operators, causing a corresponding decline in our chipset and/or
licensing revenues.
While we have had many settlement discussions with Broadcom, they have not been fruitful to
date, and the prospects for a reasonable settlement appear to be remote. To date, Broadcom has
insisted that any comprehensive settlement include the right to pass through to its customers’
intellectual property rights licensed by us to Broadcom. Any such arrangement could have a material
impact on our licensing and royalty business model.
In addition, as the number of competitors in our market increases and the functionality of our
products expands to include additional technologies and features, we may become subject to claims
of infringement or misappropriation of the intellectual property rights of others. Any claims,
regardless of their merit, could be time consuming to address, result in costly litigation, divert
the efforts of our technical and management personnel or
cause product release or shipment delays, any of which could have a material adverse effect
upon our operating results. In any potential dispute involving other companies’ patents or other
intellectual property, our chipset customers could also become the targets of litigation. Any such
litigation could severely disrupt the business of our chipset customers and their wireless operator
customers, which in turn could hurt our relationships with our chipset customers and wireless
operators and could result in a decline in our chipset market share and/or a reduction in our
licensees’ sales to wireless operators, causing a corresponding decline in our chipset and/or
licensing revenues.
A number of other companies have claimed to own patents essential to various CDMA standards,
GSM standards and implementations of OFDM and OFDMA systems. If we or other product manufacturers
are required to obtain additional licenses and/or pay royalties to one or more patent holders, this
could have a material adverse effect on the commercial implementation of our CDMA or multimode
products and technologies, demand for our licensees’ products, and our profitability.
Other companies or entities also have and may again commence actions seeking to establish the
invalidity of our patents. In the event that one or more of our patents are challenged, a court may
invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm our
competitive position. If our key patents are invalidated, or if the scope of the claims in any of
these patents is limited by court decision, we could be prevented from licensing the invalidated or
limited portion of such patents. Such adverse decisions could negatively impact our revenues. Even
if such a patent challenge is not successful, it could be expensive and time consuming to address,
divert management attention from our business and harm our reputation.
Our industry is subject to competition that could result in decreased demand for our products and
the products of our customers and licensees and/or declining average selling prices for our
licensees’ products and our products, negatively affecting our revenues and operating results.
We currently face significant competition in our markets and expect that competition will
continue. Competition in the telecommunications market is affected by various factors, including:
| • | comprehensiveness of products and technologies; | ||
| • | value added features which drive replacement rates; | ||
| • | manufacturing capability; | ||
| • | scalability and the ability of the system technology to meet customers’ immediate and future network requirements; | ||
| • | product performance and quality; | ||
| • | design and engineering capabilities; | ||
| • | compliance with industry standards; | ||
| • | time-to-market; | ||
| • | system cost; and | ||
| • | customer support. |
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This competition may result in increased development costs and reduced average selling prices
for our products and those of our customers and licensees. Reductions in the average selling price
of our licensees’ products, unless offset by an increase in volumes, generally result in reduced
royalties payable to us. While pricing pressures from competition may, to a large extent, be
mitigated by the introduction of new features and functionality in our licensees’ products, there
is no guarantee that such mitigation will occur. We anticipate that additional competitors will
enter our markets as a result of growth opportunities in wireless telecommunications, the trend
toward global expansion by foreign and domestic competitors, technological and public policy
changes and relatively low barriers to entry in selected segments of the industry.
Companies that promote non-CDMA technologies (e.g. GSM and WiMax) and companies that design
competing CDMA-based integrated circuits are generally included amongst our competitors or
potential competitors in the United States or abroad. Examples (some of whom are strategic partners
of ours in other areas) include Broadcom, EoNex Technologies, Ericsson, Freescale, Fujitsu, Intel, LSI Corporation,
NEC, Nokia, Samsung, Texas Instruments and VIA Telecom. With respect to our QES business, our
competitors are aggressively pricing products and services and are offering new value-added
products and services which may impact margins, intensify competition in current and new markets
and harm our ability to compete in certain markets.
Many of these current and potential competitors have advantages over us, including:
| • | longer operating histories and presence in key markets; | ||
| • | greater name recognition; | ||
| • | motivation by our customers in certain circumstances to find alternate suppliers; | ||
| • | access to larger customer bases; | ||
| • | economies of scale and cost structure advantages; and | ||
| • | greater sales and marketing, manufacturing, distribution, technical and other resources than we have. |
As a result of these and other factors, our competitors may be more successful than us. In
addition, we anticipate additional competitors will enter the market for products based on 3G
standards. These competitors may have more established relationships and distribution channels in
markets not currently deploying CDMA-based wireless communications technology. These competitors
also may have established or may establish financial or strategic relationships among themselves or
with our existing or potential customers, resellers or other third parties. These relationships may
affect our customers’ decisions to purchase products or license technology from us. Accordingly,
new competitors or alliances among competitors could emerge and rapidly acquire significant market
share to our detriment. In addition to the foregoing, we have seen, and believe we will continue to
see, an increase in customers requesting that we develop products, including chipsets, that will
operate in an “open source” environment. Developing open source compliant products, without
imperiling the intellectual property rights upon which our licensing business depends, may prove
difficult under certain circumstances, thereby placing us at a competitive
disadvantage for new product designs.
While we continue to believe our QMT Division’s IMOD displays will offer compelling advantages
to the display market, there can be no assurance that other technologies will not continue to
improve in ways that reduce the advantages we anticipate from our IMOD displays. The flat panel
display market is currently, and we believe will likely continue to be for some time, dominated by
displays based on liquid crystal display (LCD) technology. Numerous companies are making
substantial investments in, and conducting research to improve characteristics of LCDs.
Additionally, several other flat panel display technologies have been, or are being, developed,
including technologies for the production of organic light-emitting diode (OLED), field emission,
inorganic electroluminescence, gas plasma and vacuum fluorescent displays. In each case, advances
in LCD or other flat panel display technologies could result in technologies that are more cost
effective, have fewer display limitations, or can be brought to market faster than our IMOD
technology. These advances in competing technologies might cause display manufacturers to avoid
entering into commercial relationships with us, or not renew planned or existing relationships with
us. Our QMT Division had $215 million in assets (including $128 million in goodwill) at
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September
30, 2007. If we are not successful in bringing our IMOD display technology to market, our assets
may become impaired, which, in turn, could negatively impact our operating results.
Successful attempts by certain companies to amend or modify Standards Development Organizations’
(SDO’s) and other industry forums’ intellectual property policies could impact our licensing
business.
Some companies have proposed significant changes to existing intellectual property policies
for implementation by SDO’s and other industry organizations, some of which would require a maximum
aggregate intellectual property royalty rate for the use of all essential patents owned by all of
the member companies to be applied to the selling price of any product implementing the relevant
standard. They have further proposed that such maximum aggregate royalty rate be apportioned to
each member company with essential patents based upon the size of its essential patent portfolio.
Although the European Telecommunications Standards Institute (ETSI) ad hoc IPR group and the Next
Generation Mobile Network industry group have thus far determined that such proposals should not be
adopted as amendments to existing ETSI policies or new policies, such proposals as
described above might be revisited by ETSI and might be adopted by other SDO’s or industry
groups, resulting in a disadvantage to our business model either by limiting our return on
investment with respect to new technologies or forcing us to work outside of the SDO’s or such
other industry groups for promoting our new technologies.
We depend upon a limited number of third party suppliers to manufacture component parts,
subassemblies and finished goods for our products. If these third party suppliers do not allocate
adequate manufacturing capacity in their facilities to manufacture products on our behalf, or if
there are any disruptions in the operations of, or the loss of, any of these third parties, it
could harm our ability to meet our delivery obligations to our customers, reduce our revenue,
increase our cost of sales and harm our business.
Our ability to meet customer demand depends, in part, on available manufacturing capacity and
our ability to obtain timely and adequate delivery of parts and components from our suppliers.
Component shortages or declines in demand could adversely affect our ability and that of our
customers to ship products on a timely basis could harm our ability to achieve or sustain desired
levels of profitability. Additionally, failure to meet customer demand in a timely manner could
damage our reputation and harm our customer relationships. Our operations may also be harmed by
lengthy or recurring disruptions at any of our suppliers manufacturing facilities and by
disruptions in the distribution channels from our suppliers and to our customers. Any such
disruptions could cause significant delays in shipments until we are able to shift the products
from an affected manufacturer to another manufacturer. If the affected supplier was a sole source
supplier, we may not be able to obtain the product without significant cost and delay. The loss of
a significant third party supplier or the inability of a third party supplier to meet performance
and quality specifications or delivery schedules could harm our ability to meet our delivery
obligations to our customers and negatively impact our revenues and business operations.
QCT Segment. A supplier’s ability to meet our product manufacturing demand is limited mainly
by their overall capacity and current capacity availability. Although we have entered into
long-term contracts with our suppliers, most of these contracts do not provide for long-term
capacity commitments. To the extent that we do not have firm commitments from our suppliers over a
specific time period, or in any specific quantity, our suppliers may allocate, and in the past have
allocated, capacity to the production of products for their other customers while reducing capacity
to manufacture our products. Accordingly, capacity for our products may not be available when we
need it or available at reasonable prices. There can be no assurance that we will not experience
supply constraints, which could result in our failure to meet customer demand.
While our goal is to establish alternate suppliers for technologies that we consider critical,
some of our integrated circuits products are only available from single sources, with which we do
not have long-term contracts. Our reliance on sole or limited-source suppliers involves significant
risks including possible shortages of manufacturing capacity, poor product performance and reduced
control over delivery schedules, manufacturing capability and yields, quality assurance, quantity
and costs. The timely readiness of our foundry suppliers to support transitions to smaller geometry
process technologies could impact our ability to meet customer demand, revenue, and cost
expectations. In addition, the timing of acceptance of smaller technology designs by our customers
may subject us to the risk of excess inventories of earlier designs.
In the event of a loss of, or a decision to change a key third party supplier, qualifying a
new foundry supplier and commencing volume production or testing could involve delay and expense,
resulting in lost revenues, reduced operating margins and possible loss of customers. We work
closely with our customers to expedite their processes for evaluating new integrated circuits from
our foundry suppliers; however, in some instances, transition of
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integrated circuit production to a
new foundry supplier may cause a temporary decline in shipments of specific integrated circuits to
individual customers.
QMT Division. QMT needs to form and maintain reliable business relationships with flat panel
display manufacturers or other targeted partners to support the manufacture of IMOD displays in
commercial volumes. All of our current relationships have been for the development and limited
production of certain IMOD display panels and/or modules. Some or all of these relationships may
not succeed or, even if they are successful, may not result in the display manufacturers’ entering
into material supply relationships with us.
We have expanded our QCT segment’s manufacturing model to include the purchase of completed die
from semiconductor manufacturing foundries and to contract directly with third party manufacturers
for assembly and test services. This new production model may increase costs and lower our control
over the manufacturing process.
To further enable flexibility of supply and access to potential new foundry suppliers, and in
response to the complexity of our product roadmap, starting in fiscal 2005, we expanded our
manufacturing model to include purchasing completed die directly from semiconductor manufacturing
foundries. Under our Integrated Fabless Manufacturing (IFM) model, we contract directly with third
party manufacturers for back-end assembly and test services, and we ship the completed integrated
circuits to our customers. We expect to increase the volume of our purchases of completed die
directly from our foundry suppliers under our IFM model as we source new products and convert
existing turnkey production to our IFM model. We are unable to directly control the services
provided by our semiconductor assembly and test (SAT) suppliers, including the timely procurement
of packaging materials for our products, availability of assembly and test capacity, quality
assurance and product delivery schedules. We have a limited history of working with the SAT
suppliers under this expanded manufacturing model, and cannot guarantee that this change and our
lack of control will not cause disruptions in our operations that could harm our ability to meet
our delivery obligations to our customers, reduce our revenue, or increase our cost of sales.
Our suppliers may also be our competitors putting us at a disadvantage for pricing and capacity
allocation.
One or more of our suppliers may obtain licenses from us to manufacture CDMA-based integrated
circuits that compete with our products. In this event, the supplier could elect to allocate raw
materials and manufacturing capacity to their own products and reduce deliveries to us to our
detriment. In addition, we may not receive reasonable pricing, manufacturing or delivery terms. We
cannot guarantee that the actions of our suppliers will not cause disruptions in our operations
that could harm our ability to meet our delivery obligations to our customers or increase our cost
of sales.
We, and our licensees, are subject to the risks of conducting business outside the United States.
A significant part of our strategy involves our continued pursuit of growth opportunities in a
number of international markets. We market, sell and service our products internationally. We have
established sales offices around the world. We expect to continue to expand our international sales
operations and enter new international markets. This expansion will require significant management
attention and financial resources to successfully develop direct and indirect international sales
and support channels, and we cannot assure you that we will be successful or that our expenditures
in this effort will not exceed the amount of any resulting revenues. If we are not able to maintain
or increase international market demand for our products and technologies, we may not be able to
maintain a desired rate of growth in our business.
Our international customers sell their products to markets throughout the world, including
China, India, Japan, South Korea, North America, South America and Europe. We distinguish revenues
from external customers by geographic areas based on the location to which our products, software
or services are delivered and, for QTL’s licensing and royalty revenue, the domicile of our
licensees. Consolidated revenues from international customers as a percentage of total revenues
were 87% in fiscal 2007 and 2006 and 82% in fiscal 2005. Because most of our foreign sales are
denominated in U.S. dollars, our products and those of our customers and licensees that are sold in
U.S. dollars become less price-competitive in international markets if the value of the U.S. dollar
increases relative to foreign currencies, and our revenues may not
grow as quickly as they otherwise might in response to worldwide growth
in wireless products and services.
In many international markets, barriers to entry are created by long-standing relationships
between our potential customers and their local service providers and protective regulations,
including local content and service requirements. In addition, our pursuit of international growth
opportunities may require significant investments for
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an extended period before we realize returns,
if any, on our investments. Our business could be adversely affected by a variety of uncontrollable
and changing factors, including:
| • | difficulty in protecting or enforcing our intellectual property rights and/or contracts in a particular foreign jurisdiction, including challenges to our licensing practices under such jurisdictions’ competition laws; | ||
| • | our inability to succeed in significant foreign markets, such as China, India or Europe; | ||
| • | cultural differences in the conduct of business; | ||
| • | difficulty in attracting qualified personnel and managing foreign activities; | ||
| • | longer payment cycles for and greater difficulties collecting accounts receivable; | ||
| • | export controls, tariffs and other trade protection measures; | ||
| • | nationalization, expropriation and limitations on repatriation of cash; | ||
| • | social, economic and political instability; | ||
| • | natural disasters, acts of terrorism, widespread illness and war; | ||
| • | taxation; | ||
| • | variability in the value of the dollar against foreign currency; and | ||
| • | changes in laws and policies affecting trade, foreign investments, licensing practices and loans. |
We cannot be certain that the laws and policies of any country with respect to intellectual
property enforcement or licensing, issuance of wireless licenses or the adoption of standards will
not be changed or enforced in a way detrimental to our licensing program or to the sale or use of
our products or technology.
The wireless markets in China and India, among others, represent growth opportunities for us.
If wireless operators in China or India, or the governments of China or India, make technology
deployment or other decisions that result in actions that are adverse to the expansion of CDMA
technologies, our business could be harmed.
We are subject to risks in certain global markets in which wireless operators provide
subsidies on wireless device sales to their customers. Increases in device prices that negatively
impact device sales can result from changes in regulatory policies related to device subsidies.
Limitations or changes in policy on device subsidies in South Korea, Japan, China and other
countries may have additional negative impacts on our revenues.
Global economic conditions that impact the wireless communications industry could negatively affect
our revenues and operating results.
Global economic conditions can have wide-ranging effects on markets that we serve,
particularly wireless communications equipment manufacturers and wireless network operators. We
cannot predict negative events, such as war, that may have adverse effects on the economy or on
wireless device inventories at CDMA-based equipment manufacturers and operators. The continued
threat of terrorism and heightened security and military action in response to this threat, or any
future acts of terrorism, may cause disruptions to the global economy and to the wireless
communications industry and create uncertainties. Recent reports suggest that inflation could have
adverse effects on the global economy and capital markets. Inflation and/or deflation and economic
recessions could adversely affect our customers, including their ability to obtain financing,
upgrade wireless networks and purchase our products and services, and our end consumers, by
lowering their standards of living and diminishing their ability to purchase wireless devices based
on our technology. Inflation could also increase our costs of raw materials and operating expenses
and harm our business in other ways. During fiscal 2007, 69% of our revenues were from customers
and licensees based in South Korea, Japan and China, as compared to 70% and 69% during fiscal 2006
and 2005, respectively. These customers sell their products to markets worldwide, including Japan,
South Korea, China, India, North America, South America and Europe. A significant downturn in the
economies of Asian countries where many of our customers and licensees are located, particularly
the economies of South Korea, Japan and China, or the economies of the major markets they serve
would materially harm our business. Should such
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negative events occur, subsequent economic recovery
might not benefit us in the near term. If it does not, our ability to increase or maintain our
revenues and operating results may be impaired. In addition, because we intend to continue to make
significant investments in research and development and to maintain extensive ongoing customer
service and support capability, any decline in the rate of growth of our revenues will have a
significant adverse impact on our operating results.
Currency fluctuations could negatively affect future product sales or royalty revenue, harm our
ability to collect receivables, or increase the U.S. dollar cost of the activities of our foreign
subsidiaries and international strategic investments.
We are exposed to risk from fluctuations in currencies, which may change over time as our
business practices evolve, that could impact our operating results, liquidity and financial
condition. We operate and invest globally. Adverse movements in currency exchange rates may
negatively affect our business due to a number of situations, including the following:
| • | If the effective price of products sold by our customers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for the products could fall, which in turn would reduce our royalty and chipset revenues. | ||
| • | Declines in currency values in selected regions may adversely affect our operating results because our products and those of our customers and licensees may become more expensive to purchase in the countries of the affected currencies. | ||
| • | Assets or liabilities of our consolidated subsidiaries and our foreign investees that are not denominated in the functional currency of those entities are subject to the effects of currency fluctuations, which may affect our reported earnings. Our exposure to foreign currencies may increase as we expand into new markets. | ||
| • | Investments in our consolidated foreign subsidiaries and in other foreign entities that use the local currency as the functional currency may decline in value as a result of declines in local currency values. | ||
| • | Certain of our revenues, such as royalty revenues, are derived from licensee or customer sales that are denominated in foreign currencies. If these revenues are not subject to foreign exchange hedging transactions, weakening of currency values in selected regions could adversely affect our anticipated revenues and cash flows. | ||
| • | We may engage in foreign exchange hedging transactions that could affect our cash flows and earnings because they may require the payment of structuring fees, and they may limit the U.S. dollar value of royalties from licensees’ sales that are denominated in foreign currencies. | ||
| • | Our trade receivables are generally U.S. dollar denominated. Any significant increase in the value of the dollar against our customers’ or licensees’ functional currencies could result in an increase in our customers’ or licensees’ cash flow requirements and could consequently affect our ability to sell products and collect receivables. | ||
| • | Strengthening of currency values in selected regions may adversely affect our operating results because the activities of our foreign subsidiaries may become more expensive in U.S. dollars. | ||
| • | Strengthening of currency values in selected regions may adversely affect our cash flows and investment results because strategic investment obligations denominated in foreign currencies may become more expensive, and the U.S. dollar cost of equity in losses of foreign investees may increase. |
We may engage in acquisitions or strategic transactions or make investments that could result in
significant changes or management disruption and fail to enhance stockholder value.
From time to time, we engage in acquisitions or strategic transactions or make investments
with the goal of maximizing stockholder value. We acquire businesses, enter into joint ventures or
other strategic transactions and purchase equity and debt securities, including minority interests
in publicly-traded and private companies, non-investment grade debt securities, equity and debt
mutual funds, corporate bonds/notes and mortgage/asset-backed securities. Many of our strategic
investments are in CDMA wireless operators, early-stage companies, or venture funds to support our
business, including the global adoption of CDMA-based technologies and related services.
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Most of our strategic investments entail a high degree of risk and will not become liquid
until more than one year from the date of investment, if at all. Our acquisitions or strategic
investments (either those we have completed or may undertake in the future) may not
generate financial returns or result in increased adoption or continued use of our technologies. In
addition, our other investments may not generate financial returns or may result in losses due to
market volatility, the general level of interest rates and inflation expectations.
Achieving the anticipated benefits of acquisitions depends in part upon our ability to
integrate the acquired businesses in an efficient and effective manner. The integration of
companies that have previously operated independently may result in significant challenges, and we
may be unable to accomplish the integration smoothly or successfully. The difficulties of
integrating companies include, among others:
| • | retaining key employees; | ||
| • | maintenance of important relationships of Qualcomm and the acquired business; | ||
| • | minimizing the diversion of management’s attention from ongoing business matters; | ||
| • | coordinating geographically separate organizations; | ||
| • | consolidating research and development operations; and | ||
| • | consolidating corporate and administrative infrastructures. |
We cannot assure you that the integration of acquired businesses with our business will result
in the realization of the full benefits anticipated by us to result from the acquisition. We may
not derive any commercial value from the acquired technology, products and intellectual property or
from future technologies and products based on the acquired technology and/or intellectual
property, and we may be subject to liabilities that are not covered by indemnification protection
we may obtain.
Defects or errors in our products and services or in products made by our suppliers could harm our
relations with our customers and expose us to liability. Similar problems related to the products
of our customers or licensees could harm our business. If we experience product liability claims or
recalls, we may incur significant expenses and experience decreased demand for our products.
Our products are inherently complex and may contain defects and errors that are detected only
when the products are in use. For example, as our chipset product complexities increase, we are
required to migrate to integrated circuit technologies with smaller geometric feature sizes. The
design process interface issues are more complex as we enter into these new domains of technology,
which adds risk to yields and reliability. Because our products and services are responsible for
critical functions in our customers’ products and/or networks, such defects or errors could have a
serious impact on our customers, which could damage our reputation, harm our customer relationships
and expose us to liability. Defects or impurities in our components, materials or software or those
used by our customers or licensees, equipment failures or other difficulties could adversely affect
our ability and that of our customers and licensees to ship products on a timely basis as well as
customer or licensee demand for our products. Any such shipment delays or declines in demand could
reduce our revenues and harm our ability to achieve or sustain desired levels of profitability. We
and our customers or licensees may also experience component or software failures or defects that
could require significant product recalls, reworks and/or repairs that are not covered by warranty
reserves and which could consume a substantial portion of the capacity of our third party
manufacturers or those of our customers or licensees. Resolving any defect or failure related
issues could consume financial and/or engineering resources that could affect future product
release schedules. Additionally, a defect or failure in our products or the products of our
customers or licensees could harm our reputation and/or adversely affect the growth of 3G wireless
markets.
Testing, manufacturing, marketing and use of our products and those of our licensees and
customers entail the risk of product liability. The use of wireless devices containing our products
to access untrusted content creates a risk of exposing the system software in those devices to
viral or malicious attacks. We continue to expand our focus on this issue and take measures to
safeguard the software from this threat. However, this issue carries the risk of general product
liability claims along with the associated impacts on reputation and demand. Although we carry
product liability insurance to protect against product liability claims, we cannot assure you that
our insurance coverage will be sufficient to protect us against losses due to product liability claims, or
that we will be able to continue to maintain such insurance at a reasonable cost. Furthermore, not
all losses associated with alleged product
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failure are insurable. Our inability to maintain
insurance at an acceptable cost or to protect ourselves in other ways against potential product
liability claims could prevent or inhibit the commercialization of our products and those of our
licensees and customers and harm our future operating results. In addition, a product liability
claim or recall, whether against our licensees, customers, or us could harm our reputation and
result in decreased demand for our products.
MediaFLO does not fully control promotional activities necessary to stimulate demand for our
services.
Our MediaFLO business is a wholesale provider of mobile entertainment and information services
to our operator partners. As such, we do not set the retail price of our service to the consumer,
nor do we directly control the marketing and promotion of the service to the operator’s subscriber
base. Therefore, we are dependent upon our operator partners to price, market and otherwise promote
our services to the end users. If our operator partners do not effectively price, market and
otherwise promote the service to their subscriber base, our ability to achieve the subscriber and
revenue targets contemplated in our business plan will be negatively impacted.
Consumer acceptance and adoption of our MediaFLO technology will have a considerable impact on the
success of our MediaFLO businesses.
Customer acceptance of the services our MediaFLO businesses offer is, and will continue to be,
affected by technology-based differences and by the operational performance, quality, reliability
and coverage of our wireless network. Consumer demand could be impacted by differences in
technology, coverage and service areas, network quality, consumer perceptions, media content
offerings and rate plans. Our operator partners may have difficulty retaining subscribers if we are
unable to meet our customers’ expectations for network quality and coverage, customer care or
content. Obtaining content that is appealing to subscribers on economically rational terms may be
limited by pre-existing exclusivity agreements content providers have with their customers as well
as limitations placed on some content with respect to rights for mobile programming. An inability
to address those issues could limit our ability to expand our subscriber base and place us at a
competitive disadvantage as well as affect our ability to attract new subscribers. Additionally,
adoption and deployment of our MediaFLO technology could be adversely impacted by government
regulatory practices that support a single standard other than our technology, operator selection of
competing technologies or consumer preferences.
Our business and operating results will be harmed if we are unable to manage growth in our
business.
Certain of our businesses have experienced periods of rapid growth and/or increased their
international activities, placing significant demands on our managerial, operational and financial
resources. In order to manage growth and geographic expansion, we must continue to improve and
develop our management, operational and financial systems and controls, including quality control
and delivery and service capabilities. We also need to continue to expand, train and manage our
employee base. We must carefully manage research and development capabilities and production and
inventory levels to meet product demand, new product introductions and product and technology
transitions. We cannot assure you that we will be able to timely and effectively meet that demand
and maintain the quality standards required by our existing and potential customers and licensees.
In addition, inaccuracies in our demand forecasts, or failure of the systems used to develop
the forecasts, could quickly result in either insufficient or excessive inventories and
disproportionate overhead expenses. If we ineffectively manage our growth or are unsuccessful in
recruiting and retaining personnel, our business and operating results will be harmed.
Our operating results are subject to substantial quarterly and annual fluctuations and to market
downturns.
Our revenues, earnings and other operating results have fluctuated significantly in the past
and may fluctuate significantly in the future. General economic or other conditions causing a
downturn in the market for our products or technology, and in turn affecting the timing of customer
orders or causing cancellations or rescheduling of orders, could also adversely affect our
operating results. Moreover, our customers may change delivery schedules, cancel or reduce orders
without incurring significant penalties and generally are not subject to minimum purchase
requirements.
Our future operating results will be affected by many factors, including, but not limited to:
our ability to retain existing or secure anticipated customers or licensees, both domestically and
internationally; our ability to develop, introduce and market new technology, products and services
on a timely basis; management of inventory by us and our customers and their customers in response
to shifts in market demand; changes in the mix of technology and
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products developed, licensed, produced and sold; seasonal customer demand; and other factors described elsewhere in this Annual
Report and in these risk factors. Our cash investments represent a significant asset that may be
subject to fluctuating or even negative returns depending upon interest rate movements and
financial market conditions in fixed income and equity securities.
These factors affecting our future operating results are difficult to forecast and could harm
our quarterly and/or annual operating results. If our operating results fail to meet the financial
guidance we provide to investors, or the expectations of investment analysts or investors in any
period, securities class action litigation could be brought against us and/or the market price of
our common stock could decline.
Our stock price may be volatile.
The stock market in general, and the stock prices of technology-based and wireless
communications companies in particular, have experienced volatility that often has been unrelated
to the operating performance of any specific public company. The market price of our common stock
has fluctuated in the past and is likely to fluctuate in the future as well. Factors that may have
a significant impact on the market price of our stock include:
| • | announcements concerning us or our competitors, including the selection of wireless communications technology by wireless operators and the timing of the roll-out of those systems; | ||
| • | court or regulatory body decisions or settlements regarding intellectual property licensing and patent litigation and arbitration; | ||
| • | receipt of substantial orders or order cancellations for integrated circuits and system software products; | ||
| • | quality deficiencies in services or products; | ||
| • | announcements regarding financial developments or technological innovations; | ||
| • | international developments, such as technology mandates, political developments or changes in economic policies; | ||
| • | lack of capital to invest in 3G networks; | ||
| • | new commercial products; | ||
| • | changes in recommendations of securities analysts; | ||
| • | general stock market volatility; | ||
| • | government regulations, including share-based compensation accounting and tax regulations; | ||
| • | energy blackouts; | ||
| • | acts of terrorism and war; | ||
| • | inflation and deflation; | ||
| • | widespread illness; | ||
| • | proprietary rights or product or patent litigation against us or against our customers or licensees; | ||
| • | strategic transactions, such as spin-offs, acquisitions and divestitures; or | ||
| • | rumors or allegations regarding our financial disclosures or practices. |
Our future earnings and stock price may be subject to volatility, particularly on a quarterly
basis. Shortfalls in our revenues or earnings in any given period relative to the levels expected
by securities analysts could immediately, significantly and adversely affect the trading price of
our common stock.
In the past, securities class action litigation often has been brought against a company
following periods of volatility in the market price of its securities. Due to changes in the
volatility of our stock price, we may be the target of securities litigation in the future.
Securities and patent litigation could result in substantial uninsured costs and divert
management’s attention and resources. In addition, stock price volatility may be precipitated by
failure to meet earnings expectations or other factors, such as the potential uncertainty in future
reported earnings created by
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the assumptions used for share-based compensation and the related valuation models used to determine such expense.
Our industry is subject to rapid technological change, and we must make substantial investments in
new products and technologies to compete successfully.
New technological innovations generally require a substantial investment before they are
commercially viable. We intend to continue to make substantial investments in developing new
products and technologies, and it is possible that our development efforts will not be successful
and that our new technologies will not result in meaningful revenues. In particular, we intend to
continue to invest significant resources in developing integrated circuit products to support
high-speed wireless internet access and multimode, multiband, multinetwork operation and multimedia
applications, which encompass development of graphical display, camera and video capabilities, as
well as higher computational capability and lower power on-chip computers and signal processors. We
also continue to invest in the development of our BREW applications development platform, our
MediaFLO MDS and FLO technology and our IMOD display technology. All of these new products and
technologies face significant competition, and we cannot assure you that the revenues generated
from these products or the timing of the deployment of these products or technologies, which may be
dependent on the actions of others, will meet our expectations. We cannot be certain that we will
make the additional advances in development that may be essential to commercialize our IMOD
technology successfully.
The market for our products and technology is characterized by many factors, including:
| • | rapid technological advances and evolving industry standards; | ||
| • | changes in customer requirements; | ||
| • | frequent introductions of new products and enhancements; | ||
| • | evolving methods for transmission of wireless voice and data communications; and | ||
| • | intense competition from companies with greater resources, customer relationships and distribution capabilities. |
Our future success will depend on our ability to continue to develop and introduce new
products, technology and enhancements on a timely basis. Our future success will also depend on our
ability to keep pace with technological developments, protect our intellectual property, satisfy
customer requirements, price our products competitively and achieve market acceptance. The
introduction of products embodying new technologies and the emergence of new industry standards
could render our existing products and technology, and products and technology currently under
development, obsolete and unmarketable. If we fail to anticipate or respond adequately to
technological developments or customer requirements, or experience any significant delays in
development, introduction or shipment of our products and technology in commercial quantities,
demand for our products and our customers’ and licensees’ products that use our technology could
decrease, and our competitive position could be damaged.
Changes in assumptions used to estimate the values of share-based compensation have a significant
effect on our reported results.
We are required to estimate and record compensation expense in the statement of operations for
share-based payments, such as employee stock options, using the fair value method. This method has
a significant effect on our reported earnings, although it will not affect our cash flows, and
could adversely impact our ability to provide accurate guidance on our future reported financial
results due to the variability of the factors used to estimate the values of share-based payments.
If factors change and/or we employ different assumptions or different valuation methods in future
periods, the compensation expense that we record may differ significantly from amounts recorded
previously, which could negatively affect our stock price and our stock price volatility.
The accounting guidance for share-based compensation is relatively new, and best practices are
not well established. The application of these principles may be subject to further interpretation
and refinement over time. There are significant differences among valuation models, and there is a
possibility that we will adopt different valuation models in the future. This may result in a lack
of consistency in future periods and materially affect the fair value estimate of share-based
payments. It may also result in a lack of comparability with other companies that use different
models, methods and assumptions.
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Theoretical valuation models and market-based methods are evolving and may result in lower or
higher fair value estimates for share-based compensation. The timing, readiness, adoption, general
acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical
models may require voluminous historical information, modeling expertise, financial analyses,
correlation analyses, integrated software and databases, consulting fees, customization and testing
for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may
dilute our earnings per share and involve significant transaction fees and ongoing administrative
expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the
benefits to our investors.
Potential tax liabilities could adversely affect our results.
We are subject to income taxes in both the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our provision for income taxes. Although we believe
our tax estimates are reasonable, the final determination of tax audits and any related litigation
could be materially different than that which is reflected in historical income tax provisions and
accruals. In such case, a material effect on our income tax provision and net income in the period
or periods in which that determination is made could result. In addition, tax rules may change that
may adversely affect our future reported financial results or the way we conduct our business. For
example, we consider the operating earnings of certain non-United States subsidiaries to be
invested indefinitely outside the United States based on estimates that future domestic cash
generation will be sufficient to meet future domestic cash needs. No provision has been made for
United States federal and state or foreign taxes that may result from future remittances of
undistributed earnings of foreign subsidiaries. Our future reported financial results may be
adversely affected if tax or accounting rules regarding unrepatriated earnings change or if
domestic cash needs require us to repatriate foreign earnings.
The high amount of capital required to obtain radio frequency licenses, deploy and expand wireless
networks and obtain new subscribers could slow the growth of the wireless communications industry
and adversely affect our business.
Our growth is dependent upon the increased use of wireless communications services that
utilize our technology. In order to provide wireless communications services, wireless operators
must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in
the United States and other countries throughout the world, and limited spectrum space is allocated
to wireless communications services. Industry growth may be affected by the amount of capital
required to: obtain licenses to use new frequencies; deploy wireless networks to offer voice and
data services; expand wireless networks to grow voice and data services; and obtain new
subscribers. The significant cost of licenses, wireless networks and subscriber additions may slow
the growth of the industry if wireless operators are unable to obtain or service the additional
capital necessary to implement or expand 3G wireless networks. Our growth could be adversely
affected if this occurs.
If wireless devices pose safety risks, we may be subject to new regulations, and demand for our
products and those of our licensees and customers may decrease.
Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect
of discouraging the use of wireless devices, which would decrease demand for our products and those
of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have
updated the guidelines and methods they use for evaluating radio frequency emissions from radio
equipment, including wireless phones and other wireless devices. In addition, interest groups have
requested that the FCC investigate claims that wireless communications technologies pose health
concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also
been expressed over the possibility of safety risks due to a lack of attention associated with the
use of wireless devices while driving. Any legislation that may be adopted in response to these
expressions of concern could reduce demand for our products and those of our licensees and
customers in the United States as well as foreign countries.
Our QES and MediaFLO businesses depend on the availability of satellite and other networks.
Our OmniTRACS and OmniVision systems operate on leased Ku-band satellite transponders in the
United States, Mexico and Europe. Our primary data satellite transponder and position reporting
satellite transponder lease for these systems runs through October 2012 and includes transponder
and satellite protection (back-up capacity in the event of a transponder or satellite failure),
which we believe will provide sufficient transponder capacity for our United States OmniTRACS and
OmniVision operations through fiscal 2012. A failure to maintain adequate satellite
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capacity could harm our business, operating results, liquidity and financial position. QES terrestrial-based
products rely on wireless terrestrial communication networks operated by third parties. The
unavailability or nonperformance of these network systems could harm our business. The products and
services that we sell for use on Globalstar Inc.’s (Globalstar) low-Earth-orbit satellite network
are dependent on the availability and performance of the Globalstar satellite system. On February
6, 2007, Globalstar announced that many Globalstar satellites are experiencing an anomaly resulting
in degraded performance of the amplifiers for the S-band satellite communications antenna.
Globalstar stated that unless remedied, by some time in 2008, this degradation or degraded
performance will have a significant adverse impact on Globalstar’s ability to provide uninterrupted
two-way voice and data services on a continuous basis in any given location. On May 30, 2007,
Globalstar announced that four Globalstar satellites were successfully launched, and four
additional satellites are planned for launch shortly. Globalstar stated that it believes the
additional satellites will augment the current operating constellation and improve two-way voice
and data services until the launch of the second-generation satellite constellation, which is
scheduled to begin in the summer of 2009. If the recent launch of the satellites does not remedy
the problem or if Globalstar is unable to launch a second-generation satellite constellation, this
degraded performance will have an adverse impact on sales of our products and services that rely on
the Globalstar network.
Our MediaFLO network and systems currently operate in the United States market on a leased
Ku-band satellite transponder. Our primary program content and data distribution satellite
transponder lease runs through December 31, 2012 and includes transponder and satellite protection
(back-up capacity in the event of a transponder or satellite failure), which we believe will
provide sufficient transponder capacity for our domestic United States MediaFLO services through
fiscal 2012. Additionally our MediaFLO Transmitter Sites are monitored and controlled by a variety
of terrestrial-based data circuits relying on various terrestrial communication networks operated
by third parties. A failure to maintain adequate satellite capacity or the unavailability or
nonperformance of the terrestrial-based network systems could have an adverse effect on our
business and operating results.
Our business and operations would suffer in the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a
Disaster Recovery Plan for our internal information technology networking systems, our systems are
vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural
disasters, terrorism, war and telecommunication failures. Any system failure, accident or security
breach that causes interruptions in our operations or to our customers’ or licensees’ operations
could result in a material disruption to our business. To the extent that any disruption or
security breach results in a loss or damage to our customers’ data or applications, or
inappropriate disclosure of confidential information, we may incur liability as a result. In
addition, we may incur additional costs to remedy the damages caused by these disruptions or
security breaches.
Message transmissions for QES operations are formatted and processed at the Network Management
Center in San Diego, California, with a fully redundant backup Network Management Center located in
Las Vegas, Nevada. Content from third parties for MediaFLO operations is received, processed and
retransmitted at the Broadcast Operations Center in San Diego, California. The centers, operated by
us, are subject to system failures, which could interrupt the services and have an adverse effect
on our operating results.
From time to time, we install new or upgraded business management systems. To the extent such
systems fail or are not properly implemented, we may experience material disruptions to our
business, delays in our external financial reporting or failures in our system of internal
controls, that could have a material adverse effect on our results of operations.
Noncompliance with environmental or safety regulations could cause us to incur significant expenses
and harm our business.
As part of the development of our IMOD display technology, we are operating a research and
development fabrication facility. The development of IMOD display prototypes is a complex and
precise process involving hazardous materials subject to environmental and safety regulations.
Failure or inability to comply with existing or future environmental and safety regulations could
result in significant remediation liabilities, the imposition of fines and/or the suspension or
termination of development activities.
Our stock repurchase program may not result in a positive return of capital to stockholders.
At September 30, 2007, we have remaining authority to repurchase up to $1.5 billion of our
common stock, net of put options outstanding. Our stock repurchases may not return value to
stockholders because the market price of
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the stock may decline significantly below the levels at
which we repurchased shares of stock. Our stock purchase program is intended to deliver stockholder
value over the long-term, but stock price fluctuations can reduce the program’s effectiveness.
As part of our stock repurchase program, we may sell put options or engage in structured
derivative transactions to reduce the cost of repurchasing stock. In the event of a significant and
unexpected drop in stock price, these arrangements may require us to repurchase stock at price
levels that are significantly above the then-prevailing market price of our stock. Such
overpayments may have an adverse effect on the effectiveness of our overall stock repurchase
program and may reduce value for our stockholders.
We cannot provide assurance that we will continue to declare dividends at all or in any particular
amounts.
We intend to continue to pay quarterly dividends subject to capital availability and periodic
determinations that cash dividends are in the best interest of our stockholders. Future dividends
may be affected by, among other items, our views on potential future capital requirements,
including those related to research and development, creation and expansion of sales distribution
channels and investments and acquisitions, legal risks, stock repurchase programs, changes in
federal income tax law and changes to our business model. Our dividend payments may change from
time to time, and we cannot provide assurance that we will continue to declare dividends at all or
in any particular amounts. A reduction in our dividend payments could have a negative effect on our
stock price.
Government regulation and policies of industry standards bodies may adversely affect our business.
Our products and those of our customers and licensees are subject to various regulations,
including FCC regulations in the United States and other international regulations, as well as the
specifications of national, regional and international standards bodies. Changes in the regulation
of our activities, including changes in the allocation of available spectrum by the United States
government and other governments or exclusion or limitation of our technology or products by a
government or standards body, could have a material adverse effect on our business, operating
results, liquidity and financial position.
We hold licenses in the United States from the FCC for the spectrum referred to as Block D in
the Lower 700 MHz Band (also known as TV Channel 55), covering the entire nation for use in our
MediaFLO business. As a result, we are regulated by the FCC pursuant to Part 27 of the FCC’s rules,
which are subject to a variety of ongoing FCC proceedings. It is impossible to predict with
certainty the outcome of pending FCC or other federal or state regulatory proceedings relating to
our MediaFLO service or our use of the spectrum for which we hold licenses. Unless we are able to
obtain relief, existing laws and regulations may inhibit our ability to expand our business and to
introduce new products and services. In addition, the adoption of new laws or regulations or
changes to the existing regulatory framework could adversely affect our business plans.
We may not be able to attract and retain qualified employees.
Our future success depends largely upon the continued service of our board members, executive
officers and other key management and technical personnel. Our success also depends on our ability
to continue to attract, retain and motivate qualified personnel. In addition, implementing our
product and business strategy requires specialized engineering and other talent, and our revenues
are highly dependent on technological and product innovations. The market for such specialized
engineering and other talented employees in our industry is extremely competitive. In addition,
existing immigration laws make it more difficult for us to recruit and retain highly skilled
foreign national graduates of U.S. universities, making the pool of available talent even smaller.
Key employees represent a significant asset, and the competition for these employees is intense in
the wireless communications industry. In the event of a labor shortage, or in the event of an
unfavorable change in prevailing labor and/or immigration laws, we could experience difficulty attracting and retaining qualified employees.
We continue to anticipate increases in human resources, particularly in engineering, through fiscal
2008. If we are unable to attract and retain the qualified employees that we need, our business may
be harmed.
We may have particular difficulty attracting and retaining key personnel in periods of poor
operating performance given the significant use of incentive compensation by our competitors. We do
not have employment agreements with our key management personnel and do not maintain key person
life insurance on any of our personnel. To the extent that new regulations make it less attractive
to grant options to employees or if stockholders do not authorize shares for the continuation of
equity compensation programs in the future, we may incur increased compensation costs, change our
equity compensation strategy or find it difficult to attract, retain and motivate employees, each
of which could materially and adversely affect our business.
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Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
Changing laws, regulations and standards relating to corporate governance and public
disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations
and standards are subject to varying interpretations in many cases. As a result, their application
in practice may evolve over time. We are committed to maintaining high standards of corporate
governance and public disclosure. Complying with evolving interpretations of new or changed legal
requirements may cause us to incur higher costs as we revise current practices, policies and
procedures, and may divert management time and attention from revenue generating to compliance
activities. If our efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due to ambiguities related to
practice, our reputation might also be harmed. In addition, it has become more difficult and more
expensive for us to obtain director and officer liability insurance, and we have purchased reduced
coverage at substantially higher cost than in the past. Further, our board members, chief executive
officer and chief financial officer could face an increased risk of personal liability in
connection with the performance of their duties. As a result, we may have difficulty attracting and
retaining qualified board members and executive officers, which could harm our business.
Our charter documents and Delaware law could limit transactions in which stockholders might obtain
a premium over current market prices.
Our certificate of incorporation includes a provision that requires the approval of holders of
at least 66 2/3% of our voting stock as a condition to certain mergers or other business
transactions with, or proposed by, a holder of 15% or more of our voting stock. Under our charter
documents, stockholders are not permitted to call special meetings of our stockholders or to act by
written consent. These charter provisions may discourage certain types of transactions involving an
actual or potential change in our control, including those offering stockholders a premium over
current market prices. These provisions may also limit our stockholders’ ability to approve
transactions that they may deem to be in their best interests.
Further, our Board of Directors has the authority under Delaware law to fix the rights and
preferences of and issue shares of preferred stock, and our preferred share purchase rights
agreement will cause substantial dilution to the ownership of a person or group that attempts to
acquire us on terms not approved by our Board of Directors. While our Board of Directors approved
our preferred share purchase rights agreement to provide the board with greater ability to maximize
shareholder value, these rights could deter takeover attempts that the board finds inadequate and
make it more difficult to bring about a change in our ownership.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
At September 30, 2007, we occupied the indicated square footage in the owned or leased
facilities described below (square footage in thousands):
| Number | Total | |||||||||
| of | Square | |||||||||
| Buildings | Location | Status | Footage | Primary Use | ||||||
22
|
United States | Owned | 2,707 | Executive and administrative offices, research and development, sales and marketing, service functions, manufacturing and network management hub. | ||||||
43
|
United States | Leased | 1,603 | Administrative offices, research and development, sales and marketing, service functions and network management hub. | ||||||
5
|
India | Leased | 240 | Administrative offices, research and development and sales and marketing. | ||||||
8
|
Mexico | Leased | 134 | Administrative offices, sales and marketing, service functions, manufacturing and network operating centers. | ||||||
3
|
China | Leased | 88 | Administrative offices, research and development, sales and marketing, service functions and network operating centers. | ||||||
4
|
England | Leased | 71 | Administrative offices, research and development and sales and marketing | ||||||
3
|
Korea | Leased | 65 | Administrative offices, research and development and sales and marketing. | ||||||
1
|
India | Owned | 56 | Administrative offices, research and development and sales and marketing. | ||||||
1
|
Israel | Leased | 51 | Administrative offices, research and development and sales and marketing. | ||||||
4
|
Taiwan | Leased | 47 | Administrative offices, research and development and sales and marketing. | ||||||
4
|
Germany | Leased | 31 | Administrative offices, research and development and sales and marketing. | ||||||
27
|
Other International | Leased | 104 | Administrative offices, research and development and sales and marketing. | ||||||
| Total square footage | 5,197 | |||||||||
In addition to the facilities above, we own or lease approximately 77,000 square feet of
properties that are leased or subleased to third parties. Our facility leases expire at varying
dates through 2016 not including renewals that would be at our option. As of September 30, 2007, we
also lease space on base station towers and buildings
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pursuant to 220 lease arrangements for our MediaFLO USA network. The majority of our cell site leases have an initial term of five to seven
years with renewal options of up to five additional five-year periods.
Several owned and leased facilities in San Diego, California are under construction totaling
approximately 690,000 additional square feet to meet the requirements projected in our long-term
business plan. We believe that our facilities will be suitable and adequate for the present
purposes and that the productive capacity in such facilities is substantially utilized. In the
future, we may need to purchase, build or lease additional facilities to meet the requirements
projected in our long-term business plan.
Item 3. Legal Proceedings
Broadcom Corporation v. QUALCOMM Incorporated: On May 18, 2005, Broadcom filed two actions in
the United States District Court for the Central District of California against the Company
alleging infringement of ten patents and seeking monetary damages and injunctive relief based
thereon. On the same date, Broadcom also filed a complaint in the United States International Trade
Commission (ITC) alleging infringement of five of the same patents at issue in the Central District
Court cases seeking a determination and relief under Section 337 of the Tariff Act of 1930. On July
1, 2005, Broadcom filed an action in the United States District Court for the District of New
Jersey against the Company alleging violations of state and federal antitrust and unfair
competition laws as well as common law claims, generally relating to licensing and chip sales
activities, seeking monetary damages and injunctive relief based thereon. On September 1, 2006, the
New Jersey District Court dismissed the complaint; Broadcom appealed. On September 4, 2007, the
Court of Appeals for the Third Circuit reinstated two of the eight federal claims and five pendant state claims in
Broadcom’s complaint and affirmed the dismissal of the remaining counts. On November 2, 2007,
Broadcom filed an amended complaint in the New Jersey case, adding the allegations from a state
court case in California that had been stayed, as discussed below. On December 12, 2005, the Central
District Court in California ordered two of the Broadcom patent claims filed in the other Central
District patent action (which is stayed pending completion of the ITC action) to be transferred to
the Southern District of California to be considered in the case filed by the Company on August 22,
2005. That case was subsequently dismissed by agreement of the parties. Trial was held in May 2007
in one of the remaining Central District Court patent actions, and on May 29, 2007, the jury
rendered a verdict finding willful infringement of three patents and awarding past damages in the
approximate amount of $20 million, which has been expensed pending appeals. Following a change in
the law governing the definition of willfulness, the Court issued a tentative ruling that the
jury’s finding of willfulness and inducement should be vacated. After a hearing on October 15,
2007, the Court requested additional briefings by both parties, including briefing on the question
of whether the damages awarded under the two patents must be vacated and indicated that the Court
would postpone any decision on an appropriate injunction remedy pending its final decision on the
jury’s finding of willfulness. The Court’s final ruling on these issues and the appropriate remedy
for the jury’s infringement findings is expected within the next several weeks.
On February 14, 2006, an ITC hearing also commenced as to three patents alleged by Broadcom to
be infringed by the Company. On October 10, 2006, the Administrative Law Judge (ALJ) issued an
initial determination in which he recommended against any downstream remedies and found no
infringement by the Company on two of the three remaining patents and most of the asserted claims
of the third patent. The ALJ did find infringement on some claims of one patent. The ALJ did not
recommend excluding chips accused by Broadcom but, instead, recommended a limited exclusion order
directed only to chips that are already programmed with a specific software module and recommended
a related cease and desist order. The Commission adopted the ALJ’s initial determination on
violation and, on June 7, 2007, issued a cease and desist order and an exclusion order directed at
chips programmed with specific software and certain downstream products first imported after the
date of the exclusion order. The Federal Circuit has issued stays of the exclusion order with respect to
the downstream products of all of the Company’s customers that requested the stay. The Company is
appealing both the infringement finding and the cease and desist order and the exclusion order to
the United States Court of Appeal for the Federal Circuit. On April 13, 2007, Broadcom filed a new
complaint in California state court against the Company alleging unfair competition, breach of
contract and fraud, and seeking injunctive and monetary relief. On October 5, 2007, the Court
ordered the case stayed pending resolution of the New Jersey case, referenced above.
QUALCOMM Incorporated v. Broadcom Corporation: On October 14, 2005, the Company filed an
action in the United States District Court for the Southern District of California against Broadcom
alleging infringement of two patents, each of which relates to video encoding and decoding for
high-end multimedia processing, and seeking monetary damages and injunctive relief based thereon.
In January 2007, a jury rendered a verdict finding the patents valid but not infringed. In a
subsequent ruling, the trial judge held that the Company was not guilty of inequitable
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conduct before the Patent Office but the Company’s actions in a video-encoding standards development
organization amounted to a waiver of the right to enforce the patents under any circumstances. The
Court also ordered Qualcomm to pay Broadcom’s attorneys’ fees and costs for the case. Qualcomm and
Broadcom have each filed notices of appeal. The Court is also considering a motion for discovery
sanctions against Qualcomm for failing to produce certain documents in discovery.
Actions by the Company and its subsidiaries against Nokia Corporation and/or Nokia Inc.: On
November 4, 2005, the Company, along with its wholly-owned subsidiary, SnapTrack, filed an action
in the United States District Court for the Southern District of California against Nokia alleging
infringement of eleven Qualcomm patents and one SnapTrack patent relating to GSM/GPRS/EDGE and
position location and seeking monetary damages and injunctive relief. On May 24, 2006, the Company
filed an action in the Chancery Division of the High Court of Justice for England and Wales against
Nokia alleging infringement of two Qualcomm patents relating to GSM/GPRS/EDGE, seeking monetary
damages and injunctive relief. On June 9, 2006, the Company filed a complaint with the ITC against
Nokia alleging importation of products that infringe six Qualcomm patents relating to power
control, video encoding and decoding, and power conservation mode technologies and seeking an
exclusionary order and a cease and desist order. On July 7, 2006, the ITC commenced an
investigation. The Company subsequently withdrew three of the patents from the proceedings. The ITC
trial was completed in September 2007. The date for an initial determination from the ITC ALJ is
December 12, 2007, and the target date for resolution of the investigation is April 14, 2008. On
August 9, 2006, the Company filed an action in the District Court of Dusseldorf, Federal Republic
of Germany, against Nokia alleging infringement of two Qualcomm patents relating to GSM/GPRS/EDGE,
seeking monetary damages and injunctive relief. On October 9, 2006, the Company filed an action in
the High Court of Paris, France against Nokia alleging infringement of two patents relating to
GSM/GPRS/EDGE, seeking monetary damages and injunctive relief. On October 9, 2006, the Company
filed an action in the Milan Court, Italy against Nokia alleging infringement of two patents
relating to GSM/GPRS/EDGE, seeking monetary damages and injunctive relief. In February 2007, the
Company initiated proceedings in the People’s Republic of China against Nokia for infringement of
three patents by Nokia’s GSM/GPRS/EDGE products. On April 2, 2007, the Company filed suit against
Nokia in the Eastern District of Texas, Marshall Division for infringement of two patents and in
the Western District of Wisconsin for infringement of three patents. These cases are directed to
Nokia GSM/GPRS/EDGE cellular phones. In response, Nokia filed counterclaims alleging infringement
by the Company of six Nokia patents, two of which Nokia also asserted against the Company’s
subsidiary, MediaFLO USA, Inc. No trial date is set and discovery has not yet begun. On October 17,
2007, the Company and MediaFLO USA, Inc. filed a motion to stay Nokia’s infringement counterclaims
pending the arbitration proceeding filed on April 5, 2007, discussed below. On July 11, 2007, the
Wisconsin Court issued an order transferring that case to the United States District Court for the
Southern District of California and the parties have consolidated the matter with the San Diego
matter referenced above and stipulated to a stay of the proceedings pending final resolution of the
ITC matter referenced above. On April 5, 2007, the Company filed an arbitration demand with the
American Arbitration Association requesting a ruling that, among other things, Nokia’s continued
use of the Company’s patents in Nokia’s CDMA cellular handsets (including WCDMA) after April 9,
2007 constitutes an election by Nokia to extend its license under the parties’ existing agreement.
On July 9, 2007, the Company filed an amended demand for arbitration, alleging that Nokia’s
institution of certain patent infringement proceedings against the Company was a material breach of
the license agreement between the parties.
Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated: On August 9, 2006, Nokia
Corporation and Nokia Inc. filed a complaint in Delaware Chancery Court seeking declaratory and
injunctive relief relating to alleged commitments made by the Company to wireless industry
standards setting organizations. The Company has moved to dismiss the complaint. On April 12, 2007
and June 5, 2007, the Company filed counterclaims seeking declarations that, among other things,
the Company’s 2001 license agreement with Nokia fulfilled and/or superseded any ostensible
obligations to offer or grant patent licenses to Nokia allegedly arising from the Company’s
participation in certain standards setting organizations. Both parties have moved to dismiss the
other’s complaints. In March 2007, Nokia filed actions in Germany and the Netherlands alleging that
certain of the Company’s patents are exhausted with regards to Nokia’s products placed on the
European market that contain chipsets supplied to Nokia by Texas Instruments. On October 23, 2007,
the German court dismissed Nokia’s claims. On August 16, 2007, Nokia Corporation and Nokia Inc.
filed a complaint with the United States International Trade Commission (ITC) alleging importation
of products that infringe five Nokia patents and seeking an exclusionary order and a cease and
desist order. The ITC instituted an investigation on September 17, 2007. The Company filed a motion
to terminate the investigation pending resolution of the arbitration proceeding instituted by the
Company on
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April 5, 2007. On October 18, 2007, the ALJ issued an order recommending the Company’s
motion be granted. The ALJ’s determination will become the ITC’s final decision unless the ITC
decides within 30 days to review the decision.
European Commission Complaint: On October 28, 2005, it was reported that six companies
(Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the
European Commission, alleging that the Company violated European Union competition law in its WCDMA
licensing practices. The Company has received the complaints and has submitted replies to the
allegations, as well as documents and other information requested by the European Commission. On
October 1, 2007, the European Commission announced that it was initiating a proceeding, though it
has not decided to issue a Statement of Objections, and it has not made any conclusions as to the
merits of the complaints.
Tessera, Inc. v. QUALCOMM Incorporated: On April 17, 2007, Tessera, Inc. filed a patent
infringement lawsuit in the United States District Court for the Eastern Division of Texas and a
complaint with the United States ITC pursuant to Section 337 of the Tariff Act of 1930 against the
Company and other companies, alleging infringement of two patents relating to semiconductor
packaging structures and seeking monetary damages and injunctive and other relief based hereon. The
ITC instituted the investigation on May 15, 2007. On July 11, 2007, the ITC issued an order that
set August 21, 2008 as the target date for completion of the investigation.
Other: The Company has been named, along with many other manufacturers of wireless phones,
wireless operators and industry-related organizations, as a defendant in several purported class
action lawsuits, and individually filed actions pending in Pennsylvania and Washington D.C.,
seeking monetary damages arising out of its sale of cellular phones. The courts that have reviewed
similar claims against other companies to date have held that there was insufficient scientific
basis for the plaintiffs’ claims in those cases.
It has been reported that two U.S. companies (Texas Instruments and Broadcom) and two South
Korean companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korea
Fair Trade Commission alleging that the Company’s business practices are, in some way, a violation
of South Korean anti-trust regulations. To date, the Company has not received the complaints but
has submitted information and documents to the Korea Fair Trade Commission.
The Japan Fair Trade Commission has also received unspecified complaints alleging the
Company’s business practices are, in some way, a violation of Japanese law. The Company has not
received the complaints but has submitted information and documents to the Japan Fair Trade
Commission.
Although there can be no assurance that unfavorable outcomes in any of the foregoing matters
would not have a material adverse effect on the Company’s operating results, liquidity or financial
position, the Company believes the claims made by other parties are without merit and will
vigorously defend the actions. Other than amounts relating to the Broadcom Corporation v. QUALCOMM
Incorporated and QUALCOMM Incorporated v. Broadcom Corporation matters, the Company has not
recorded any accrual for contingent liabilities associated with the other legal proceedings
described above, based on the Company’s belief that additional liabilities, while possible, are not
probable. Further, any possible range of loss cannot be estimated at this time. The Company is
engaged in numerous other legal actions arising in the ordinary course of its business and believes that
the ultimate outcome of these actions will not have a material adverse effect on its operating
results, liquidity or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended September 30,
2007.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock is traded on the NASDAQ Stock Market under the symbol “QCOM.” The following
table sets forth the range of high and low sales prices on the NASDAQ Stock Market of the common
stock for the fiscal periods indicated, as reported by NASDAQ. Such quotations represent inter-dealer
prices without retail markup, markdown or commission and may not necessarily represent actual
transactions.
| High ($) | Low ($) | |||||||
2006 |
||||||||
First quarter |
46.60 | 39.02 | ||||||
Second quarter |
51.18 | 42.91 | ||||||
Third quarter |
53.01 | 38.77 | ||||||
Fourth quarter |
40.92 | 32.76 | ||||||
2007 |
||||||||
First quarter |
40.99 | 34.10 | ||||||
Second quarter |
44.12 | 36.79 | ||||||
Third quarter |
47.72 | 40.98 | ||||||
Fourth quarter |
45.58 | 35.23 | ||||||
As
of November 6, 2007, there were 10,031 holders of record of our common stock. On November 6,
2007, the last sale price reported on the NASDAQ Stock Market for our
common stock was $41.56 per
share.
Dividends
On March 7, 2006, we announced an increase in our quarterly dividend from $0.09 to $0.12 per
share on our common stock. On March 13, 2007, we announced an increase in our quarterly dividend
from $0.12 to $0.14 per share of common stock. Cash dividends announced in fiscal 2006 and 2007
were as follows (in millions, except per share data):
| Cumulative | ||||||||||||
| Per Share | Total | by Fiscal Year | ||||||||||
2006 |
||||||||||||
First quarter |
$ | 0.09 | $ | 148 | $ | 148 | ||||||
Second quarter |
0.09 | 150 | 298 | |||||||||
Third quarter |
0.12 | 202 | 500 | |||||||||
Fourth quarter |
0.12 | 198 | 698 | |||||||||
| $ | 0.42 | $ | 698 | |||||||||
2007 |
||||||||||||
First quarter |
$ | 0.12 | $ | 198 | $ | 198 | ||||||
Second quarter |
0.12 | 200 | 398 | |||||||||
Third quarter |
0.14 | 234 | 632 | |||||||||
Fourth quarter |
0.14 | 230 | 862 | |||||||||
| $ | 0.52 | $ | 862 | |||||||||
On October 11, 2007, we announced a cash dividend of $0.14 per share on our common stock,
payable on January 4, 2008 to stockholders of record as of December 7, 2007. We intend to continue
to pay quarterly dividends subject to capital availability and periodic determinations that cash
dividends are in the best interests of our stockholders. Future dividends may be affected by, among
other items, our views on potential future capital requirements, including those relating to
research and development, creation and expansion of sales distribution channels and investments and
acquisitions, legal risks, stock repurchase programs, changes in federal income tax law and changes
to our business model.
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Share-Based Compensation
We primarily issue stock options under our share-based compensation plans, which are part of a
broad-based, long-term retention program that is intended to attract and retain talented employees
and directors and align stockholder and employee interests.
Pursuant to our 2006 Long-Term Incentive Plan (2006 Plan), we grant options to selected
employees, directors and consultants to purchase shares of our common stock at a price not less
than the fair market value of the stock at the date of grant. The 2006 Plan provides for the grant
of both incentive and non-qualified stock options as well as stock appreciation rights, restricted
stock, restricted stock units, performance units and shares and other stock-based awards.
Generally, options outstanding vest over five years and are exercisable for up to 10 years from the
grant date. The Board of Directors may terminate the 2006 Plan at any time.
Additional information regarding our stock option plans and plan activity for fiscal 2007,
2006 and 2005 is provided in the notes to our consolidated financial statements in this Annual
Report in “Notes to Consolidated Financial Statements, Note 8 — Employee Benefit Plans” and in our
2008 Proxy Statement under the heading “Equity Compensation Plan Information.”
Issuer Purchases of Equity Securities
Issuer purchases of equity securities during the fourth quarter of fiscal 2007 (in millions,
except per share data):
| Approximate Dollar | ||||||||||||||||
| Total Number of | Value of Shares | |||||||||||||||
| Shares Purchased as | That May Yet Be | |||||||||||||||
| Part of Publicly | Purchased Under the | |||||||||||||||
| Total Number of | Average Price Paid | Announced Plans or | Plans or | |||||||||||||
| Period | Shares Purchased | Per Share(1) | Programs(2) | Programs(3) | ||||||||||||
July 2, 2007 to July 29, 2007 |
0.4 | $ | 42.35 | 0.4 | $ | 2,856 | ||||||||||
July 30, 2007 to August 26, 2007 |
27.0 | 38.94 | 27.0 | 1,804 | ||||||||||||
August 27, 2007 to September
30, 2007 |
3.8 | 39.45 | 3.8 | 1,654 | ||||||||||||
Total |
31.2 | 39.04 | 31.2 | 1,654 | ||||||||||||
| (1) | Average price paid per share excludes cash paid for commissions. We repurchased 2.5 million shares in the fourth quarter of 2007 upon the exercise of a put option. A premium totaling $3 million was excluded from the average price paid per share. If the premium had been included, the average price paid per share for the purchases of shares made during the fourth quarter would have been $38.93. | |
| (2) | On May 22, 2007, we announced that we had been authorized to repurchase up to $3.0 billion of our common stock with no expiration date. The $3.0 billion stock repurchase program replaced a $2.5 billion stock repurchase program, of which approximately $0.9 billion remained authorized for repurchases. | |
| (3) | The approximate dollar value of shares that may yet be purchased has not been reduced by the net cost of $189 million (net of the premiums received) of 5 million shares that may be repurchased related to put options outstanding at September 30, 2007. |
We repurchased and retired 37,263,000 shares of common stock for $1.5 billion during fiscal
2007, excluding $9 million of premiums received.
Performance Measurement Comparison of Stockholder Return
The following graph compares total stockholder return on our common stock since September 29,
2002 to two indices: the Standard & Poor’s 500 Stock Index (the S&P 500) and the Nasdaq Total
Return Index for Communications Equipment Stocks, SIC 3660-3669 (the Nasdaq Industry). The S&P 500
tracks the aggregate price performance of the equity securities of 500 United States companies
selected by Standard & Poor’s Index Committee to include companies in leading industries and to
reflect the United States stock market. The Nasdaq Industry tracks the aggregate price performance
of equity securities of communications equipment companies traded on the Nasdaq
Stock Market. The total return for our stock and for each index assumes the reinvestment of
dividends and is based on the returns of the component companies weighted according to their
capitalizations as of the end of each annual period. We began paying dividends on our common stock
on March 31, 2003. Our common stock is traded on the Nasdaq Global Select Market and is a component
of each of the S&P 500 and the Nasdaq Industry.
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Comparison of Cumulative Total Return on Investment Since
September 29, 2002(1)
September 29, 2002(1)
The Company’s closing stock price on September 28, 2007, the last trading day of the Company’s
2007 fiscal year, was $42.26 per share.
| (1) | Shows the cumulative total return on investment assuming an investment of $100 in each of our common stock, the S&P 500 and the Nasdaq Industry on September 29, 2002. All returns are reported as of our fiscal year end, which is the last Sunday of the month in which the fourth quarter ends, whereas the numbers for the S&P 500 are calculated as of the last day of the month in which the corresponding quarter ends. |
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Item 6. Selected Financial Data
The following balance sheet data and statement of operations data for the five fiscal years
ended September 30, 2007, September 24, 2006, September 25, 2005, September 26, 2004 and September
28, 2003 were derived from our audited consolidated financial statements. Consolidated balance
sheets at September 30, 2007 and September 24, 2006 and the related consolidated statements of
operations and cash flows for fiscal 2007, 2006 and 2005 and notes thereto appear elsewhere herein.
The data should be read in conjunction with the annual consolidated financial statements, related
notes and other financial information appearing elsewhere herein.
| Years Ended (1) | ||||||||||||||||||||
| September 30, | September 24, | September 25, | September 26, | September 28, | ||||||||||||||||
| 2007 | 2006 | 2005 | 2004 (2)(4) | 2003 (2) | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenues |
$ | 8,871 | $ | 7,526 | $ | 5,673 | $ | 4,880 | $ | 3,847 | ||||||||||
Operating income |
2,883 | 2,690 | 2,386 | 2,129 | 1,573 | |||||||||||||||
Income from continuing operations |
3,303 | 2,470 | 2,143 | 1,725 | 1,029 | |||||||||||||||
Net income |
3,303 | 2,470 | 2,143 | 1,720 | 827 | |||||||||||||||
Per Share Data: (3) |
||||||||||||||||||||
Income from continuing operations — basic |
$ | 1.99 | $ | 1.49 | $ | 1.31 | $ | 1.07 | $ | 0.65 | ||||||||||
Income from continuing operations — diluted |
1.95 | 1.44 | 1.26 | 1.03 | 0.63 | |||||||||||||||
Net income — basic |
1.99 | 1.49 | 1.31 | 1.06 | 0.52 | |||||||||||||||
Net income — diluted |
1.95 | 1.44 | 1.26 | 1.03 | 0.51 | |||||||||||||||
Dividends announced |
0.520 | 0.420 | 0.320 | 0.190 | 0.085 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash, cash equivalents and marketable
securities |
$ | 11,815 | $ | 9,949 | $ | 8,681 | $ | 7,635 | $ | 5,372 | ||||||||||
Total assets |
18,495 | 15,208 | 12,479 | 10,820 | 8,822 | |||||||||||||||
Long-term debt (5) |
91 | 58 | 3 | — | 123 | |||||||||||||||
Total stockholders’ equity |
15,835 | 13,406 | 11,119 | 9,664 | 7,598 | |||||||||||||||
| (1) | Our fiscal year ends on the last Sunday in September. The fiscal year ended September 30, 2007 included 53 weeks. The four fiscal years ended September 24, 2006, September 25, 2005, September 26, 2004 and September 28, 2003 each included 52 weeks. | |
| (2) | During fiscal 2004, we sold the Vésper Operating Companies and the Vésper Towers and returned personal mobile service (SMP) licenses to Anatel, the telecommunications regulatory agency in Brazil. The results of operations, including gains and losses realized on the sales transactions and the SMP licenses, were presented as discontinued operations in the consolidated statements of operations. | |
| (3) | We effected a two-for-one stock split in August 2004. All references to number of shares and per share amounts reflect this stock split. | |
| (4) | Prior to the fourth quarter of fiscal 2004, we recorded royalty revenues from certain licensees based on our estimates of royalties during the period they were earned. Starting in the fourth quarter of fiscal 2004, we began recognizing royalty revenues solely based on royalties reported by licensees during the quarter. The change in the timing of recognizing royalty revenue was made prospectively and had the initial one-time effect of reducing royalty revenues recorded in the fourth quarter of fiscal 2004. | |
| (5) | Long-term debt for the years ended September 30, 2007, September 24, 2006 and September 25, 2005 consisted of capital lease obligations, which are included in other liabilities in the consolidated balance sheets. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, the following discussion contains forward-looking
statements that are subject to risks and uncertainties. Actual results may differ substantially
from those referred to herein due to a number of factors, including but not limited to risks
described in the section entitled Risk Factors and elsewhere in this Annual Report.
Overview
Recent Developments
Revenues for fiscal 2007 were $8.87 billion, with net income of $3.30 billion. The following
recent developments occurred with respect to key elements of our business or our industry during
fiscal 2007:
| • | Worldwide wireless subscribers grew by more than 21% to reach approximately 3.1 billion.(1) | ||
| • | CDMA subscribers, including both 2G (cdmaOne) and 3G (CDMA2000 1X, 1xEV-DO and WCDMA), grew to approximately 17% of total worldwide wireless subscribers to date. (1) | ||
| • | 3G subscribers (all CDMA-based) grew to approximately 530 million worldwide by September 30, 2007, including approximately 370 million CDMA2000 1X/1xEV-DO subscribers and approximately 160 million WCDMA/HSPA subscribers. (1) | ||
| • | CDMA-based handset shipments totaled approximately 338 million units, an increase of 34% over the 253 million units shipped in fiscal 2006. (2) (4) | ||
| • | CDMA-based handset shipments grew faster than total worldwide handsets and represent an estimated 32% of the total (1.1 billion) worldwide handset shipments, compared to 28% of the total (911 million) shipments in fiscal 2006. (3) | ||
| • | The average selling price of CDMA-based handsets was estimated to be approximately $214, same as the prior year. (2) (4) | ||
| • | We shipped approximately 253 million Mobile Station Modem (MSM) integrated circuits for CDMA-based wireless devices and data modules, an increase of 22%, compared to approximately 207 million MSM integrated circuits in fiscal 2006. | ||
| • | We are engaged in multiple disputes with Nokia Corp., including arbitration over Nokia’s obligation to pay royalties for the use of certain of our patents. As a result, under generally accepted accounting principles, we are not recording royalty revenue attributable to Nokia’s sales after April 9, 2007 until an arbitrator (or court) awards damages or the disputes are otherwise resolved by agreement with Nokia, resulting in a negative impact on royalty revenues reported by our QTL segment. We expect activity in this area to remain high and anticipate some decisions and/or rulings in 2008. |
| (1) | According to Wireless Intelligence, an independent source of wireless operator data. | |
| (2) | Fiscal 2007 information was derived from reports provided by our licensees/manufacturers during the year and our own estimates of unreported activity. Fiscal 2006 information was derived from reports provided by our licensees/manufacturers during the year. | |
| (3) | Based on current reports by Strategy Analytics, a global research and consulting firm, in their Global Handset Market Share Updates. | |
| (4) | We perform periodic audits of the royalties payable by our licensees. As a result of our audit process, we determined during the fourth quarter of fiscal 2007 that total CDMA-based handset unit shipments and average selling prices (ASPs) should be adjusted for certain periods. The adjustments related only to handset shipments and ASPs and did not impact the amount or timing of our revenue. |
Our Business and Operating Segments
We design, manufacture, have manufactured on our behalf and market digital wireless
telecommunications products and services based on our CDMA technology and other technologies. We
derive revenue principally from sales of integrated circuit products, from license fees and
royalties for use of our intellectual property, from services and related hardware sales and from
software development and licensing and related services. Operating expenses primarily consist of
cost of equipment and services, research and development and selling, general and administrative
expenses.
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We conduct business primarily through four reportable segments. These segments are: Qualcomm
CDMA Technologies, or QCT; Qualcomm Technology Licensing, or QTL; Qualcomm Wireless & Internet, or
QWI; and Qualcomm Strategic Initiatives, or QSI.
QCT is a leading developer and supplier of CDMA-based integrated circuits and system software
for wireless voice and data communications, multimedia functions and global positioning system
products. QCT’s integrated circuit products and system software are used in wireless devices,
particularly mobile phones, data cards and infrastructure equipment. The integrated circuits for
wireless devices include the MSM, RF and PM devices. These integrated circuits for wireless devices
and system software perform voice and data communication, multimedia and global positioning
functions, radio conversion between RF and baseband signals and power management. QCT’s system
software enables the other device components to interface with the integrated circuit products and
is the foundation software enabling phone manufacturers to develop handsets utilizing the
functionality within the integrated circuits. The infrastructure equipment integrated circuits and
system software perform the core baseband CDMA modem functionality in the wireless operator’s base
station equipment. In addition to the key components in a wireless system, QCT provides system
reference designs and development tools to assist in customizing wireless devices and user
interfaces, to integrate our products with components developed by others, and to test
interoperability with existing and planned networks. QCT revenues comprised 59%, 58% and 58% of
total consolidated revenues in fiscal 2007, 2006 and 2005, respectively.
QCT utilizes a fabless production business model, which means that we do not own or operate
foundries for the production of silicon wafers from which our integrated circuits are made. We rely
on independent third party suppliers to perform the manufacturing and assembly, and most of the
testing, of our integrated circuits. Our suppliers are also responsible for the procurement of most
of the raw materials used in the production of our integrated circuits. We employ both turnkey and
two-stage manufacturing business models to purchase our integrated circuits. Turnkey is when our
foundry suppliers are responsible for delivering fully assembled and tested integrated circuits.
Under the two-stage manufacturing business model, we purchase completed die directly from
semiconductor manufacturing foundries and contract directly with third party manufacturers for
back-end assembly and test services. We refer to this two-stage manufacturing business model as
Integrated Fabless Manufacturing (IFM).
QTL grants licenses to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of certain wireless
products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD,
GPRS/EDGE and/or OFDMA standards and their derivatives. QTL receives revenue from license fees as
well as ongoing royalties based on worldwide sales by licensees of products incorporating or using
our intellectual property. License fees are fixed amounts paid in one or more installments. Ongoing
royalties are generally based upon a percentage of the wholesale selling price of licensed
products, net of certain permissible deductions (e.g. certain shipping costs, packing costs, VAT,
etc.). QTL revenues comprised 31%, 33% and 30% of total consolidated revenues in fiscal 2007, 2006
and 2005, respectively. The vast majority of such revenues have been generated primarily through
our licensees’ sales of cdmaOne, CDMA2000 and WCDMA products.
QWI, which includes Qualcomm Enterprise Services (QES) (formerly Qualcomm Wireless Business
Solutions, or QWBS), Qualcomm Internet Services (QIS) and Qualcomm Government Technologies (QGOV),
generates revenues primarily through mobile communication products and services, software and
software development aimed at support and delivery of wireless applications. QES sells equipment,
software and services used by transportation and other companies to connect wirelessly with their
assets, products and workforce. QES also sells products that operate on the Globalstar
low-Earth-orbit satellite-based telecommunications system and provides related services. Through
September 2007, QES has shipped approximately 1,192,000 terrestrial-based and satellite-based
communications systems. QIS provides BREW-based (Binary Runtime Environment for Wireless) products
that include user interface and content delivery and management products and services for the
wireless industry. QIS also provides QChat, which enables virtually instantaneous push-to-talk
functionality on CDMA-based wireless devices. The QGOV division provides development, hardware and
analytical expertise involving wireless communications technologies to United States government
agencies. QWI revenues comprised 9%, 10% and 12% of total consolidated revenues in fiscal 2007,
2006 and 2005, respectively.
QSI manages the Company’s strategic investment activities, including MediaFLO USA, Inc.
(MediaFLO USA), the Company’s wholly-owned wireless multimedia operator subsidiary. QSI also makes
strategic investments to promote the worldwide adoption of CDMA-based products and services. Our
strategy is to invest in CDMA-based
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operators, licensed device manufacturers and start-up companies
that we believe open new markets for CDMA
technology, support the design and introduction of new CDMA-based products or possess unique
capabilities or technology. Our MediaFLO USA subsidiary offers services over our nationwide
multicasting network based on our MediaFLO MDS and FLO technology. This network is utilized as a
shared resource for wireless operators and their customers in the United States. The commercial
availability of the MediaFLO USA network and service will continue to be determined by our wireless
operator partners. MediaFLO USA’s network uses the 700 MHz spectrum for which we hold licenses
nationwide. Additionally, MediaFLO USA has and will continue to procure, aggregate and distribute
content in service packages which we will make available on a wholesale basis to our wireless
operator customers (whether they operate on CDMA or GSM/WCDMA networks) in the United States.
Distribution, marketing, billing and customer relationships remain services provided by our
wireless operator partners. As part of our strategic investment activities, we intend to pursue
various exit strategies at some point in the future, which may include distribution of our
ownership interest in MediaFLO USA to our stockholders in a spin-off transaction.
Nonreportable segments include: the Qualcomm MEMS Technologies division, which is developing
an IMOD display technology based on micro-electro-mechanical-system (MEMS) structure combined with
thin film optics; the Qualcomm Flarion Technologies division, which is developing OFDM/OFDMA
technologies; the MediaFLO Technologies division, which is developing our MediaFLO MDS and FLO
technology and markets MediaFLO for deployment outside of the United States; and other product
initiatives.
Looking Forward
The deployment of 3G networks (CDMA2000 and WCDMA) enables higher voice capacity and data
rates, thereby supporting more minutes of use and data intensive applications like multimedia. As a
result, we expect continued growth in demand for 3G products and services around the world. As we
look forward to the next several months, the following items are likely to have an impact on our
business:
| • | The deployment of CDMA2000 networks is expected to continue. |
| • | More than 230 operators have launched CDMA2000 1X; (1) | ||
| • | More than 75 operators have deployed the higher data speeds of 1xEV-DO and 10 operators have deployed, and several more are preparing to deploy EV-DO Revision A. (1) |
| • | GSM operators are expected to continue transitioning to WCDMA networks. |
| • | More than 180 GSM operators have migrated their networks to WCDMA; (2) | ||
| • | More than 140 operators have launched commercial HSDPA networks and manufacturers are beginning to test and deploy the faster uplink speeds of HSUPA. (2) |
| • | We expect WCDMA device prices will continue to segment into high and low end due to high volumes and vibrant competition in marketplaces around the world. As more operators deploy the higher data speeds of HSPA, we expect consumer demand for advanced 3G devices to accelerate. | ||
| • | To meet growing demand for advanced 3G wireless devices and increased multimedia MSM functionality, we intend to continue to invest significant resources toward the development of multimedia products, software and services for the wireless industry. However, we expect that a portion of our research and development initiatives in fiscal 2008 will not reach commercialization until several years in the future. | ||
| • | We expect demand for low-end wireless devices to continue and have developed a family of Qualcomm Single Chip (QSC) products, which integrate the baseband, radio frequency and power management functions into one chip, lowering component counts and enabling faster time-to-market for our customers. While we continue to invest resources aggressively to expand our QSC product family to address the low-end market more effectively with CDMA-based products, we still face significant competition from GSM-based products, particularly in emerging markets. |
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| • | We will continue to invest in the evolution of CDMA and a broad range of other technologies as part of our vision to enable a range of technologies, each optimized for specific services, including the following products and technologies: |
| • | The continued evolution of CDMA-based technologies, including the long-term roadmaps of 1xEV-DO and High Speed Packet Access (HSPA); | ||
| • | OFDM and OFDMA-based technologies; | ||
| • | Our BREW applications platform, content delivery services and user interfaces; | ||
| • | Our MediaFLO MDS and FLO technology for delivery of multimedia content; and | ||
| • | Our IMOD display technology. |
In addition to the foregoing business and market-based matters, the following items are likely
to have an impact on our business and results of operations over the next several months:
| • | We expect that we will continue to be involved in litigation, including our ongoing disputes with Broadcom and Nokia, and to appear in front of administrative and regulatory bodies, including the European Commission, the Korea Fair Trade Commission and the Japan Fair Trade Commission to defend our business model and, in some cases, to thwart efforts by companies to gain competitive advantage or negotiating leverage. | ||
| • | We have been and continue to consider reasonable ways that we can be of assistance to our customers, including in some cases certain levels of financial support to minimize the impact of the litigation in which we are involved. | ||
| • | We will continue to devote resources to working with and educating all participants in the wireless value chain as to the benefits of our business model in promoting a highly competitive and innovative wireless market. However, we expect that certain companies may continue to be dissatisfied with the need to pay reasonable royalties for the use of our technology and not welcome the success of our business model in enabling new, highly cost-effective competitors to their products. We expect that such companies will continue to challenge our business model in various forums throughout the world. |
| (1) | According to public reports made available at www.cdg.org. | |
| (2) | As reported by the Global mobile Suppliers Association, an international organization of WCDMA and GSM (Global System for Mobile Communications) suppliers in their October 2007 reports. |
Further discussion of risks related to our business is presented in the Risk Factors included
in this Annual Report.
Revenue Concentrations
Revenues from customers in South Korea, China, Japan and the United States comprised 31%, 21%,
17% and 13%, respectively, of total consolidated revenues for fiscal 2007, as compared to 32%, 17%,
21% and 13%, respectively, for fiscal 2006, and 37%, 11%, 21% and 18%, respectively, in fiscal
2005. We distinguish revenues from external customers by geographic areas based on the location to
which our products, software or services are delivered and, for QTL’s licensing and royalty
revenues, the domicile of our licensees. The increase in revenues from customers in China from 11%
and 17% of total revenues in fiscal 2005 and 2006, respectively, to 21% in fiscal 2007 is primarily
attributable to increased shipments of integrated circuits to CDMA device manufacturers with
locations in China. The increasing trend in revenues from customers in China is expected to
continue. Combined revenues from customers in South Korea, Japan and the United States decreased as
a percentage of total revenues, from 76% in fiscal 2005 to 66% in fiscal 2006 and 61% in fiscal
2007, primarily due to increases in the percentage of revenues from WCDMA manufacturers in Western
Europe and increased activity by manufacturers with locations in China.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations and liquidity and capital resources
are based on our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and
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judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and
judgments, including those related to revenue recognition, valuation of intangible assets and
investments, share-based payments, income taxes, and litigation. We base our estimates on
historical and anticipated results and trends and on various other assumptions that we believe are
reasonable under the circumstances, including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. By their nature, estimates are subject to an inherent degree
of uncertainty. Actual results that differ from our estimates could have a significant adverse
effect on our operating results and financial position. We believe that the following significant
accounting policies and assumptions may involve a higher degree of judgment and complexity than
others.
Revenue Recognition. We derive revenue principally from sales of integrated circuit products,
from royalties and license fees for our intellectual property, from messaging and other services
and related hardware sales and from software development and licensing and related services. The
timing of revenue recognition and the amount of revenue actually recognized in each case depends
upon a variety of factors, including the specific terms of each arrangement and the nature of our
deliverables and obligations. Determination of the appropriate amount of revenue recognized
involves judgments and estimates that we believe are reasonable, but actual results may differ from
our estimates. We record reductions to revenue for customer incentive programs, including special
pricing agreements and other volume-related rebate programs. Such reductions to revenue are
estimates, based on a number of factors, including our assumptions related to historical and
projected customer sales volumes and the contractual provisions of our customer agreements.
We license rights to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of certain wireless
products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD
and/or the OFDMA standards and their derivatives. Licensees typically pay a license fee in one or
more installments and ongoing royalties based on their sales of products incorporating or using our
licensed intellectual property. License fees are recognized over the estimated period of future
benefit to the average licensee, typically five to seven years. We earn royalties on such licensed
CDMA products sold worldwide by our licensees at the time that the licensees’ sales occur. Our
licensees, however, do not report and pay royalties owed for sales in any given quarter until after
the conclusion of that quarter, and, in some instances, although royalties are reported quarterly,
payment is on a semi-annual basis. We recognize royalty revenues based on royalties reported by
licensees during the quarter. From time to time, licensees will not report royalties timely due to
legal disputes, and when this occurs, the timing and comparability of royalty revenue could be
affected.
Valuation of Intangible Assets and Investments. Our business acquisitions typically result in
the recording of goodwill and other intangible assets, and the recorded values of those assets may
become impaired in the future. As of September 30, 2007, our goodwill and intangible assets, net of
accumulated amortization, were $1.3 billion and $664 million, respectively. The determination of
the value of such intangible assets requires management to make estimates and assumptions that
affect our consolidated financial statements. We assess potential impairments to intangible assets
when there is evidence that events or changes in circumstances indicate that the carrying amount of
an asset may not be recovered. Our judgments regarding the existence of impairment indicators and
future cash flows related to intangible assets are based on operational performance of our
businesses, market conditions and other factors. Although there are inherent uncertainties in this
assessment process, the estimates and assumptions we use, including estimates of future cash flows,
volumes, market penetration and discount rates, are consistent with our internal planning. If these
estimates or their related assumptions change in the future, we may be required to record an
impairment charge on all or a portion of our goodwill and intangible assets. Furthermore, we cannot
predict the occurrence of future impairment-triggering events nor the impact such events might have
on our reported asset values. Future events could cause us to conclude that impairment indicators
exist and that goodwill or other intangible assets associated with our acquired businesses is
impaired. Any resulting impairment loss could have an adverse impact on our results of operations.
We hold minority investments in publicly-traded companies whose share prices may be highly
volatile. We also hold investments in other marketable securities, including non-investment grade
debt securities, equity and debt mutual funds, corporate bonds/notes and mortgage/asset-backed
securities. These investments, which are recorded at fair value with increases or decreases
generally recorded through stockholders’ equity as other comprehensive income or loss, totaled $9.4
billion at September 30, 2007. We record impairment charges through the statement of
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operations when we believe an investment has experienced a decline that is other than
temporary. The determination that a decline is other than temporary is subjective and influenced by
many factors. In addition, the fair values of our strategic investments are subject to substantial
quarterly and annual fluctuations and to significant market volatility. Future adverse changes in
market conditions or poor operating results of investees could result in losses or an inability to
recover the carrying value of the investments, thereby requiring impairment charges in the future.
When assessing these investments for an other-than-temporary decline in value, we consider such
factors as, among other things, how significant the decline in value is as a percentage of the
original cost, how long the market value of the investment has been less than its original cost,
the performance of the investee’s stock price in relation to the stock price of its competitors
within the industry, the market in general and analyst recommendations, as applicable. We also
review the financial statements of the investee to determine if the investee is experiencing
financial difficulties. In the event our judgments change as to other-than-temporary declines in
value, we may record an impairment loss, which could have an adverse impact on our results of
operations. During fiscal 2007, 2006 and 2005, we recorded $16 million, $20 million and $13
million, respectively, in other-than-temporary losses on our investments in marketable securities.
We hold minority strategic investments in private companies whose values are difficult to
determine. These investments totaled $114 million at September 30, 2007. We record impairment
charges when we believe an investment has experienced a decline that is other-than-temporary. The
determination that a decline is other-than-temporary is subjective and influenced by many factors.
Future adverse changes in market conditions or poor operating results of investees could result in
losses or an inability to recover the carrying value of the investments, thereby possibly requiring
impairment charges in the future. When assessing investments in private companies for an
other-than-temporary decline in value, we consider such factors as, among other things, the share
price from the investee’s latest financing round, the performance of the investee in relation to
its own operating targets and its business plan, the investee’s revenue and cost trends, the
investee’s liquidity and cash position, including its cash burn rate, and market acceptance of the
investee’s products and services. From time to time, we may consider third party evaluations,
valuation reports or advice from investment banks. We also consider new products/services that the
investee may have forthcoming, any significant news specific to the investee or the investee’s
competitors and/or industry and the outlook of the overall industry in which the investee operates.
In the event our judgments change as to other-than temporary declines in value, we may record an
impairment loss, which could have an adverse impact on our results of operations. During fiscal
2007, 2006 and 2005, we recorded $11 million, $4 million and $1 million, respectively, in
other-than-temporary losses on our investments in private companies. Due to financial and
competitive challenges facing our investees, we cannot assure you that our investments will
generate financial returns or that we will not have to write down our investments.
Share-Based Payments. We grant options to purchase our common stock to our employees and
directors under our equity compensation plans. Eligible employees can also purchase shares of our
common stock at 85% of the lower of the fair market value on the first or the last day of each
six-month offering period under our employee stock purchase plans. The benefits provided under
these plans are share-based payments subject to the provisions of revised Statement of Financial
Accounting Standards No. 123 (FAS 123R), “Share-Based Payment.” We use the fair value method to
apply the provisions of FAS 123R with a modified prospective application. Under the modified
prospective application method, prior periods are not revised for comparative purposes. Share-based
compensation expense recognized under FAS 123R for fiscal 2007 and 2006 was $493 million and $495
million, respectively. At September 30, 2007, total unrecognized estimated compensation expense
related to non-vested stock options granted prior to that date was $1.3 billion, which is expected
to be recognized over a weighted-average period of 3.4 years. Net stock options, after forfeitures
and cancellations, granted during fiscal 2007 represented 2.0% of outstanding shares as of the
beginning of the fiscal period. Total stock options granted during fiscal 2007 represented 2.3% of
outstanding shares as of the end of the fiscal period.
We estimate the value of stock option awards on the date of grant using a lattice binomial
option-pricing model (binomial model). The determination of the fair value of share-based payment
awards on the date of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include, but
are not limited to, our expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.
We believe it is important for investors to be aware of the high degree of subjectivity involved
when using option-pricing models to estimate share-based compensation under FAS 123R.
Option-pricing models were developed for use in estimating the value of traded options that have no
vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our
share-based payments have characteristics significantly different
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from those of freely traded options, and because valuation model assumptions are subjective,
in our opinion, existing valuation models, including the Black-Scholes and lattice binomial models,
may not provide reliable measures of the fair values of our share-based compensation awards. There
is not currently a generally accepted market-based mechanism or other practical application to
verify the reliability and accuracy of the estimates stemming from these valuation models. Although
we estimate the fair value of employee share-based awards in accordance with FAS 123R and the
Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107), the
option-pricing model we use may not produce a value that is indicative of the fair value observed
in a willing buyer/willing seller market transaction.
For purposes of estimating the fair value of stock options granted during fiscal 2007, we used
the implied volatility of market-traded options in our stock for the expected volatility assumption
input to the binomial model. We utilized the term structure of volatility up to approximately two
years, and we used the implied volatility of the option with the longest time to maturity for the
expected volatility estimates for periods beyond two years. The weighted-average volatility
assumption was 33.4% for fiscal 2007, which if increased to 37%, would increase the
weighted-average estimated fair value of stock options granted during fiscal 2007 by $0.80 per
share, or 5%. The volatility percentage assumed for fiscal 2007 and 2006 was based on the implied
volatility of traded options, as compared to the blend of implied and historical volatility data
used in prior years. FAS 123R includes implied volatility in its list of factors that should be
considered in estimating expected volatility. We believe implied volatility is more useful than
historical volatility in estimating expected volatility because it is generally reflective of both
historical volatility and expectations of how future volatility will differ from historical
volatility.
The risk-free interest rate is based on the yield curve of U.S. Treasury strip securities for
a period consistent with the contractual life of the option in effect at the time of grant. The
weighted-average risk-free interest rate assumption was 4.6% for fiscal 2007, which if increased to
6.5%, would increase the weighted-average estimated fair value of stock options granted during
fiscal 2007 by $0.95 per share, or 7%.
We do not target a specific dividend yield for our policy on dividend payments, but we are
required to assume a dividend yield as an input to the binomial model. The dividend yield
assumption is based on our history and expectation of dividend payouts. The dividend yield
assumption was 1.3% for fiscal 2007, which if decreased to 0.4%, would increase the
weighted-average estimated fair value of stock options granted during fiscal 2007 by $0.96 per
share, or 7%. Dividends and/or increases or decreases in dividend payments are subject to board
approval as well as to future cash inflows and outflows resulting from operating performance, stock
repurchase programs, mergers and acquisitions, and other sources and uses of cash. While our
historical dividend rate is assumed to continue in the future, it may be subject to substantial
change, and investors should not depend upon this forecast as a reliable indication of future cash
distributions that will be made to investors.
The post-vesting forfeiture rate is estimated using historical option cancellation
information. The weighted-average post-vesting forfeiture rate assumption was 6.5% for fiscal 2007,
which if decreased to 1.5%, would increase the weighted-average estimated fair value of stock
options granted during fiscal 2007 by $0.73 per share, or 5%.
The suboptimal exercise factor is estimated using historical option exercise information. The
weighted-average suboptimal exercise factor assumption was 1.8 for fiscal 2007, which if increased
to 2.1, would increase the weighted-average estimated fair value of stock options granted during
fiscal 2007 by $0.66 per share, or 5%.
Income Taxes. Our income tax returns are based on calculations and assumptions that are
subject to examination by the Internal Revenue Service and other tax authorities. While we believe
we have appropriate support for the positions taken on our tax returns, we regularly assess the
potential outcomes of these examinations and any future examinations for the current or prior years
in determining the adequacy of our provision for income taxes. As part of our assessment of
potential adjustments to our tax returns, we increase our current tax liability to the extent an
adjustment would result in a cash tax payment or decrease our deferred tax assets to the extent an
adjustment would not result in a cash tax payment. We continually assess the likelihood and amount
of potential adjustments and adjust the income tax provision, the current tax liability and
deferred taxes in the period in which the facts that give rise to a revision become known. Although
we believe that the estimates and assumptions supporting our assessments are reasonable,
adjustments could be materially different from those which are reflected in historical income tax
provisions and recorded assets and liabilities. For example, during fiscal 2007, we recorded an
income tax benefit of $331 million resulting from the completion of audits of our fiscal 2003 and
2004 federal tax returns.
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We regularly review our deferred tax assets for recoverability and establish a valuation
allowance based on historical taxable income, projected future taxable income, the expected timing
of the reversals of existing temporary
differences and the implementation of tax-planning strategies. As of September 30, 2007, gross
deferred tax assets were $1.08 billion. If we are unable to generate sufficient future taxable
income in certain tax jurisdictions, or if there is a material change in the actual effective tax
rates or time period within which the underlying temporary differences become taxable or
deductible, we could be required to increase our valuation allowance against our deferred tax
assets which could result in an increase in our effective tax rate and an adverse impact on
operating results.
As of September 30, 2007, we had gross deferred tax assets of $192 million related to realized
and unrealized capital losses and $14 million related to foreign net operating losses. We can only
use capital losses to offset capital gains. Based upon our assessments of projected future capital
gains and losses and related tax planning strategies, we expect that our future capital gains will
not be sufficient to utilize all the capital losses that we have incurred through fiscal 2007.
Therefore, we have provided a $6 million valuation allowance for the portion of capital losses we
do not expect to utilize. We can only use foreign net operating losses to offset taxable income of
certain legal entities in certain foreign tax jurisdictions. Based upon our assessments of
projected future taxable income and losses and historical losses incurred by these entities, we
expect that the future taxable income of the entities in these tax jurisdictions will not be
sufficient to utilize the foreign net operating losses we have incurred through fiscal 2007.
Therefore, we have provided a full valuation allowance for these net operating losses. Significant
judgment is required to forecast the timing and amount of future capital gains, the timing of
realization of capital losses and the amount of future taxable income in certain foreign
jurisdictions. Adjustments to our valuation allowance based on changes to our forecast of capital
losses, capital gains and foreign taxable income are reflected in the period the change is made.
We consider the operating earnings of certain non-United States subsidiaries to be invested
indefinitely outside the United States based on estimates that future domestic cash generation will
be sufficient to meet future domestic cash needs. No provision has been made for United States
federal and state, or foreign taxes that may result from future remittances of undistributed
earnings of foreign subsidiaries, the cumulative amount of which is approximately $4.7 billion as
of September 30, 2007. Should we repatriate foreign earnings, we would have to adjust the income
tax provision in the period in which the decision to repatriate earnings of foreign subsidiaries is
made.
With the adoption of FAS 123R in fiscal 2006, we recognize windfall tax benefits associated
with the exercise of stock options directly to stockholders’ equity only when realized.
Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting
from windfall tax benefits occurring from September 26, 2005 onward. A windfall tax benefit occurs
when the actual tax benefit realized by us upon an employee’s disposition of a share-based award
exceeds the deferred tax asset, if any, associated with the award that we had recorded. When
assessing whether a tax benefit relating to share-based compensation has been realized, we follow
the tax law ordering method, under which current year share-based compensation deductions are
assumed to be utilized before net operating loss carryforwards and other tax attributes.
Litigation. We are currently involved in certain legal proceedings. Although there can be no
assurance that unfavorable outcomes in any of these matters would not have a material adverse
effect on our operating results, liquidity or financial position, we believe the claims are without
merit and intend to vigorously defend the actions. We estimate the range of liability related to
pending litigation where the amount and range of loss can be estimated. We record our best estimate
of a loss when the loss is considered probable. Where a liability is probable and there is a range
of estimated loss with no best estimate in the range, we record the minimum estimated liability
related to the claim. As additional information becomes available, we assess the potential
liability related to our pending litigation and revise our estimates. Other than amounts relating
to the Broadcom Corporation v. QUALCOMM Incorporated and QUALCOMM Incorporated v. Broadcom
Corporation matters, we have not recorded any accrual for contingent liabilities associated with
any other legal proceedings based on our belief that additional liabilities, while possible, are
not probable. Further, any possible range of loss cannot be estimated at this time. Revisions in
our estimates of the potential liability could materially impact our results of operations.
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Fiscal 2007 Compared to Fiscal 2006
Revenues. Total revenues for fiscal 2007 were $8.87 billion, compared to $7.53 billion for
fiscal 2006. Revenues from three customers of our QCT, QTL and QWI segments (each of whom accounted
for more than 10% of our consolidated revenues for the period) comprised approximately 41% and 39%
in aggregate of total consolidated revenues in fiscal 2007 and 2006, respectively.
Revenues from sales of equipment and services for fiscal 2007 were $5.77 billion, compared to
$4.78 billion for fiscal 2006. Revenues from sales of integrated circuit products increased $922
million, resulting primarily from an increase of $761 million related to higher unit shipments,
mostly consisting of MSM and accompanying RF and PM integrated circuits, and an increase of $144
million related to the net effects of changes in product mix and the average sales prices of such
products.
Revenues from licensing and royalty fees for fiscal 2007 were $3.11 billion, compared to $2.75
billion for fiscal 2006. Revenues from licensing and royalty fees increased primarily as a result
of a $306 million increase in royalties reported to QTL by our external licensees resulting from an
increase in sales of CDMA-based products by licensees and a $30 million increase in QIS revenues
primarily related to our expanded BREW customer base and products and a licensing agreement with
Sprint. Worldwide demand for CDMA-based products has increased primarily as a result of the growth
in sales of high-end WCDMA products and shifts in the geographic distribution of sales of CDMA2000
products.
Cost of Equipment and Services. Cost of equipment and services revenues for fiscal 2007 was
$2.68 billion, compared to $2.18 billion for fiscal 2006. Cost of equipment and services revenues
as a percentage of equipment and services revenues was 47% for fiscal 2007, compared to 46% for
fiscal 2006. Cost of equipment and services revenues in fiscal 2007 included $39 million in
share-based compensation, compared to $41 million in fiscal 2006.
Research and Development Expenses. For fiscal 2007, research and development expenses were
$1.83 billion or 21% of revenues, compared to $1.54 billion or 20% of revenues for fiscal 2006. The
dollar increase was primarily attributable to a $283 million increase in costs related to
integrated circuit products, next generation CDMA and OFDMA technologies, the expansion of our
intellectual property portfolio and other initiatives to support the acceleration of advanced
wireless products and services, including lower cost devices, the integration of wireless with
consumer electronics and computing, the convergence of multiband, multimode, multinetwork products
and technologies, third party operating systems and services platforms. The technologies supporting
these initiatives may include CDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA
(including GSM/GPRS/EDGE), HSDPA, HSUPA and OFDMA. The increase in research and development
expenses incurred also related to the development of our FLO technology, MediaFLO MDS and IMOD
display products using MEMS technology. Research and development expenses in fiscal 2007 included
share-based compensation and in-process research and development of $221 million and $10 million,
respectively, compared to $216 million and $22 million, respectively, in fiscal 2006.
Selling, General and Administrative Expenses. For fiscal 2007, selling, general and
administrative expenses were $1.48 billion or 17% of revenues, compared to $1.12 billion or 15% of
revenues for fiscal 2006. The dollar and percentage increases were primarily attributable to a $152
million increase in costs related to litigation and other legal matters, a $98 million increase in
employee related expenses, a $40 million increase in other professional fees, a $39 million
increase in bad debt expense, a $32 million increase in cooperative and other marketing expenses
and a $28 million increase in depreciation and amortization, partially offset by a $44 million gain
on the sale of a building. Selling, general and administrative expenses in fiscal 2007 included
share-based compensation of $233 million, compared to $238 million in fiscal 2006.
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Net Investment Income. Net investment income was $743 million for fiscal 2007, compared to
$466 million for fiscal 2006. The net increase was primarily comprised as follows (in millions):
| Year Ended | ||||||||||||
| September 30, | September 24, | |||||||||||
| 2007 | 2006 | Change | ||||||||||
Interest and dividend income: |
||||||||||||
Corporate and other segments |
$ | 551 | $ | 410 | $ | 141 | ||||||
QSI |
7 | 6 | 1 | |||||||||
Interest expense |
(11 | ) | (4 | ) | (7 | ) | ||||||
Net realized gains on investments: |
||||||||||||
Corporate and other segments |
201 | 106 | 95 | |||||||||
QSI |
21 | 30 | (9 | ) | ||||||||
Other-than-temporary losses on investments |
(27 | ) | (24 | ) | (3 | ) | ||||||
Gains (losses) on derivative instruments |
2 | (29 | ) | 31 | ||||||||
Equity in losses of investees |
(1 | ) | (29 | ) | 28 | |||||||
| $ | 743 | $ | 466 | $ | 277 | |||||||
The increase in interest and dividend income on cash and marketable securities held by
corporate and other segments was a result of higher average cash and marketable securities balances
and higher interest rates on interest-bearing securities. Net realized gains on corporate
investments increased primarily due to strength in the equity markets and reallocation of certain
portfolio assets. Losses on derivative instruments in fiscal 2006 related primarily to changes in
the fair values of put options sold in connection with our stock repurchase program. Equity in
losses of investees in fiscal 2006 resulted primarily from the effect of investment losses
recognized by Inquam and a venture fund investee in fiscal 2006, of which our share was $20 million
and $11 million, respectively.
Income Tax Expense. Income tax expense was $323 million for fiscal 2007, compared to $686
million for fiscal 2006. The annual effective tax rate was 9% for fiscal 2007, compared to 22% for
fiscal 2006. The annual effective tax rate for fiscal 2007 is lower than the annual effective tax
rate for fiscal 2006 primarily due to the impact of prior year audits completed during fiscal 2007
and additional foreign earnings taxed at less than the United States federal statutory tax rate.
The annual effective tax rate for fiscal 2007 is 26% lower than the United States federal
statutory rate primarily due to benefits of approximately 20% related to foreign earnings taxed at
less than the United States federal rate, 9% related to the impact of the tax audits completed
during the year and 2% related to research and development tax credits, partially offset by state
taxes of approximately 5%.
Fiscal 2006 Compared to Fiscal 2005
Revenues. Total revenues for fiscal 2006 were $7.53 billion, compared to $5.67 billion for
fiscal 2005. Revenues from three customers of our QCT, QTL and QWI segments comprised an aggregate
of 39% of total consolidated revenues in both fiscal 2006 and 2005.
Revenues from sales of equipment and services for fiscal 2006 were $4.78 billion, compared to
$3.74 billion for fiscal 2005. Revenues from sales of integrated circuits increased $1.00 billion,
resulting primarily from an increase of $1.34 billion related primarily to higher unit shipments of
MSM and accompanying RF integrated circuits, partially offset by a decrease of $349 million related
to the net effects of reductions in average sales prices and changes in product mix.
Revenues from licensing and royalty fees for fiscal 2006 were $2.75 billion, compared to $1.93
billion for fiscal 2005. Revenues from licensing and royalty fees increased primarily as a result
of a $774 million increase in royalty revenue, consisting primarily of royalties reported to QTL by
our external licensees, resulting from an increase in sales of CDMA-based products by licensees and
the impact of the expiration of one of our royalty sharing obligations.
Cost of Equipment and Services. Cost of equipment and services revenues for fiscal 2006 was
$2.18 billion, compared to $1.65 billion for fiscal 2005. Cost of equipment and services revenues
as a percentage of equipment and services revenues was 46% for fiscal 2006, compared to 44% for
fiscal 2005. The decline in margin percentage in fiscal 2006 compared to fiscal 2005 was primarily
due to the effect of $41 million in share-based compensation during fiscal 2006 as a result of the
adoption of FAS123R during fiscal 2006 and a decrease in QCT margin percentage resulting primarily
from an increase in product support costs.
Research and Development Expenses. For fiscal 2006, research and development expenses were
$1.54 billion or 20% of revenues, compared to $1.01 billion or 18% of revenues for fiscal 2005.
Research and development
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expenses for fiscal 2006 included share-based compensation of $216 million
as a result of the adoption of FAS 123R during
fiscal 2006 and in-process research and development of $22 million resulting from
acquisitions, both of which caused the increase in research and development expenses as a
percentage of revenues. The dollar increase in research and development expenses also included a
$272 million increase in costs related to the development of integrated circuit products and other
initiatives to support lower cost devices, multimedia applications, high-speed wireless internet
access and multimode, multiband, multinetwork products and technologies, including CDMA2000 1X,
1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA (including GSM/GPRS/EDGE), HSDPA, HSUPA and
OFDMA, and the development of our FLO technology, MediaFLO MDS and iMoD display products using MEMS
technology.
Selling, General and Administrative Expenses. For fiscal 2006, selling, general and
administrative expenses were $1.12 billion or 15% of revenues, compared to $631 million or 11% of
revenues for fiscal 2005. Selling, general and administrative expenses for fiscal 2006 included
share-based compensation of $238 million as a result of the adoption of FAS 123R during fiscal
2006. The percentage increase was primarily attributable to the share-based compensation. The
dollar increase was also attributable to a $107 million increase in professional fees, primarily
related to legal activities, a $90 million increase in employee-related expenses, a $14 million
increase in selling and marketing expenses and a $14 million decrease in other income.
Net Investment Income. Net investment income was $466 million for fiscal 2006, compared to
$423 million for fiscal 2005. The change was primarily comprised as follows (in millions):
| Year Ended | ||||||||||||
| September 24, 2006 | September 25, 2005 | Change | ||||||||||
Interest and dividend income: |
||||||||||||
Corporate and other segments |
$ | 410 | $ | 252 | $ | 158 | ||||||
QSI |
6 | 4 | 2 | |||||||||
Interest expense |
(4 | ) | (3 | ) | (1 | ) | ||||||
Net realized gains on investments: |
||||||||||||
Corporate and other segments |
106 | 78 | 28 | |||||||||
QSI |
30 | 101 | (71 | ) | ||||||||
Other-than-temporary losses on investments |
(24 | ) | (14 | ) | (10 | ) | ||||||
(Losses) gains on derivative instruments |
(29 | ) | 33 | (62 | ) | |||||||
Equity in losses of investees |
(29 | ) | (28 | ) | (1 | ) | ||||||
| $ | 466 | $ | 423 | $ | 43 | |||||||
The increase in interest and dividend income on cash and marketable securities held by
corporate and other segments was a result of higher average cash and marketable securities balances
and higher interest rates earned on interest-bearing securities. Net realized gains on QSI
investments in fiscal 2005 resulted primarily from a $48 million gain on our minority investment in
a wireless publisher and a $41 million gain on the sale of our investment in a wireless
telecommunications company. Losses and gains on derivative instruments in fiscal 2006 and 2005,
respectively, related primarily to changes in the fair values of put options sold in connection
with our stock repurchase program.
Income Tax Expense. Income tax expense was $686 million for fiscal 2006, compared to $666
million for fiscal 2005. The annual effective tax rate was approximately 22% for fiscal 2006,
compared to 24% for fiscal 2005. The annual effective tax rate for fiscal 2006 was lower than the
annual effective tax rate for fiscal 2005 primarily due to an increase in foreign earnings taxed at
less than the United States federal tax rate.
The annual effective tax rate for fiscal 2006 was 13% lower than the United States federal
statutory rate primarily due to benefits of approximately 15% related to foreign earnings taxed at
less than the United States federal rate, 2% related to the impact of prior year tax audits
completed during the year, 1% related to an increase in tax benefits resulting from our increased
ability to use our capital loss carryforwards and 1% related to research and development tax
credits, partially offset by state taxes of approximately 5% and other permanent differences of 1%.
Our Segment Results for Fiscal 2007 Compared to Fiscal 2006
The following should be read in conjunction with the fiscal 2007 and 2006 financial results
for each reporting segment. See “Notes to Consolidated Financial Statements — Note 10 — Segment
Information.”
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QCT Segment. QCT revenues for fiscal 2007 were $5.28 billion, compared to $4.33 billion for
fiscal 2006. Equipment and services revenues, mostly consisting of MSM and accompanying RF and PM
integrated circuits, were $5.12 billion for fiscal 2007, compared to $4.20 billion for fiscal 2006.
The increase in equipment and services revenue resulted primarily from an increase of $761 million
related to higher unit shipments and an increase of $144 million related to the net effects of
changes in product mix and the average sales prices of such products. Approximately 253 million MSM
integrated circuits were sold during fiscal 2007, compared to approximately 207 million for fiscal
2006.
QCT’s earnings before taxes for fiscal 2007 were $1.55 billion, compared to $1.30 billion for
fiscal 2006. QCT’s operating income as a percentage of its revenues (operating margin percentage)
was 29% in fiscal 2007, compared to 30% in fiscal 2006. The decrease in operating margin percentage
was primarily due to increases in research and development and selling, general and administrative
expenses, partially offset by an increase in the gross margin percentage.
QCT inventories increased by 116% in fiscal 2007 from $179 million to $387 million due to
increased purchases of completed die directly from foundry suppliers for use in QCT’s CDMA-based
integrated circuit products in connection with the shift in our manufacturing business model from
turnkey to IFM.
QTL Segment. QTL revenues for fiscal 2007 were $2.77 billion, compared to $2.47 billion for
fiscal 2006. QTL’s earnings before taxes for fiscal 2007 were $2.34 billion, compared to $2.23
billion for fiscal 2006. QTL’s operating margin percentage was 84% in fiscal 2007, compared to 90%
in fiscal 2006. The increase in revenues primarily resulted from a $306 million increase in
royalties reported to us by our external licensees, which were $2.72 billion in fiscal 2007,
compared to $2.42 billion in fiscal 2006. Revenues from amortized license fees were $49 million in
fiscal 2007, compared to $50 million in fiscal 2006. The increase in earnings before taxes
was primarily attributable to the increase in
revenues, partially offset by increases in legal and bad debt expenses, which resulted in a
corresponding decline in operating margin percentage.
QWI Segment. QWI revenues for fiscal 2007 were $828 million, compared to $731 million for
fiscal 2006. Revenues increased primarily due to increases of $78 million and $11 million in QIS
and QES revenues, respectively. The increase in QIS revenues is primarily attributable to a $61
million increase in QChat revenues resulting from increased development efforts under a licensing
agreement with Sprint and an $18 million increase in fees related to our expanded BREW customer
base and products. The increase in QES revenues is primarily attributable to a $26 million increase
in equipment and messaging revenues, partially offset by a $15 million decrease in amortization of
deferred revenues related to historical equipment sales. QES shipped approximately 190,300
terrestrial-based and satellite-based systems during fiscal 2007, compared to approximately 140,300
terrestrial-based and satellite-based systems in fiscal 2006.
QWI’s earnings before taxes for fiscal 2007 were $88 million, compared to $78 million for
fiscal 2006. QWI’s operating margin percentage was 11% in fiscal 2007, compared to 10% in fiscal
2006. The increase in QWI’s earnings before taxes was primarily due to a $54 million increase in
QIS gross margin, largely resulting from our expanded BREW customer base and products and QChat
development efforts, partially offset by a $29 million increase in QWI selling, general and
administrative expenses and an $18 million decrease in QES gross margin. The increase in QWI’s
operating margin percentage was primarily attributable to the increase in QIS gross margin,
partially offset by the decrease in QES gross margin.
QSI Segment. QSI’s loss before taxes for fiscal 2007 was $240 million, compared to $133
million for fiscal 2006. QSI’s loss before taxes included a $118 million increase in our MediaFLO
USA subsidiary’s loss before taxes comprised primarily of $70 million in cost of services revenues
related to the commencement of our MediaFLO services in March 2007 and a $42 million increase in
selling, general and administrative expenses, including $20
million related to cooperative marketing expenses. During fiscal 2006, QSI recorded $30
million in equity in losses of investees resulting primarily from the effect of investment losses
recognized by Inquam and a venture fund investee in fiscal 2006, of which our share was $20 million
and $11 million, respectively. Equity in losses of investees was nominal during fiscal 2007.
Our Segment Results for Fiscal 2006 Compared to Fiscal 2005
The following should be read in conjunction with the financial results of fiscal 2006 and 2005
for each reporting segment. See “Notes to Consolidated Financial Statements, Note 10 — Segment
Information.”
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QCT Segment. QCT revenues for fiscal 2006 were $4.33 billion, compared to $3.29 billion for
fiscal 2005. Equipment and services revenues, primarily from MSM and accompanying RF integrated
circuits, were $4.20 billion for fiscal 2006, compared to $3.20 billion for fiscal 2005. The
increase in equipment and services revenue was primarily comprised of an increase of $1.34 billion
related to higher unit shipments, partially offset by a decrease of $349 million related to the
effects of reductions in average sales prices and changes in product mix. Approximately 207 million
MSM integrated circuits were sold during fiscal 2006, compared to approximately 151 million for
fiscal 2005.
QCT’s earnings before taxes for fiscal 2006 were $1.30 billion, compared to $980 million for
fiscal 2005. QCT’s operating income as a percentage of its revenues (operating margin percentage)
was 30% during both fiscal 2006 and 2005. The operating margin percentage remained consistent as
the gross margin percentage decrease, resulting primarily from an increase in product support
costs, was offset by a decrease in research and development expenses as a percentage of QCT
revenue.
QTL Segment. QTL revenues for fiscal 2006 were $2.47 billion, compared to $1.71 billion for
fiscal 2005. QTL’s earnings before taxes for fiscal 2006 were $2.23 billion, compared to $1.54
billion for fiscal 2005. QTL’s operating margin percentage was 90% in fiscal 2006 as compared to
89% in fiscal 2005. The increase in both revenues and earnings before taxes primarily resulted from
a $774 million increase in royalties reported to us by our licensees, which were $2.42 billion in
fiscal 2006, compared to $1.64 billion in fiscal 2005. The increase in royalty revenue relates to
the increase in sales of CDMA-based products by licensees and the impact of the expiration of one
of our royalty sharing obligations. Revenues from amortized license fees were $50 million in fiscal
2006, compared to $69 million in fiscal 2005.
QWI Segment. QWI revenues for fiscal 2006 were $731 million, compared to $682 million for
fiscal 2005. Revenues increased primarily due to increases of $41 million and $11 million in QIS
and QES revenues, respectively. The increase in QIS revenues was primarily attributable to a $28
million increase in fees related to our expanded BREW customer base and products and a $17 million
increase in QChat revenues resulting from increased development efforts under the licensing
agreement with Sprint. The increase in QES revenues was primarily attributable to a $16 million
increase in equipment revenue and a $14 million increase in messaging services revenue, partially
offset by a $19 million decrease in amortization of deferred revenues related to historical
equipment sales. QES shipped approximately 140,300 satellite-based and terrestrial-based systems
during fiscal 2006, compared to approximately 156,700 satellite-based and terrestrial-based systems
in fiscal 2005.
QWI’s earnings before taxes for fiscal 2006 were $78 million, compared to $62 million for
fiscal 2005. QWI’s operating margin percentage was 10% in fiscal 2006, compared to 9% in fiscal
2005. The increase in QWI earnings before taxes was primarily due to a $39 million increase in QIS
gross margin largely resulting from the increase in fees related to our expanded BREW customer base
and products and QChat development efforts, partially offset by the effect of a $23 million
increase in QWI research and development and selling, general and administrative expenses. The
increase in QWI’s operating margin percentage was primarily due to the increase in QIS gross
margin.
QSI Segment. QSI’s loss before taxes for fiscal 2006 was $133 million, compared to earnings
before taxes of $10 million for fiscal 2005. QSI’s loss before taxes included a $55 million
increase in our MediaFLO USA subsidiary’s operating expenses. During fiscal 2006, QSI recorded $30
million in realized gains on marketable securities and other investments, compared to $101 million
in fiscal 2005.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and marketable
securities, cash generated from operations and proceeds from the issuance of common stock under our
stock option and employee stock purchase plans. Cash, cash equivalents and marketable securities
were $11.8 billion at September 30, 2007, an
increase of $1.9 billion from September 24, 2006. Our cash, cash equivalents and marketable
securities at September 30, 2007 consisted of $5.5 billion held by foreign subsidiaries with the
remaining balance of $6.3 billion held domestically. Due to tax considerations, we derive liquidity
for operations primarily from domestic cash flow and investments held domestically. Cash provided
by operating activities was $3.8 billion during fiscal 2007, compared to $3.3 billion during fiscal
2006. Net proceeds from the issuance of common stock under our stock option and employee stock
purchase plans was $556 million during fiscal 2007, compared to $692 million during fiscal 2006.
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On May 22, 2007, we announced we had been authorized to repurchase up to $3.0 billion of our
common stock. The $3.0 billion stock repurchase program replaced a $2.5 billion stock repurchase
program, of which approximately $0.9 billion remained authorized for repurchases. The stock
repurchase program has no expiration date. During fiscal 2007, we repurchased and retired
37,263,000 shares of our common stock for $1.5 billion. In connection with the stock repurchase
program, we have put options outstanding, with expiration dates ranging from December 2007 through
March 2008, that may require us to repurchase an aggregate of 5,000,000 shares of our common stock
upon exercise for $189 million (net of the option premiums received). Any shares repurchased upon
exercise of put options will be retired. At September 30, 2007, $1.5 billion remains authorized for
repurchases under our stock repurchase program, net of put options outstanding. In the period from
October 1, 2007 through November 7, 2007 we repurchased and retired 12,720,000 shares of our own
common stock for approximately $525 million. We will continue our active evaluation of repurchases
under this program.
We declared and paid dividends totaling $862 million, $698 million and $524 million, or $0.52,
$0.42 and $0.32 per common share, during fiscal 2007, 2006 and 2005, respectively. On October 11,
2007, we announced a cash dividend of $0.14 per share on our common stock, payable on January 4,
2008 to stockholders of record as of December 7, 2007. We intend to continue to pay quarterly
dividends subject to capital availability and periodic determinations that cash dividends are in
the best interest of our stockholders.
Accounts
receivable increased by 2% during fiscal 2007. Days sales outstanding, on a
consolidated basis, were 27 days at September 30, 2007 compared to 29 days at September 24, 2006.
The increase in accounts receivable was primarily due to the increase in revenue in fiscal 2007 as
compared to fiscal 2006 and the contractual timing of cash receipts for royalty receivables, some
of which are paid semi-annually. The change in days sales outstanding was a result of the increase
in revenue, partially offset by the effect of the increase in accounts receivable.
We intend to continue our strategic investment activities to promote the worldwide adoption of
CDMA-based products and the growth of CDMA-based wireless data and wireless internet products. As
part of these investment activities, we may provide financing to facilitate the marketing and sale
of CDMA equipment by authorized suppliers. In the event additional needs or uses for cash arise, we
may raise additional funds from a combination of sources including potential debt and equity
issuance.
We believe our current cash and cash equivalents, marketable securities and cash generated
from operations will satisfy our expected working and other capital requirements for the
foreseeable future based on current business plans, including acquisitions, investments in other
companies and other assets to support the growth of our business, financing and other commitments,
the payment of dividends and possible additional stock repurchases.
Contractual Obligations / Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our consolidated balance
sheets or fully disclosed in the notes to our consolidated financial statements. We have no
material off-balance sheet arrangements as defined in S-K 303(a)(4)(ii).
At September 30, 2007, our outstanding contractual obligations included (in millions):
Contractual Obligations
Payments Due By Fiscal Period
Payments Due By Fiscal Period
| No Expiration | ||||||||||||||||||||||||
| Total | 2008 | 2009-2010 | 2011-2012 | Beyond 2012 | Date | |||||||||||||||||||
Purchase obligations (1) |
$ | 1,052 | $ | 760 | $ | 193 | $ | 91 | $ | 8 | $ | — | ||||||||||||
Operating leases |
390 | 75 | 113 | 63 | 139 | — | ||||||||||||||||||
Other commitments (2) |
50 | — | — | 40 | 3 | 7 | ||||||||||||||||||
Total commitments |
1,492 | 835 | 306 | 194 | 150 | 7 | ||||||||||||||||||
Capital leases (3) |
200 | 6 | 12 | 12 | 170 | — | ||||||||||||||||||
Other long-term liabilities (4) |
15 | — | 10 | 1 | 4 | — | ||||||||||||||||||
Total recorded liabilities |
215 | 6 | 22 | 13 | 174 | — | ||||||||||||||||||
Total |
$ | 1,707 | $ | 841 | $ | 328 | $ | 207 | $ | 324 | $ | 7 | ||||||||||||
| (1) | Total purchase obligations include $615 million in commitments to purchase integrated circuit product inventories. | |
| (2) | Certain of these commitments do not have fixed funding dates. Amounts are presented based on the expiration of the commitment, but actual funding may occur earlier or not at all as funding is subject to certain conditions. Commitments represent the maximum amounts to be financed or funded under these arrangements; actual financing or funding may be in lesser amounts. | |
| (3) | Amounts represent future minimum lease payments including interest payments. Capital lease obligations are included in other liabilities in the consolidated balance sheet at September 30, 2007. | |
| (4) | Certain long-term liabilities reflected on our balance sheet, such as unearned revenue, are not presented in this table because they do not require cash settlement in the future. |
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Additional information regarding our financial commitments at September 30, 2007 is provided
in the notes to our consolidated financial statements. See “Notes to Consolidated Financial
Statements, Note 4 — Investments in Other Entities” and “Note 9 — Commitments and Contingencies.”
Future Accounting Requirements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) “Accounting for Uncertainty
in Income Taxes” which prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN
48 are effective for us beginning October 1, 2007. The cumulative effect of initially adopting FIN
48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will
be presented separately. Only tax positions that meet the more likely than not recognition
threshold at the effective date may be recognized upon adoption of FIN 48. We are in the process of
finalizing the impact the adoption of FIN 48 will have on our consolidated financial statements but
expect the adjustment to opening retained earnings to be immaterial.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. We invest our cash in a number of diversified investment and
non-investment grade fixed and floating rate securities, consisting of cash equivalents, marketable
debt securities and debt mutual funds. Changes in the general level of United States interest rates
can affect the principal values and yields of fixed interest-bearing securities. If interest rates
in the general economy were to rise rapidly in a short period of time, our fixed interest-bearing
securities could lose value. If the general economy were to weaken significantly, the credit
profile, financial strength and growth prospects of issuers of interest-bearing securities held in
our investment portfolios could deteriorate, and our interest-bearing securities could lose value.
We may implement investment strategies of different types with varying duration and risk/return
trade-offs that do not perform well.
The following table provides information about our interest-bearing securities that are
sensitive to changes in interest rates. The table presents principal cash flows, weighted average
yield at cost and contractual maturity dates. Additionally, we have assumed that these securities
are similar enough within the specified categories to aggregate these securities for presentation
purposes.
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Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
| No Single | ||||||||||||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Maturity | Total | |||||||||||||||||||||||||
Fixed interest-bearing securities: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 543 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 543 | ||||||||||||||||
Interest rate |
5.4 | % | ||||||||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||||||||||
Investment grade |
$ | 1,851 | $ | 289 | $ | 163 | $ | 57 | $ | 20 | $ | 10 | $ | 405 | $ | 2,795 | ||||||||||||||||
Interest rate |
5.1 | % | 5.2 | % | 4.8 | % | 5.5 | % | 5.4 | % | 7.4 | % | 5.4 | % | ||||||||||||||||||
Non-investment grade |
$ | 12 | $ | 16 | $ | 13 | $ | 44 | $ | 41 | $ | 368 | $ | — | $ | 494 | ||||||||||||||||
Interest rate |
5.3 | % | 7.0 | % | 8.9 | % | 8.3 | % | 8.0 | % | 8.5 | % | ||||||||||||||||||||
Floating interest-bearing
securities: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1,719 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,719 | ||||||||||||||||
Interest rate |
5.4 | % | ||||||||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||||||||||
Investment grade |
$ | 213 | $ | 214 | $ | 202 | $ | 56 | $ | 78 | $ | 94 | $ | 531 | $ | 1,388 | ||||||||||||||||
Interest rate |
5.5 | % | 5.7 | % | 5.8 | % | 5.7 | % | 5.9 | % | 5.8 | % | 5.8 | % | ||||||||||||||||||
Non-investment grade |
$ | 12 | $ | 11 | $ | 28 | $ | 65 | $ | 118 | $ | 391 | $ | 712 | $ | 1,337 | ||||||||||||||||
Interest rate |
6.7 | % | 7.0 | % | 7.3 | % | 7.4 | % | 7.1 | % | 7.4 | % | 7.1 | % | ||||||||||||||||||
Cash and cash equivalents and available-for-sale securities are recorded at fair value.
Mortgage Risk. A small portion of our diversified investment program includes investment-grade
mortgage- and asset-backed securities. In fiscal 2007, following a multi-year housing industry
expansion, mortgage industry excesses became apparent and caused concern among investors in pools
of residential mortgages or other assets securitized by them. We have no direct investments in the
lowest credit quality, or subprime, mortgages nor investments collateralized by assets that include
subprime mortgages. We have indirect exposure to subprime mortgages to the extent of our
investments in large, diversified financial companies, commercial banks, insurance companies and
public/private investment funds that participate or invest in subprime mortgage loans, mortgage
insurance, or loan servicing, which could impact the fair values of our securities.
Equity Price Risk. We have a diversified marketable securities portfolio, including mutual
fund and exchange traded fund shares, that is subject to equity price risk. The recorded values of
marketable equity securities increased to $1.52 billion at September 30, 2007 from $1.34 billion at
September 24, 2006. The recorded values of equity mutual fund and exchange traded fund shares
increased to $1.87 billion at September 30, 2007 from $1.52 billion at September 24, 2006. We make
equity investments in companies of varying size, style, industry and geography, and changes in
investment allocations may affect the price volatility of our investments. A 10% decrease in the
market price of our marketable equity securities and equity mutual fund and exchange traded fund
shares at September 30, 2007 would cause a corresponding 10% decrease in the carrying amounts of
these securities of $339 million.
Our strategic investments in other entities consist substantially of investments in private
early-stage companies accounted for under the equity and cost methods. Accordingly, we believe that
our exposure to market risk from these investments is not material. Additionally, we do not
anticipate any near-term changes in the nature of our market risk exposures or in management’s
objectives and strategies with respect to managing such exposures. The recorded values of these
strategic investments totaled $114 million at September 30, 2007, compared to $93 million at
September 24, 2006.
In connection with our stock repurchase program, we sell put options that may require us to
repurchase shares of our common stock at fixed prices. These written put options subject us to
equity price risk. At September 30, 2007, we had two outstanding put options, enabling holders to
sell 5,000,000 shares of our common stock upon exercise
for approximately $189 million (net of the option premiums received). The put option
liabilities, with a fair value of $10 million at September 30, 2007, were included in other current
liabilities. If the fair value of our common stock at September 30, 2007 decreased by 15%, the
amount required to physically settle the put options would exceed the fair value of the shares by
$9 million, net of the $14 million in premiums received.
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Additional information regarding our strategic investments is provided in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report.
Foreign Exchange Risk. We manage our exposure to foreign exchange market risks, when deemed
appropriate, through the use of derivative financial instruments, consisting primarily of foreign
currency forward and option contracts. Such derivative financial instruments are viewed as hedging
or risk management tools and are not used for speculative or trading purposes. At September 30,
2007, we had no foreign currency forward contracts outstanding. At September 30, 2007, we had a net
liability of $1 million related to our foreign currency option contracts that hedge the foreign
currency risk on royalties earned from certain international licensees on their sales of CDMA and
WCDMA products. If our forecasted royalty revenues were to decline by 30% and foreign exchange
rates were to change unfavorably by 30% in each of our hedged foreign currencies, we would incur a
loss of approximately $6 million resulting from a decrease in fair value of the portion of our
hedges that would be rendered ineffective. See “Notes to Consolidated Financial Statements, Note 1
— The Company and Its Significant Accounting Policies” for a description of our foreign currency
accounting policies.
Financial instruments held by consolidated subsidiaries that are not denominated in the
functional currency of those entities are subject to the effects of currency fluctuations and may
affect reported earnings. As a global concern, we face exposure to adverse movements in foreign
currency exchange rates. We may hedge currency exposures associated with certain assets and
liabilities denominated in nonfunctional currencies and certain anticipated nonfunctional currency
transactions. As a result, we could experience unanticipated gains or losses on anticipated foreign
currency cash flows, as well as economic loss with respect to the recoverability of investments.
While we may hedge certain transactions with non-United States customers, declines in currency
values in certain regions may, if not reversed, adversely affect future product sales because our
products may become more expensive to purchase in the countries of the affected currencies.
Our analysis methods used to assess and mitigate the risks discussed above should not be
considered projections of future risks.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements at September 30, 2007 and September 24, 2006 and the
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, are included
in this Annual Report on Form 10-K on pages F-1 through F-29.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this Annual Report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control — Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of September 30,
2007.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the
consolidated financial statements included in this Annual Report on Form 10-K, has also audited the
effectiveness of our internal control over financial reporting as of September 30, 2007, as stated
in their report which appears on page F-1.
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Inherent Limitations Over Internal Controls
Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures that:
| i. | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; | ||
| ii. | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | ||
| iii. | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations, including the possibility of
human error and circumvention by collusion or overriding of controls. Accordingly, even an
effective internal control system may not prevent or detect material misstatements on a timely
basis. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during fiscal 2007
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. Directors and Executive Officers and Corporate Governance
The information required by this item regarding directors is incorporated by reference to our
Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of Stockholders to be held in 2008 (the “2008 Proxy Statement”) under the
heading “Election of Directors.” Information regarding executive officers is set forth in Item 1 of
Part I of this Report under the caption “Executive Officers.” The information regarding our code of
ethics is incorporated by reference to the 2008 Proxy Statement under the heading “Code of Ethics.”
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the 2008 Proxy Statement
under the heading “Executive Compensation and Related Information.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated by reference to the 2008 Proxy Statement
under the headings “Equity Compensation Plan Information” and “Stock Ownership of Certain
Beneficial Owners and Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the 2008 Proxy Statement
under the heading “Certain Relationships and Related Person Transactions.”
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the 2008 Proxy Statement
under the heading “Fees for Professional Services.”
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PART IV
Item 15. Exhibits and Financial Statement Schedule
The following documents are filed as part of this report:
| (a) | Financial Statements: |
| Page | ||||
| Number | ||||
| F-1 | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| S-1 | ||||
Financial statement schedules other than those listed above have been omitted because they are
either not required, not applicable or the information is otherwise included in the notes to the
consolidated financial statements.
| (b) | Exhibits: |
| Exhibit | ||
| Number | Description | |
3.1
|
Restated Certificate of Incorporation. (1) | |
3.2
|
Certificate of Amendment of Certificate of Designation. (2) | |
3.4
|
Amended and Restated Bylaws. (3) | |
10.1
|
Form of Indemnity Agreement between the Company, each director and certain officers.(4)(5) | |
10.2
|
1991 Stock Option Plan, as amended.(4)(6) | |
10.4
|
Form of Stock Option Grant under the 1991 Stock Option Plan.(4)(6) | |
10.21
|
Executive Retirement Matching Contribution Plan, as amended.(4)(6) | |
10.22
|
1996 Non-qualified Employee Stock Purchase Plan, as amended.(4)(6) | |
10.29
|
1998 Non-Employee Director’s Stock Option Plan, as amended.(4)(9) | |
10.40
|
Form of Stock Option Grant Notice and Agreement under the 2001 Stock Option Plan.(4)(6) | |
10.41
|
2001 Employee Stock Purchase Plan, as amended.(4)(6) | |
10.43
|
Form of Stock Option Grant Notice and Agreement under the 2001 Non-Employee Directors’ Stock Option Plan.(4)(8) | |
10.55
|
2001 Stock Option Plan, as amended.(4)(9) | |
10.58
|
Form of Annual Grant under the 1998 Non-Employee Directors’ Stock Option Plan.(4)(6) | |
10.63
|
Summary of Changes to Non-Employee Director Compensation Program.(4)(10) | |
10.66
|
2001 Non-Employee Directors’ Stock Option Plan, as amended.(4)(11) | |
10.71
|
Voluntary Executive Retirement Contribution Plan, as amended.(4)(12) | |
10.73
|
2007 Long-Term Incentive Plan.(1)(4) | |
10.74
|
Forms of Grant Notice and Stock Option Agreement under the 2007 Long-Term Incentive Plan.(1)(4) | |
10.75
|
2006 Bonuses and 2007 Annual Base Salary for Named Executive Officers. (13) | |
10.76
|
Summary of 2007 Annual Bonus Program for Named Executive Officers. (14) | |
10.77
|
Amendment dated December 7, 2006 to the Amended and Restated Rights Agreement between the Company and Computershare Investor Services LLC, as Rights Agent. (15) | |
21
|
Subsidiaries of the Registrant. |
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| Exhibit | ||
| Number | Description | |
23.1
|
Consent of Independent Registered Public Accounting Firm. | |
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Paul E. Jacobs. | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William E. Keitel. | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Paul E. Jacobs. | |
32.2
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for William E. Keitel. |
| (1) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on March 13, 2006. | |
| (2) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 30, 2005. | |
| (3) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 22, 2006. | |
| (4) | Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 15(a). | |
| (5) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-42782). | |
| (6) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2004. | |
| (7) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 26, 2000. | |
| (8) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2001. | |
| (9) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2004. | |
| (10) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 25, 2005. | |
| (11) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K/A filed on May 6, 2005. |
|
| (12) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 26, 2005. | |
| (13) | Filed under item 1.01 of the Registrant’s Current Report on Form 8-K filed on November 13, 2006. | |
| (14) | Filed under item 5.02 of the Registrant’s Current Report on Form 8-K filed on December 1, 2006. | |
| (15) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 12, 2006. |
63
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
November 8, 2007
| QUALCOMM Incorporated |
||||
| By | /s/ Paul E. Jacobs | |||
| Paul E. Jacobs, | ||||
| Chief Executive Officer | ||||
64
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated:
| Signature | Title | Date | ||
/s/ Paul E. Jacobs
|
Chief Executive Officer and Director (Principal Executive Officer) |
November 8, 2007 | ||
/s/ William E. Keitel
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
November 8, 2007 | ||
/s/ Irwin Jacobs
|
Chairman of the Board | November 8, 2007 | ||
/s/ Barbara T. Alexander
|
Director | November 8, 2007 | ||
/s/ Donald Cruickshank
|
Director | November 8, 2007 | ||
/s/ Raymond V. Dittamore
|
Director | November 8, 2007 | ||
/s/ Robert E. Kahn
|
Director | November 8, 2007 | ||
/s/ Sherry Lansing
|
Director | November 8, 2007 | ||
/s/ Duane A. Nelles
|
Director | November 8, 2007 | ||
/s/ Peter M. Sacerdote
|
Director | November 8, 2007 | ||
/s/ Brent Scowcroft
|
Director | November 8, 2007 | ||
/s/ Marc I. Stern
|
Director | November 8, 2007 |
65
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of QUALCOMM Incorporated:
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of QUALCOMM Incorporated
and its subsidiaries at September 30, 2007 and September 24, 2006, and the results of their
operations and their cash flows for each of the three years in the period ended September 30, 2007
in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2007, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements, on the financial statement
schedule, and on the Company’s internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation in fiscal 2006.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
| /s/ PricewaterhouseCoopers LLP | ||||
| PricewaterhouseCoopers LLP | ||||
| San Diego, California | ||||
| November 8, 2007 | ||||
F-1
Table of Contents
QUALCOMM Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
| September 30, | September 24, | |||||||
| 2007 | 2006 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,411 | $ | 1,607 | ||||
Marketable securities |
4,170 | 4,114 | ||||||
Accounts receivable, net |
715 | 700 | ||||||
Inventories |
469 | 250 | ||||||
Deferred tax assets |
435 | 235 | ||||||
Collateral held under securities lending |
421 | — | ||||||
Other current assets |
200 | 143 | ||||||
Total current assets |
8,821 | 7,049 | ||||||
Marketable securities |
5,234 | 4,228 | ||||||
Property, plant and equipment, net |
1,788 | 1,482 | ||||||
Goodwill |
1,325 | 1,230 | ||||||
Deferred tax assets |
318 | 512 | ||||||
Other assets |
1,009 | 707 | ||||||
Total assets |
$ | 18,495 | $ | 15,208 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 635 | $ | 420 | ||||
Payroll and other benefits related liabilities |
311 | 273 | ||||||
Unearned revenue |
218 | 197 | ||||||
Income taxes payable |
119 | 137 | ||||||
Obligation under securities lending |
421 | — | ||||||
Other current liabilities |
554 | 395 | ||||||
Total current liabilities |
2,258 | 1,422 | ||||||
Unearned revenue |
142 | 141 | ||||||
Other liabilities |
260 | 239 | ||||||
Total liabilities |
2,660 | 1,802 | ||||||
Commitments and contingencies (Notes 4 and 9) |
||||||||
Stockholders’ equity: |
||||||||
Preferred stock, $0.0001 par value; issuable in series;
8 shares authorized; none outstanding at
September 30, 2007 and September 24, 2006 |
— | — | ||||||
Common stock, $0.0001 par value; 6,000 shares
authorized; 1,646 and 1,652 shares issued and
outstanding at September 30, 2007 and September 24, 2006,
respectively |
— | — | ||||||
Paid-in capital |
7,057 | 7,242 | ||||||
Retained earnings |
8,541 | 6,100 | ||||||
Accumulated other comprehensive income |
237 | 64 | ||||||
Total stockholders’ equity |
15,835 | 13,406 | ||||||
Total liabilities and stockholders’ equity |
$ | 18,495 | $ | 15,208 | ||||
See accompanying notes.
F-2
Table of Contents
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| Year Ended | ||||||||||||
| September 30, | September 24, | September 25, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Revenues: |
||||||||||||
Equipment and services |
$ | 5,765 | $ | 4,776 | $ | 3,744 | ||||||
Licensing and royalty fees |
3,106 | 2,750 | 1,929 | |||||||||
Total revenues |
8,871 | 7,526 | 5,673 | |||||||||
Operating expenses: |
||||||||||||
Cost of equipment and services revenues |
2,681 | 2,182 | 1,645 | |||||||||
Research and development |
1,829 | 1,538 | 1,011 | |||||||||
Selling, general and administrative |
1,478 | 1,116 | 631 | |||||||||
Total operating expenses |
5,988 | 4,836 | 3,287 | |||||||||
Operating income |
2,883 | 2,690 | 2,386 | |||||||||
Investment income, net (Note 5) |
743 | 466 | 423 | |||||||||
Income before income taxes |
3,626 | 3,156 | 2,809 | |||||||||
Income tax expense |
(323 | ) | (686 | ) | (666 | ) | ||||||
Net income |
$ | 3,303 | $ | 2,470 | $ | 2,143 | ||||||
Basic earnings per common share |
$ | 1.99 | $ | 1.49 | $ | 1.31 | ||||||
Diluted earnings per common share |
$ | 1.95 | $ | 1.44 | $ | 1.26 | ||||||
Shares used in per share calculations: |
||||||||||||
Basic |
1,660 | 1,659 | 1,638 | |||||||||
Diluted |
1,693 | 1,711 | 1,694 | |||||||||
Dividends per share announced |
$ | 0.52 | $ | 0.42 | $ | 0.32 | ||||||
See accompanying notes.
F-3
Table of Contents
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Year Ended | ||||||||||||
| September 30, | September 24, | September 25, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Operating Activities: |
||||||||||||
Net income |
$ | 3,303 | $ | 2,470 | $ | 2,143 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
383 | 272 | 200 | |||||||||
Non-cash portion of share-based compensation expense |
488 | 495 | — | |||||||||
Incremental tax benefits from stock options exercised |
(240 | ) | (403 | ) | — | |||||||
Net realized gains on marketable securities and other investments |
(222 | ) | (136 | ) | (179 | ) | ||||||
(Gains) losses on derivative instruments |
(2 | ) | 29 | (33 | ) | |||||||
Other-than-temporary losses on marketable securities and
other investments |
27 | 24 | 14 | |||||||||
Equity in losses of investees |
1 | 29 | 28 | |||||||||
Non-cash income tax expense |
91 | 514 | 498 | |||||||||
Other items, net |
(42 | ) | (28 | ) | — | |||||||
Changes in assets and liabilities, net of effects of acquisitions (Note 11): |
||||||||||||
Accounts receivable, net |
(16 | ) | (133 | ) | 35 | |||||||
Inventories |
(234 | ) | (71 | ) | (23 | ) | ||||||
Other assets |
(96 | ) | 15 | (74 | ) | |||||||
Trade accounts payable |
209 | 51 | 57 | |||||||||
Payroll, benefits and other liabilities |
139 | 96 | 49 | |||||||||
Unearned revenue |
22 | 29 | (29 | ) | ||||||||
Net cash provided by operating activities |
3,811 | 3,253 | 2,686 | |||||||||
Investing Activities: |
||||||||||||
Capital expenditures |
(818 | ) | (685 | ) | (576 | ) | ||||||
Purchases of available-for-sale securities |
(8,492 | ) | (12,517 | ) | (8,055 | ) | ||||||
Proceeds from sale of available-for-sale securities |
7,998 | 10,853 | 8,072 | |||||||||
Maturities of held-to-maturity securities |
— | 130 | 10 | |||||||||
Other investments and acquisitions, net of cash acquired |
(249 | ) | (407 | ) | (249 | ) | ||||||
Change in collateral held under securities lending |
(421 | ) | — | — | ||||||||
Other items, net |
84 | 3 | 22 | |||||||||
Net cash used by investing activities |
(1,898 | ) | (2,623 | ) | (776 | ) | ||||||
Financing Activities: |
||||||||||||
Proceeds from issuance of common stock |
556 | 692 | 386 | |||||||||
Incremental tax benefits from stock options exercised |
240 | 403 | — | |||||||||
Repurchase and retirement of common stock |
(1,482 | ) | (1,500 | ) | (953 | ) | ||||||
Proceeds from put options |
17 | 11 | 37 | |||||||||
Dividends paid |
(862 | ) | (698 | ) | (524 | ) | ||||||
Change in obligation under securities lending |
421 | — | — | |||||||||
Other items, net |
(1 | ) | — | — | ||||||||
Net cash used by financing activities |
(1,111 | ) | (1,092 | ) | (1,054 | ) | ||||||
Effect of exchange rate changes on cash |
2 | (1 | ) | — | ||||||||
Net increase (decrease) in cash and cash equivalents |
804 | (463 | ) | 856 | ||||||||
Cash and cash equivalents at beginning of year |
1,607 | 2,070 | 1,214 | |||||||||
Cash and cash equivalents at end of year |
$ | 2,411 | $ | 1,607 | $ | 2,070 | ||||||
See accompanying notes.
F-4
Table of Contents
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
| Accumulated | ||||||||||||||||||||
| Other | Total | |||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stockholders’ | ||||||||||||||||
| Shares | Capital | Earnings | Income (Loss) | Equity | ||||||||||||||||
Balance at September 26, 2004 |
1,635 | 6,940 | 2,709 | 15 | 9,664 | |||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||
Net income |
— | — | 2,143 | — | 2,143 | |||||||||||||||
Unrealized net gains on securities and derivative
instruments,
net of income taxes of $84 |
— | — | — | 119 | 119 | |||||||||||||||
Reclassification adjustment for net realized gains
on securities
and derivative instruments included in net income,
net of income taxes of $73 |
— | — | — | (109 | ) | (109 | ) | |||||||||||||
Other comprehensive income |
13 | 13 | ||||||||||||||||||
Total comprehensive income |
2,166 | |||||||||||||||||||
Exercise of stock options |
30 | 348 | — | — | 348 | |||||||||||||||
Tax benefit from exercise of stock options |
— | 346 | — | — | 346 | |||||||||||||||
Issuance for Employee Stock Purchase and Executive
Retirement Plans |
2 | 56 | — | — | 56 | |||||||||||||||
Repurchase and retirement of common stock |
(27 | ) | (953 | ) | — | — | (953 | ) | ||||||||||||
Dividends |
— | — | (524 | ) | — | (524 | ) | |||||||||||||
Other |
— | 16 | — | — | 16 | |||||||||||||||
Balance at September 25, 2005 |
1,640 | 6,753 | 4,328 | 38 | 11,119 | |||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||
Net income |
— | — | 2,470 | — | 2,470 | |||||||||||||||
Unrealized net gains on securities and derivative
instruments,
net of income taxes of $65 |
— | — | — | 104 | 104 | |||||||||||||||
Reclassification adjustment for net realized gains
on securities
and derivative instruments included in net income,
net of income taxes of $56 |
— | — | — | (89 | ) | (89 | ) | |||||||||||||
Other comprehensive income, net of income taxes of $8 |
— | — | — | 11 | 11 | |||||||||||||||
Total comprehensive income |
2,496 | |||||||||||||||||||
Exercise of stock options |
36 | 608 | — | — | 608 | |||||||||||||||
Tax benefit from exercise of stock options |
— | 394 | — | — | 394 | |||||||||||||||
Issuance for Employee Stock Purchase and Executive
Retirement Plans |
2 | 71 | — | — | 71 | |||||||||||||||
Share-based compensation |
— | 496 | — | — | 496 | |||||||||||||||
Repurchase and retirement of common stock |
(34 | ) | (1,473 | ) | — | — | (1,473 | ) | ||||||||||||
Dividends |
— | — | (698 | ) | — | (698 | ) | |||||||||||||
Value of common stock issued for acquisition |
8 | 353 | — | — | 353 | |||||||||||||||
Value of options exchanged for acquisitions |
— | 40 | — | — | 40 | |||||||||||||||
Balance at September 24, 2006 |
1,652 | 7,242 | 6,100 | 64 | 13,406 | |||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||
Net income |
— | — | 3,303 | — | 3,303 | |||||||||||||||
Unrealized net gains on securities and derivative
instruments,
net of income taxes of $198 |
— | — | — | 274 | 274 | |||||||||||||||
Reclassification adjustment for net realized gains
on securities
and derivative instruments included in net income,
net of income taxes of $87 |
— | — | — | (131 | ) | (131 | ) | |||||||||||||
Other comprehensive income, net of income taxes of $6 |
— | — | — | 30 | 30 | |||||||||||||||
Total comprehensive income |
3,476 | |||||||||||||||||||
Exercise of stock options |
28 | 477 | — | — | 477 | |||||||||||||||
Tax benefit from exercise of stock options |
— | 229 | — | — | 229 | |||||||||||||||
Issuance for Employee Stock Purchase and Executive
Retirement Plans |
3 | 88 | — | — | 88 | |||||||||||||||
Share-based compensation |
— | 485 | — | — | 485 | |||||||||||||||
Repurchase and retirement of common stock |
(37 | ) | (1,459 | ) | — | — | (1,459 | ) | ||||||||||||
Dividends |
— | — | (862 | ) | — | (862 | ) | |||||||||||||
Other |
— | (5 | ) | — | — | (5 | ) | |||||||||||||
Balance at September 30, 2007 |
1,646 | $ | 7,057 | 8,541 | $ | 237 | $ | 15,835 | ||||||||||||
See accompanying notes.
F-5
Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and Its Significant Accounting Policies
The Company. QUALCOMM Incorporated (the Company or QUALCOMM), a Delaware corporation,
develops, designs, manufactures and markets digital wireless telecommunications products and
services. The Company is a leading developer and supplier of Code Division Multiple Access
(CDMA)-based integrated circuits and system software for wireless voice and data communications,
multimedia functions and global positioning system products to wireless device and infrastructure
manufacturers. The Company also manufactures and sells products based upon Orthogonal Frequency
Division Multiplexing Access (OFDMA) technology, e.g. FLASH-OFDM. The Company grants licenses to
use portions of its intellectual property portfolio, which includes certain patent rights essential
to and/or useful in the manufacture and sale of certain wireless products, and receives license
fees as well as ongoing royalties based on sales by licensees of wireless telecommunications
equipment products incorporating its patented technologies. Currently, the vast majority of the
Company’s license fees and royalty revenue is comprised of fees and royalties from companies
selling wireless products incorporating the Company’s CDMA technologies, but the Company has also
licensed its patented OFDMA technology. The Company provides satellite- and terrestrial-based
two-way data messaging and position reporting services for transportation companies, private
fleets, construction equipment fleets and other enterprise companies. The Company provides the BREW
(Binary Runtime Environment for Wireless) product and services to wireless network operators,
handset manufacturers and application developers and support for developing and delivering
over-the-air wireless applications and services. The Company also makes strategic investments to
promote the worldwide adoption of CDMA products and services for wireless voice and internet data
communications.
Principles of Consolidation. The Company’s consolidated financial statements include the
assets, liabilities and operating results of majority-owned subsidiaries. The ownership of the
other interest holders of consolidated subsidiaries is reflected as minority interest and is not
significant. All significant intercompany accounts and transactions have been eliminated. Certain
of the Company’s foreign subsidiaries and equity method investees are included in the consolidated
financial statements one month in arrears to facilitate the timely inclusion of such entities in
the Company’s consolidated financial statements. The Company does not have any investments in
entities it believes are variable interest entities for which the Company is the primary
beneficiary.
Financial Statement Preparation. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts and the disclosure of contingent amounts in the
Company’s consolidated financial statements and the accompanying notes. Actual results could differ
from those estimates. Certain prior year amounts have been reclassified to conform to the current
year presentation.
Fiscal Year. The Company operates and reports using a 52-53 week fiscal year ending on the
last Sunday in September. Fiscal year ended September 30, 2007 included 53 weeks. The fiscal year
ended September 24, 2006 and September 25, 2005 each included 52 weeks.
Revenue Recognition. The Company derives revenue principally from sales of integrated circuit
products, from royalties for its intellectual property, from messaging and other services and
related hardware sales, from software development and licensing and related services, and from
license fees for intellectual property. The timing of revenue recognition and the amount of revenue
actually recognized in each case depends upon a variety of factors, including the specific terms of
each arrangement and the nature of the Company’s deliverables and obligations. The development
stage of the Company’s customers’ products does not affect the timing or amount of revenue
recognized.
The Company licenses rights to use portions of its intellectual property portfolio, which
includes certain patent rights essential to and/or useful in the manufacture and sale of certain
wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, Wideband
CDMA (WCDMA), CDMA Time Division Duplex (TDD) and/or OFDMA standards and their derivatives.
Licensees typically pay a license fee in one or more installments and ongoing royalties based on
their sales of products incorporating or using the Company’s licensed intellectual property.
License fees are recognized over the estimated period of future benefit to the average licensee,
typically five to seven years. The Company earns royalties on such licensed CDMA products sold
worldwide by its licensees at the time that the licensees’ sales occur. The Company’s licensees, however, do
not report and pay royalties owed for sales in any given quarter until after the conclusion of that
quarter, and, in some instances,
F-6
Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
although royalties are reported quarterly, payment is on a
semi-annual basis. The Company recognizes royalty revenues based on royalties reported by licensees
during the quarter.
Revenues from sales of the Company’s CDMA-based integrated circuits are recognized at the time
of shipment, or when title and risk of loss pass to the customer and other criteria for revenue
recognition are met, if later. Revenues from providing services are recorded when earned.
The Company recognizes revenues allocated to certain satellite and terrestrial-based two-way
data messaging and position reporting hardware using the residual method. Revenues from such sales
are recorded at the time of shipment, or when title and risk of loss pass to the customer and other
criteria for revenue recognition are met.
Revenues from long-term contracts are generally recognized using the percentage-of-completion
method of accounting, based on costs incurred compared with total estimated costs. The
percentage-of-completion method relies on estimates of total contract revenue and costs. Revenue
and profit are subject to revisions as the contract progresses to completion. Revisions in profit
estimates are charged or credited to income in the period in which the facts that give rise to the
revision become known. If actual contract costs are greater than expected, reduction of contract
profit would be required. Billings on uncompleted contracts in excess of incurred cost and accrued
profit are classified as unearned revenue in the Company’s consolidated balance sheets. Estimated
contract losses are recognized when determined. If substantive uncertainty related to customer
acceptance exists or the contract’s duration is relatively short, the Company uses the
completed-contract method.
The Company provides both perpetual and renewable time-based software licenses. Revenues from
software license fees are recognized when all of the following criteria are met: the written
agreement is executed; the software is delivered; the license fee is fixed and determinable;
collectibility of the license fee is probable; and if applicable, when vendor-specific objective
evidence exists to allocate the total license fee to elements of multiple-element arrangements,
including post-contract customer support. When contracts contain multiple elements wherein
vendor-specific objective evidence of fair value exists for all undelivered elements, the Company
recognizes revenue for the delivered elements and defers revenue for the fair value of the
undelivered elements until the remaining obligations have been satisfied. If vendor-specific
objective evidence of fair value does not exist for all undelivered elements, revenue for the
delivered and undelivered elements is deferred until remaining obligations have been satisfied, or
if the only undelivered element is post-contract customer support and vendor specific objective
evidence of the fair value of post-contract customer support does not exist, revenue from the
entire arrangement is recognized ratably over the support period. Judgments and estimates are made
in connection with the recognition of software license revenue, which may include assessments of
collectibility, the fair value of deliverable elements and the implied support period. The amount
or timing of the Company’s software license revenue may differ as a result of changes in these
judgments or estimates.
The Company records reductions to revenue for customer incentive programs, including special
pricing agreements and other volume-related rebate programs. Such reductions to revenue are based
on a number of factors, including the contractual provisions of the customer agreements and the
Company’s assumptions related to historical and projected customer sales volumes, market share and
inventory levels.
Unearned revenue consists primarily of fees related to software products, license fees for
intellectual property, hardware products sales with continuing performance obligations and billings
on uncompleted contracts in excess of incurred cost and accrued profit.
Concentrations. A significant portion of the Company’s revenues is concentrated with a limited
number of customers as the worldwide market for wireless telecommunications products is dominated
by a small number of large corporations. Revenues from three customers of the Company’s QCT, QTL
and QWI segments each comprised an aggregate of 14%, 14% and 13% of total consolidated revenues in
fiscal 2007, compared to 13% of total consolidated revenues in fiscal 2006 and 15%, 13% and 11% of
total consolidated revenues in fiscal 2005. Aggregated accounts receivable from these three
customers comprised 50% and 45% of gross accounts receivable at September 30, 2007 and September
24, 2006, respectively.
Revenues from international customers were approximately 87% of total consolidated revenues in
fiscal 2007 and 2006 and 82% of total consolidated revenues in 2005.
Cost of Equipment and Services Revenues. Cost of equipment and services revenues is primarily
comprised of the cost of equipment revenues, the cost of messaging services revenues and the cost
of development and other
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
services revenues. Cost of equipment revenues consists of the cost of
equipment sold and sustaining engineering costs, including personnel and related costs. Cost of
messaging services revenues consists principally of satellite transponder costs, network operations
expenses, including personnel and related costs, depreciation and airtime charges by
telecommunications operators. Cost of development and other services revenues primarily includes
personnel costs and related expenses.
Shipping and Handling Costs. Costs incurred for shipping and handling are included in cost of
equipment and services revenues at the time the related revenue is recognized. Amounts billed to a
customer for shipping and handling are reported as revenue.
Research and Development. Costs incurred in research and development activities are expensed
as incurred, except certain software development costs capitalized after technological feasibility
of the software is established.
Marketing. Certain cooperative marketing programs reimburse customers for marketing activities
for certain of the Company’s products and services, subject to defined criteria. Cooperative
marketing obligations are accrued and the costs are recorded in the period in which the costs are
incurred by the customer and the Company is obligated to reimburse the customer. Cooperative
marketing costs are recorded as selling, general and administrative expenses to the extent that a
marketing benefit separate from the revenue transaction can be identified and the cash paid does
not exceed the fair value of that marketing benefit received. Any excess of cash paid over the fair
value of the marketing benefit received is recorded as a reduction in revenue.
Income Taxes. The asset and liability approach is used to recognize deferred tax assets and
liabilities for the expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in
income in the period such changes are enacted. The Company records a valuation allowance to reduce
the deferred tax assets to the amount that is more likely than not to be realized.
The Company’s income tax returns are based on calculations and assumptions that are subject to
examination by the Internal Revenue Service and other tax authorities. While the Company believes
it has appropriate support for the positions taken on its tax returns, the Company regularly
assesses the potential outcomes of examinations by tax authorities in determining the adequacy of
its provision for income taxes. As part of its assessment of potential adjustments to its tax
returns, the Company increases its current tax liability to the extent an adjustment would result
in a cash tax payment or decreases its deferred tax assets to the extent an adjustment would not
result in a cash tax payment. The Company continually assesses the likelihood and amount of
potential adjustments and adjusts the income tax provision, the current tax liability and deferred
taxes in the period in which the facts that give rise to a revision become known.
The Company recognizes windfall tax benefits associated with the exercise of stock options
directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not
recognized for net operating loss carryforwards resulting from windfall tax benefits. A windfall
tax benefit occurs when the actual tax benefit realized by the Company upon an employee’s
disposition of a share-based award exceeds the deferred tax asset, if any, associated with the
award that the Company had recorded. When assessing whether a tax benefit relating to share-based
compensation has been realized, the Company follows the tax law ordering method, under which
current year share-based compensation deductions are assumed to be utilized before net operating
loss carryforwards and other tax attributes.
Cash Equivalents. The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are comprised of money market
funds, certificates of deposit, commercial paper and government agencies’ securities. The carrying
amounts approximate fair value due to the short maturities of these instruments.
Marketable Securities. The appropriate classification of marketable securities is determined
at the time of purchase, and such designation is reevaluated as of each balance sheet date.
Available-for-sale securities are stated at fair value as determined by the most recently traded
price of each security at the balance sheet date. For securities that may not have been actively
traded in a given period, fair value is determined using matrix pricing and other valuation
techniques. The net unrealized gains or losses on available-for-sale securities are reported as a
component of comprehensive income (loss), net of tax. The specific identification method is used to
compute the realized gains and losses on debt and equity securities.
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company regularly monitors and evaluates the realizable value of its marketable
securities. When assessing marketable securities for other-than-temporary declines in value, the
Company considers factors including: how significant the decline in value is as a percentage of the
original cost, how long the market value of the investment has been less than its original cost,
the performance of the investee’s stock price in relation to the stock price of its competitors
within the industry, expected market volatility and the market in general, analyst recommendations,
the views of external investment managers, any news or financial information that has been released
specific to the investee and the outlook for the overall industry in which the investee operates.
If events and circumstances indicate that a decline in the value of these assets has occurred and
is other-than-temporary, the Company records a charge to investment income (expense).
Allowances for Doubtful Accounts. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of the Company’s customers to make required payments.
The Company considers the following factors when determining if collection of a fee is reasonably
assured: customer credit-worthiness, past transaction history with the customer, current economic
industry trends and changes in customer payment terms. If the Company has no previous experience
with the customer, the Company typically obtains reports from various credit organizations to
ensure that the customer has a history of paying its creditors. The Company may also request
financial information, including financial statements or other documents (e.g. bank statements) to
ensure that the customer has the means of making payment. If these factors do not indicate
collection is reasonably assured, revenue is deferred until collection becomes reasonably assured,
which is generally upon receipt of cash. If the financial condition of the Company’s customers were
to deteriorate, adversely affecting their ability to make payments, additional allowances would be
required.
Inventories. Inventories are valued at the lower of cost or market (replacement cost, not to
exceed net realizable value) using the first-in, first-out method. Recoverability of inventory is
assessed based on review of committed purchase orders from customers, as well as purchase
commitment projections provided by customers, among other things.
Property, Plant and Equipment. Property, plant and equipment are recorded at cost and
depreciated or amortized using the straight-line method over their estimated useful lives.
Buildings and building improvements are depreciated over 30 years and 15 years, respectively.
Leasehold improvements are amortized over the shorter of their estimated useful lives or the
remaining term of the related lease. Other property, plant and equipment have useful lives ranging
from 2 to 15 years. Direct external and internal costs of developing software for internal use are
capitalized subsequent to the preliminary stage of development. Leased property meeting certain
capital lease criteria is capitalized, and the net present value of the related lease payments is
recorded as a liability. Amortization of capital leased assets is recorded using the straight-line
method over the shorter of the estimated useful lives or the lease terms. Maintenance, repairs, and
minor renewals and betterments are charged to expense as incurred.
Upon the retirement or disposition of property, plant and equipment, the related cost and
accumulated depreciation or amortization are removed, and a gain or loss is recorded.
Investments in Other Entities. The Company makes strategic investments in companies that have
developed or are developing innovative wireless data applications and wireless operators that
promote the worldwide deployment of CDMA systems. Investments in corporate entities with less than
a 20% voting interest are generally accounted for under the cost method. The cost method is also
used to account for investments that are not in-substance common stock. The Company uses the equity
method to account for investments in common stock or in-substance common stock of corporate
entities, including limited liability corporations that do not maintain specific ownership
accounts, in which it has a voting interest of 20% to 50% or in which it otherwise has the ability
to exercise significant influence, and in partnerships and limited liability corporations that do
maintain specific ownership accounts in which it has other than minor to 50% ownership interests.
Under the equity method, the investment is originally recorded at cost and adjusted to recognize
the Company’s share of net earnings or losses of the investee, limited to the extent of the
Company’s investment in and advances to the investee and financial guarantees on behalf of the
investee that create additional basis. The Company’s equity in net earnings or losses of its
investees is recorded one month in arrears to facilitate the timely inclusion of such equity in net
earnings or losses in the Company’s consolidated financial statements.
The Company regularly monitors and evaluates the realizable value of its investments. When
assessing an investment for an other-than-temporary decline in value, the Company considers such
factors as, among other things, the share price from the investee’s latest financing round, the
performance of the investee in relation to its
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
own operating targets and its business plan, the
investee’s revenue and cost trends, as well as liquidity and cash position, including its cash burn
rate, market acceptance of the investee’s products/services as well as any new products or services
that may be forthcoming, any significant news that has been released specific to the investee or
the investee’s competitors and/or industry and the outlook for the overall industry in which the
investee operates. From time to time, the Company may consider third party evaluations, valuation
reports or advice from investment banks. If events and circumstances indicate that a decline in the
value of these assets has occurred and is other-than-temporary, the Company records a charge to
investment income (expense).
Derivatives. The Company may enter into foreign currency forward and option contracts to hedge
certain foreign currency transactions and probable anticipated foreign currency transactions. Gains
and losses arising from changes in the fair values of foreign currency forward and option contracts
that are not designated as hedging instruments are recorded in investment income (expense) as gains
(losses) on derivative instruments. Gains and losses arising from the effective portion of foreign
currency forward and option contracts that are designated as cash-flow hedging instruments are
recorded in accumulated other comprehensive income as gains (losses) on derivative instruments, net
of tax. The amounts are subsequently reclassified into revenues in the same period in which the
underlying transactions affect the Company’s earnings. The Company had no outstanding forward
contracts at September 30, 2007 and September 24, 2006. The value of the Company’s foreign currency
option contracts recorded in other current assets was $1 million at both September 30, 2007 and
September 24, 2006, and the value recorded in other current liabilities was $2 million and $3
million at September 30, 2007 and September 24, 2006, respectively, all of which were designated as
cash-flow hedging instruments.
In connection with its stock repurchase program, the Company may sell put options that require
the Company to repurchase shares of its common stock at fixed prices. The premiums received from
put options are recorded as other current liabilities. Changes in the fair value of put options are
recorded in investment income (expense) as gains (losses) on derivative instruments. The value of
the put options recorded in other current liabilities was $10 million and $19 million at September
30, 2007 and September 24, 2006, respectively.
Goodwill and Other Intangible Assets. Goodwill represents the excess of purchase price and
related costs over the value assigned to the net tangible and identifiable intangible assets of
businesses acquired. Goodwill is tested annually for impairment and in interim periods if certain
events occur indicating that the carrying value of goodwill may be impaired. The Company completed
its annual testing for fiscal 2007, 2006 and 2005 and determined that its recorded goodwill was not
impaired.
Software development costs are capitalized when a product’s technological feasibility has been
established through the date a product is available for general release to customers. Software
development costs are amortized on a straight-line basis over the estimated economic life of the
software, ranging from less than one year to three years, taking into account such factors as the
effects of obsolescence, technological advances and competition. The weighted-average amortization
period for capitalized software was three years at September 30, 2007 and September 24, 2006. Other
intangible assets are amortized on a straight-line basis over their useful lives, ranging from less
than one year to 28 years.
Weighted-average amortization periods for finite-lived intangible assets, by class, were as
follows:
| September 30, 2007 |
September 24, 2006 |
|||||||
Wireless licenses |
15 years | 15 years | ||||||
Marketing-related |
18 years | 19 years | ||||||
Technology-based |
12 years | 15 years | ||||||
Customer-related |
5 years | 7 years | ||||||
Other |
28 years | 28 years | ||||||
Total intangible assets |
13 years | 15 years | ||||||
Valuation of Long-Lived and Intangible Assets. The Company assesses potential impairments to
its long-lived assets when there is evidence that events or changes in circumstances indicate that
the carrying amount of an asset may not be recovered. An impairment loss is recognized when the
carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of the asset. Any
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
required impairment loss is measured as the amount by which the carrying amount of a long-lived asset
exceeds its fair value and is recorded as a reduction in the carrying value of the related asset
and a charge to operating results.
Securities Lending. The Company engages in transactions in which certain fixed-income and
equity securities are loaned to selected broker-dealers. The loaned securities of $411 million at
September 30, 2007 continue to be carried as marketable securities on the balance sheet. Cash
collateral, equal to at least 101% of the fair value of the securities loaned plus accrued
interest, is held and invested by one or more securities lending agents on behalf of the Company.
The Company monitors the fair value of securities loaned and the collateral received and obtains
additional collateral as necessary. Collateral of $421 million at September 30, 2007 was recorded
as a current asset with a corresponding current liability. The Company did not engage in securities
lending during fiscal 2006.
Litigation. The Company is currently involved in certain legal proceedings. The Company
estimates the range of liability related to pending litigation where the amount and range of loss
can be reasonably estimated. The Company records its best estimate of a loss when the loss is
considered probable. Where a liability is probable and there is a range of estimated loss with no
best estimate in the range, the Company records the minimum estimated liability related to the
claim. As additional information becomes available, the Company assesses the potential liability
related to the Company’s pending litigation and revises its estimates. The Company’s policy is to
expense legal costs associated with defending itself as incurred.
Share-Based Payments. The Company adopted the revised statement of Financial Accounting
Standards No. 123, “Share-Based Payment” (FAS 123R) in fiscal 2006. Under FAS 123R, share-based
compensation cost is measured at the grant date, based on the estimated fair value of the award,
and is recognized as expense over the employee’s requisite service period. The Company adopted the
provisions of FAS 123R using a modified prospective application. Accordingly, fiscal 2005 results
were not revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards
and to awards that were outstanding on the effective date, which are subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the effective date is
recognized over the remaining service period using the compensation cost calculated for pro forma
disclosure purposes under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (FAS
123).
The Company elected to adopt the alternative transition method for calculating the tax effects
of share-based compensation. The alternative transition method includes a simplified method to
establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the
tax effects of employee share-based compensation, which is available to absorb tax deficiencies
which could be recognized subsequent to the adoption of FAS 123R.
Share-Based Compensation Information under FAS 123R
Upon adoption of FAS 123R, the Company also changed its method of valuation for stock options
granted beginning in fiscal 2006 to a lattice binomial option-pricing model (binomial model) from
the Black-Scholes option-pricing model (Black-Scholes model) previously used for the Company’s pro
forma information required under FAS 123. The Company’s employee stock options have various
restrictions that reduce option value, including vesting provisions and restrictions on transfer
and hedging, among others, and are often exercised prior to their contractual maturity.
The weighted-average estimated fair values of employee stock options granted during fiscal
2007 and 2006 were $14.54 and $15.73 per share, respectively, using the binomial model with the
following weighted-average assumptions (annualized percentages):
| 2007 | 2006 | |||||||
Volatility |
33.4 | % | 30.7 | % | ||||
Risk-free interest rate |
4.6 | % | 4.6 | % | ||||
Dividend yield |
1.3 | % | 1.0 | % | ||||
Post-vesting forfeiture rate |
6.5 | % | 6.0 | % | ||||
Suboptimal exercise factor |
1.8 | 1.7 | ||||||
The Company uses the implied volatility of market-traded options in the Company’s stock for
the expected volatility assumption. The term structure of volatility is used up to approximately
two years, and the Company used the implied volatility of the option with the longest time to
maturity for periods beyond two years. Prior to fiscal 2006, the Company had used a combination of
its historical stock price and implied volatility in accordance with FAS 123 for purposes of its
pro forma information. The selection of implied volatility data to estimate expected
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
volatility was based upon the availability of actively traded options on the Company’s stock and the Company’s
assessment that implied volatility is more representative of future stock price trends than
historical volatility.
The risk-free interest rate assumption is based upon observed interest rates appropriate for
the terms of the Company’s employee stock options. The Company does not target a specific dividend
yield for its dividend payments but is required to assume a dividend yield as an input to the
binomial model. The dividend yield assumption is based on the Company’s history and expectation of
future dividend payouts and may be subject to substantial change in the future. The post-vesting
forfeiture rate and suboptimal exercise factor are based on the Company’s historical option
cancellation and employee exercise information, respectively. The suboptimal exercise factor is the
ratio by which the stock price must increase over the exercise price before employees are expected
to exercise their stock options.
The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding and is a derived output of the binomial model. The
expected life of employee stock options is impacted by all of the underlying assumptions used in
the Company’s model. The binomial model assumes that employees’ exercise behavior is a function of
the options’ remaining contractual life and the extent to which the option is in-the-money (i.e.
the average stock price during the period is above the strike price of the stock option). The
binomial model estimates the probability of exercise as a function of these two variables based on
the history of exercises and cancellations of past grants made by the Company. The expected life of
employee stock options granted, derived from the binomial model, was 6.2 years and 5.8 years during
fiscal 2007 and fiscal 2006, respectively.
The pre-vesting forfeiture rate represents the rate at which stock options are expected to be
forfeited by employees prior to their vesting. Pre-vesting forfeitures were estimated to be
approximately 0% in both fiscal 2007 and 2006, based on historical experience. The effect of
pre-vesting forfeitures on the Company’s recorded expense has historically been negligible due to
the predominantly monthly vesting of option grants. If pre-vesting forfeitures occur in the future,
the Company will record the effect of such forfeitures as the forfeitures occur. The Company will
continue to evaluate the appropriateness of this assumption. In the Company’s pro forma information
required under FAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures
as they occurred.
Total estimated share-based compensation expense, related to all of the Company’s share-based
awards, was comprised as follows (in millions, except per share data):
| 2007 | 2006 | |||||||
Cost of equipment and services revenues |
$ | 39 | $ | 41 | ||||
Research and development |
221 | 216 | ||||||
Selling, general and administrative |
233 | 238 | ||||||
Share-based compensation expense before taxes |
493 | 495 | ||||||
Related income tax benefits |
(169 | ) | (175 | ) | ||||
Share-based compensation expense, net of taxes |
$ | 324 | $ | 320 | ||||
Net share-based compensation expense, per common share: |
||||||||
Basic |
$ | 0.20 | $ | 0.19 | ||||
Diluted |
$ | 0.19 | $ | 0.19 | ||||
The Company recorded $98 million and $86 million in share-based compensation expense during
fiscal 2007 and 2006, respectively, related to share-based awards granted during those periods. The
remaining share-based compensation expense primarily related to stock option awards granted in
earlier periods. In addition, for fiscal 2007 and 2006, $240 million and $403 million,
respectively, was presented as financing activities in the consolidated statements of cash flows to
reflect the incremental tax benefits from stock options exercised in those periods.
Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006
Prior to adopting the provisions of FAS 123R, the Company recorded estimated compensation
expense for employee stock options based upon their intrinsic value on the date of grant pursuant
to Accounting Principles Board Opinion 25 (APB 25), “Accounting for Stock Issued to Employees” and
provided the required pro forma
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disclosures of FAS 123. Because the Company established the
exercise price based on the fair market value of the Company’s stock at the date of grant, the
stock options had no intrinsic value upon grant, and therefore no estimated expense was recorded
prior to adopting FAS 123R. Each accounting period, the Company reported the potential dilutive
impact of stock options in its diluted earnings per common share using the treasury-stock method.
Out-of-the-money stock options (i.e. the average stock price during the period was below the strike
price of the stock option) were not included in diluted earnings per common share as their effect
was anti-dilutive.
The weighted-average estimated fair value of employee stock options granted during fiscal 2005
was $14.80 per share. The fair value was calculated using the Black-Scholes model and assuming a
weighted average expected life of 6 years and weighted average annualized percentages of 3.9% for
the risk-free interest rate, 36.5% for volatility and 0.8% for the dividend yield. For purposes of
pro forma disclosures under FAS 123, the estimated fair values of share-based payments are assumed
to be amortized to expense over the vesting periods. The pro forma effects of recognizing estimated
compensation expense under the fair value method on net income and earnings per common share for
the year ended September 25, 2005 were as follows (in millions, except per share data):
Net income, as reported |
$ | 2,143 | ||
Add: Share-based employee compensation expense included in
reported net income, net of related tax benefits |
2 | |||
Deduct: Share-based employee compensation expense determined under
the fair value based method for all awards, net of related tax effects |
(305 | ) | ||
Pro forma net income |
$ | 1,840 | ||
Earnings per common share: |
||||
Basic — as reported |
$ | 1.31 | ||
Basic — pro forma |
$ | 1.12 | ||
Diluted — as reported |
$ | 1.26 | ||
Diluted — pro forma |
$ | 1.09 | ||
Foreign Currency. Foreign subsidiaries operating in a local currency environment use the local
currency as the functional currency. Resulting translation gains or losses are recognized as a
component of other comprehensive income. Where the United States dollar is the functional currency,
resulting translation gains or losses are recognized
in the statements of operations. Net foreign currency transaction gains included in the
Company’s statement of operations were $1 million in fiscal 2007, 2006 and 2005.
Comprehensive Income. Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources, including foreign currency translation adjustments and unrealized gains and losses on
marketable securities. The Company presents comprehensive income in its consolidated statements of
stockholders’ equity. The reclassification adjustment for net realized gains results from the
recognition of the net realized gains in the statements of operations when marketable securities
are sold or derivative instruments are settled.
Components of accumulated other comprehensive income consisted of the following (in millions):
| September 30, 2007 | September 24, 2006 | |||||||
Net unrealized gains on marketable
securities and
derivative instruments, net of income taxes |
$ | 240 | $ | 87 | ||||
Foreign currency translation |
(3 | ) | (23 | ) | ||||
| $ | 237 | $ | 64 | |||||
Earnings Per Common Share. Basic earnings per common share is computed by dividing net income
by the weighted-average number of common shares outstanding during the reporting period. Diluted
earnings per common share is computed by dividing net income by the combination of dilutive common
share equivalents, comprised of shares issuable under the Company’s share-based compensation plans
and shares subject to written put options, and the weighted-average number of common shares
outstanding during the reporting period. Dilutive common share
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equivalents include the dilutive
effect of in-the-money share equivalents, which is calculated based on the average share price for
each period using the treasury stock method. Under the treasury stock method, the exercise price of
an option, the amount of compensation cost, if any, for future service that the Company has not yet
recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital, if
any, when the option is exercised are assumed to be used to repurchase shares in the current
period. The incremental dilutive common share equivalents, calculated using the treasury stock
method, for fiscal 2007, 2006 and 2005 were 32,333,000, 51,835,000 and 56,127,000, respectively.
Employee stock options to purchase 96,278,000, 54,541,000 and 33,660,000 shares of common
stock during fiscal 2007, 2006 and 2005, respectively, were outstanding but not included in the
computation of diluted earnings per common share because the effect on diluted earnings per share
would be anti-dilutive. The computation of diluted earnings per share during fiscal 2007 excluded
1,615,000 shares of common stock issuable under our employee stock purchase plans because the
effect was anti-dilutive. Put options outstanding during 2007 and 2005 to purchase a
weighted-average 1,000,000 and 13,000,000 shares of common stock, respectively, were not included
in the earnings per common share computation because the put options’ exercise prices were less
than the average market price of the common stock while they were outstanding, and therefore, the
effect on diluted earnings per common share would be anti-dilutive (Note 7).
Future Accounting Requirements. In July 2006, the FASB issued FASB Interpretation No. 48 (FIN
48) “Accounting for Uncertainty in Income Taxes” which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax positions taken or
expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition,
classification, accounting in interim periods and disclosure requirements for uncertain tax
positions. The accounting provisions of FIN 48 will be effective for the Company beginning October
1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to
opening retained earnings in the year of adoption and will be presented separately. Only tax
positions that meet the more likely than not recognition threshold at the effective date may be
recognized upon adoption of FIN 48. The Company is in the process of finalizing the impact the
adoption of FIN 48 will have on its consolidated financial statements but expects the adjustment to
opening retained earnings to be immaterial.
Note 2. Marketable Securities
Marketable securities were comprised as follows (in millions):
| Current | Noncurrent | |||||||||||||||
| September 30, 2007 | September 24, 2006 | September 30, 2007 | September 24, 2006 | |||||||||||||
Available-for-sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 58 | $ | 73 | $ | — | $ | — | ||||||||
Government-sponsored enterprise
securities |
219 | 667 | — | — | ||||||||||||
Municipal bonds |
— | 5 | — | — | ||||||||||||
Foreign government bonds |
8 | 17 | — | — | ||||||||||||
Corporate bonds and notes |
2,939 | 2,693 | 21 | 23 | ||||||||||||
Mortgage- and asset-backed securities |
573 | 617 | — | — | ||||||||||||
Non-investment grade debt securities |
19 | 24 | 1,812 | 1,368 | ||||||||||||
Equity securities |
203 | 18 | 1,316 | 1,318 | ||||||||||||
Equity mutual funds and exchange
traded funds |
— | — | 1,871 | 1,519 | ||||||||||||
Debt mutual funds |
151 | — | 214 | — | ||||||||||||
| $ | 4,170 | $ | 4,114 | $ | 5,234 | $ | 4,228 | |||||||||
Marketable securities in the amount of $411 million at September 30, 2007 have been loaned
under the Company’s securities lending program (Note 1).
As of September 30, 2007, the contractual maturities of available-for-sale debt securities
were as follows (in millions):
| Years to Maturity | No Single | ||||||||||||||||||||
| Less than | One to | Five to | Greater than | Maturity | |||||||||||||||||
| One Year | Five Years | Ten Years | Ten Years | Date | Total | ||||||||||||||||
| $ | 2,195 | $ | 1,401 | $ | 825 | $ | 42 | $ | 1,551 | $ | 6,014 | ||||||||||
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities with no single maturity date included mortgage- and asset-backed securities.
Available-for-sale securities were comprised as follows (in millions):
| Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
September 30, 2007 |
||||||||||||||||
Equity securities |
$ | 2,941 | $ | 492 | $ | (43 | ) | $ | 3,390 | |||||||
Debt securities |
6,042 | 18 | (46 | ) | 6,014 | |||||||||||
| $ | 8,983 | $ | 510 | $ | (89 | ) | $ | 9,404 | ||||||||
September 24, 2006 |
||||||||||||||||
Equity securities |
$ | 2,693 | $ | 194 | $ | (32 | ) | $ | 2,855 | |||||||
Debt securities |
5,500 | 11 | (24 | ) | 5,487 | |||||||||||
| $ | 8,193 | $ | 205 | $ | (56 | ) | $ | 8,342 | ||||||||
The Company recorded realized gains and losses on sales of available-for-sale marketable
securities as follows (in millions):
| Gross Realized | ||||||||||||
| Fiscal Year | Gross Realized Gains | Losses | Net Realized Gains | |||||||||
2007 |
$ | 244 | $ | (26 | ) | $ | 218 | |||||
2006 |
176 | (47 | ) | 129 | ||||||||
2005 |
198 | (31 | ) | 167 | ||||||||
The following table shows the gross unrealized losses and fair values of the Company’s
investments in individual securities that have been in a continuous unrealized loss position deemed
to be temporary for less than 12 months and for more than 12 months, aggregated by investment
category, at September 30, 2007 (in millions):
| Less than 12 months | More than 12 months | |||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
Corporate bonds and notes |
$ | 634 | $ | (6 | ) | $ | 277 | $ | (1 | ) | ||||||
Mortgage- and asset-backed securities |
123 | (2 | ) | 22 | — | |||||||||||
Non-investment grade debt securities |
1,101 | (35 | ) | 49 | (2 | ) | ||||||||||
Equity securities |
506 | (41 | ) | — | — | |||||||||||
Equity mutual funds and exchange traded funds |
58 | (2 | ) | — | — | |||||||||||
| $ | 2,422 | $ | (86 | ) | $ | 348 | $ | (3 | ) | |||||||
The unrealized losses on the Company’s investments in marketable securities were caused
primarily by a combination of short-term industry-and market-specific events. The duration and
severity of the unrealized losses in relation to the carrying amounts of the individual investments
were largely consistent with the expected volatility of each asset category. The Company’s analysis
of market research, industry reports, economic forecasts and the specific circumstances of the
issuer indicate that it is reasonable to expect a recovery in fair value up to the
Company’s cost basis within a reasonable period of time. Accordingly, the Company considered
these unrealized losses to be temporary at September 30, 2007.
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Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Composition of Certain Financial Statement Captions
Accounts Receivable.
| September 30, 2007 | September 24, 2006 | |||||||
| (In millions) | ||||||||
Trade, net of allowances for doubtful
accounts of $36 and $1,
respectively |
$ | 657 | $ | 632 | ||||
Long-term contracts |
39 | 44 | ||||||
Other |
19 | 24 | ||||||
| $ | 715 | $ | 700 | |||||
Inventories.
| September 30, 2007 | September 24, 2006 | |||||||
| (In millions) | ||||||||
Raw materials |
$ | 27 | $ | 30 | ||||
Work-in-process |
161 | 13 | ||||||
Finished goods |
281 | 207 | ||||||
| $ | 469 | $ | 250 | |||||
Property, Plant and Equipment.
| September 30, 2007 | September 24, 2006 | |||||||
| (In millions) | ||||||||
Land |
$ | 124 | $ | 76 | ||||
Buildings and improvements |
954 | 853 | ||||||
Computer equipment |
800 | 659 | ||||||
Machinery and equipment |
999 | 764 | ||||||
Furniture and office equipment |
48 | 43 | ||||||
Leasehold improvements |
205 | 171 | ||||||
| 3,130 | 2,566 | |||||||
Less accumulated depreciation
and amortization |
(1,342 | ) | (1,084 | ) | ||||
| $ | 1,788 | $ | 1,482 | |||||
Depreciation and amortization expense related to property, plant and equipment for fiscal
2007, 2006 and 2005 was $317 million, $239 million and $177 million, respectively. The net book
values of property under capital leases included in buildings and improvements were $91 million and
$58 million at September 30, 2007 and September 24, 2006, respectively. These capital leases
principally related to base station towers and buildings. Amortization of assets recorded under
capital leases is included in depreciation expense. Capital lease additions during fiscal 2007,
2006 and 2005 were $33 million, $56 million and $3 million, respectively.
At September 30, 2007 and September 24, 2006, buildings and improvements and leasehold
improvements with net book values of $7 million and $19 million, respectively, including
accumulated depreciation and amortization of $3 million and $15 million, respectively, were leased
to third parties or held for lease to third parties. Future minimum rental income on facilities
leased to others is expected to be $1 million in both fiscal 2008 and 2009 and negligible in fiscal
2010.
Goodwill and Other Intangible Assets. The Company’s reportable segment assets do not include
goodwill (Note 10). The Company allocates goodwill to its reporting units for annual impairment
testing purposes. Goodwill was allocable to reporting units included in the Company’s reportable
segments at September 30, 2007 as follows: $422 million in Qualcomm CDMA Technologies, $684 million
in Qualcomm Technology Licensing, $91 million in Qualcomm Wireless & Internet, and $128 million in
Qualcomm MEMS Technology (a nonreportable segment
F-16
Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included in reconciling items in Note 10). The
increase in goodwill from September 24, 2006 to September 30, 2007 was the result of the Company’s
business acquisitions (Note 11), partially offset by currency translation adjustments and tax
deductions resulting from the exercise of stock options that were vested as of the business
acquisition date.
The components of purchased intangible assets, which are included in other assets, were as
follows (in millions):
| September 30, 2007 | September 24, 2006 | |||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
Wireless licenses |
$ | 262 | $ | (30 | ) | $ | 238 | $ | (22 | ) | ||||||
Marketing-related |
23 | (13 | ) | 21 | (11 | ) | ||||||||||
Technology-based |
502 | (97 | ) | 257 | (43 | ) | ||||||||||
Customer-related |
16 | (5 | ) | 6 | (2 | ) | ||||||||||
Other |
7 | (1 | ) | 7 | (1 | ) | ||||||||||
| $ | 810 | $ | (146 | ) | $ | 529 | $ | (79 | ) | |||||||
All of the Company’s purchased intangible assets other than certain wireless licenses in the
amount of $174 million and goodwill are subject to amortization. Amortization expense related to
these purchased intangible assets for fiscal 2007, 2006 and 2005 was $68 million, $32 million and
$19 million, respectively, and is expected to be $67 million in fiscal 2008, $58 million in fiscal
2009, $52 million in fiscal 2010, $49 million in fiscal 2011, $41 million in fiscal 2012, and $223
million thereafter.
Capitalized software development costs, which are included in other assets, were $14 million
and $27 million at September 30, 2007 and September 24, 2006, respectively. Accumulated
amortization on capitalized software was $14 million and $27 million at September 30, 2007 and
September 24, 2006, respectively. Amortization expense related to capitalized software was
negligible in fiscal 2007 and was $1 million and $4 million in fiscal 2006 and 2005, respectively.
Note 4. Investments in Other Entities
Strategic equity investments as of September 30, 2007 and September 24, 2006 totaled $114
million and $94 million, respectively, including $86 million and $73 million, respectively,
accounted for using the cost method. Differences between the carrying amounts of strategic equity
investments accounted for using the equity method and the Company’s underlying equity in the net
assets of those investees were not significant at September 30, 2007 and September 24, 2006. At
September 30, 2007, effective ownership interests in equity method investees ranged from
approximately 19% to 50%. Funding commitments related to these investments totaled $7 million at
September 30, 2007, which the Company expects to fund through fiscal 2009. Such commitments are
subject to the investees meeting certain conditions. As such, actual equity funding may be in
lesser amounts.
Note 5. Investment Income
Investment income, net was comprised as follows (in millions):
| 2007 | 2006 | 2005 | ||||||||||
Interest and dividend income |
$ | 558 | $ | 416 | $ | 256 | ||||||
Interest expense |
(11 | ) | (4 | ) | (3 | ) | ||||||
Net realized gains on marketable securities |
218 | 129 | 167 | |||||||||
Net realized gains on other investments |
4 | 7 | 12 | |||||||||
Other-than-temporary losses on marketable securities |
(16 | ) | (20 | ) | (13 | ) | ||||||
Other-than-temporary losses on other investments |
(11 | ) | (4 | ) | (1 | ) | ||||||
Gains (losses) on derivative instruments |
2 | (29 | ) | 33 | ||||||||
Equity in losses of investees |
(1 | ) | (29 | ) | (28 | ) | ||||||
| $ | 743 | $ | 466 | $ | 423 | |||||||
F-17
Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes
The components of the income tax provision were as follows (in millions):
| 2007 | 2006 | 2005 | ||||||||||
Current provision: |
||||||||||||
Federal |
$ | 192 | $ | 299 | $ | 77 | ||||||
State |
37 | 88 | 42 | |||||||||
Foreign |
185 | 156 | 140 | |||||||||
| 414 | 543 | 259 | ||||||||||
Deferred provision: |
||||||||||||
Federal |
(75 | ) | 165 | 398 | ||||||||
State |
(15 | ) | (23 | ) | 9 | |||||||
Foreign |
(1 | ) | 1 | — | ||||||||
| (91 | ) | 143 | 407 | |||||||||
| $ | 323 | $ | 686 | $ | 666 | |||||||
The foreign component of the income tax provision consists primarily of foreign withholding taxes
on royalty income included in United States earnings.
The components of income before income taxes by United States and foreign jurisdictions were
as follows (in millions):
| 2007 | 2006 | 2005 | ||||||||||
United States |
$ | 1,681 | $ | 1,445 | $ | 1,570 | ||||||
Foreign |
1,945 | 1,711 | 1,239 | |||||||||
| $ | 3,626 | $ | 3,156 | $ | 2,809 | |||||||
The following is a reconciliation of the expected statutory federal income tax provision to
the Company’s actual income tax provision (in millions):
| 2007 | 2006 | 2005 | ||||||||||
Expected income tax provision at federal
statutory tax rate |
$ | 1,269 | $ | 1,105 | $ | 983 | ||||||
State income tax provision, net of federal
benefit |
180 | 176 | 109 | |||||||||
Foreign income taxed at other than U.S.
rates |
(710 | ) | (474 | ) | (290 | ) | ||||||
Tax audit settlements |
(331 | ) | (73 | ) | — | |||||||
Tax credits |
(91 | ) | (36 | ) | (66 | ) | ||||||
Valuation allowance |
(7 | ) | (46 | ) | (78 | ) | ||||||
One-time dividend |
— | — | 35 | |||||||||
Other |
13 | 34 | (27 | ) | ||||||||
Income tax expense |
$ | 323 | $ | 686 | $ | 666 | ||||||
The Company has not provided for United States income taxes and foreign withholding taxes on a
cumulative total of approximately $4.7 billion of undistributed earnings from certain non-United
States subsidiaries indefinitely invested outside the United States. Should the Company repatriate
foreign earnings, the Company would have to adjust the income tax provision in the period
management determined that the Company would repatriate the earnings. The American Jobs Creation Act of 2004 created a temporary incentive for
corporations in the United States to repatriate accumulated income earned abroad by providing an 85
percent dividends received deduction for certain dividends from controlled foreign corporations. In
the fourth quarter of fiscal 2005, the Company repatriated approximately $0.5 billion of foreign
earnings qualifying for the special incentive and recorded a related expense of approximately $35
million for federal and state income tax liabilities. This distribution does not change the
Company’s intention to reinvest indefinitely the undistributed earnings of certain of its foreign
subsidiaries in operations outside the United States.
During fiscal 2007, the Internal Revenue Service completed audits of the Company’s tax returns
for fiscal 2003 and 2004 and during fiscal 2006, the Internal Revenue Service and the California
Franchise Tax Board completed
F-18
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
audits of the Company’s tax returns for fiscal 2001 and 2002,
resulting in adjustments to the Company’s net operating loss and credit carryover amounts for those
years. The tax provision was reduced by $331 million and $73 million during fiscal 2007 and 2006,
respectively, to reflect the known and expected impacts of the audits on the reviewed and open tax
years.
The Company had net deferred tax assets and deferred tax liabilities as follows (in millions):
| September 30, 2007 | September 24, 2006 | |||||||
Accrued liabilities, reserves and other |
$ | 246 | $ | 169 | ||||
Share-based compensation |
295 | 164 | ||||||
Capitalized start-up and organizational costs |
86 | 46 | ||||||
Deferred revenue |
70 | 55 | ||||||
Unrealized losses on marketable securities |
59 | 43 | ||||||
Unrealized losses on other investments |
124 | 145 | ||||||
Capital loss carryover |
9 | 82 | ||||||
Tax credits |
91 | 129 | ||||||
Unused net operating losses |
80 | 59 | ||||||
Other basis differences |
18 | 22 | ||||||
Total gross deferred assets |
1,078 | 914 | ||||||
Valuation allowance |
(20 | ) | (22 | ) | ||||
Total net deferred assets |
1,058 | 892 | ||||||
Purchased intangible assets |
(99 | ) | (79 | ) | ||||
Deferred contract costs |
(6 | ) | (6 | ) | ||||
Unrealized gains on marketable securities |
(179 | ) | (67 | ) | ||||
Property, plant and equipment |
(26 | ) | (10 | ) | ||||
Total deferred liabilities |
(310 | ) | (162 | ) | ||||
Net deferred assets |
$ | 748 | $ | 730 | ||||
Reported as: |
||||||||
Current deferred tax assets |
$ | 435 | $ | 235 | ||||
Current deferred tax liabilities(1) |
— | (1 | ) | |||||
Non-current deferred tax assets |
318 | 512 | ||||||
Non-current deferred tax liabilities(2) |
(5 | ) | (16 | ) | ||||
| $ | 748 | $ | 730 | |||||
| (1) | Included in other current liabilities in the consolidated balance sheets. | |
| (2) | Included in other liabilities in the consolidated balance sheets. |
At September 30, 2007, the Company had unused federal net operating loss carryforwards of $206
million expiring from 2019 through 2026, unused state net operating loss carryforwards of $98
million expiring from 2008 through 2016, and unused foreign net operating loss carryforwards of $75
million, with $57 million expiring from 2008 through 2016. At September 30, 2007, the Company had
unused federal income tax credits of $195 million, with $185 million expiring from 2022 through
2027, and state income tax credits of $9 million, which do not expire. The Company does not expect
its federal and state net operating loss carryforwards and its federal income tax credits to expire
unused.
The Company believes, more likely than not, that it will have sufficient taxable income after
stock option related deductions to utilize the majority of its deferred tax assets. As of September
30, 2007, the Company has provided a valuation allowance on foreign net operating losses and net
capital losses of $14 million and $6 million, respectively. The valuation allowances reflect the
uncertainty surrounding the Company’s ability to generate sufficient future taxable income in
certain foreign tax jurisdictions to utilize its foreign net operating losses and the Company’s
ability to generate sufficient capital gains to utilize all capital losses.
Cash amounts paid for income taxes, net of refunds received, were $233 million, $172 million
and $168 million for fiscal 2007, 2006 and 2005, respectively. The income taxes paid primarily
relate to foreign withholding taxes.
F-19
Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Capital Stock
Preferred Stock. The Company has 8,000,000 shares of preferred stock authorized for issuance
in one or more series, at a par value of $0.0001 per share. In conjunction with the distribution of
preferred share purchase rights, 4,000,000 shares of preferred stock are designated as Series A
Junior Participating Preferred Stock and such shares are reserved for issuance upon exercise of the
preferred share purchase rights. At September 30, 2007 and September 24, 2006, no shares of
preferred stock were outstanding.
Preferred Share Purchase Rights Agreement. The Company has a Preferred Share Purchase Rights
Agreement (Rights Agreement) to protect stockholders’ interests in the event of a proposed takeover
of the Company. Under the original Rights Agreement, adopted on September 26, 1995, the Company
declared a dividend of one preferred share purchase right (a Right) for each share of the Company’s
common stock outstanding. Pursuant to the Rights Agreement, as amended and restated on December 7,
2006, each Right entitles the registered holder to purchase from the Company a one one-thousandth
share of Series A Junior Participating Preferred Stock, $0.0001 par value per share, subject to
adjustment for subsequent stock splits, at a purchase price of $180. The Rights are exercisable
only if a person or group (an Acquiring Person) acquires beneficial ownership of 20% or more of the
Company’s outstanding shares of common stock without Board approval. Upon exercise, holders, other
than an Acquiring Person, will have the right, subject to termination, to receive the Company’s
common stock or other securities, cash or other assets having a market value, as defined, equal to
twice such purchase price. The Rights, which expire on September 25, 2015, are redeemable in whole,
but not in part, at the Company’s option prior to the time such Rights are triggered for a price of
$0.001 per Right.
Stock Repurchase Program. On May 22, 2007, the Company announced that it had been authorized
to repurchase up to $3.0 billion of the Company’s common stock. The $3.0 billion stock repurchase
program replaced a $2.5 billion stock repurchase program, of which approximately $0.9 billion
remained authorized for repurchases. The stock repurchase program has no expiration date. When
stock is repurchased and retired, the amount paid in excess of par value is recorded to paid-in
capital. During fiscal 2007, 2006 and 2005, the Company repurchased and retired 37,263,000,
34,000,000 and 27,083,000 shares of common stock for $1.5 billion, $1.5 billion and $953 million,
respectively, excluding $9 million and $5 million of premiums received related to put options that
were exercised in fiscal 2007 and 2006, respectively. At September 30, 2007, approximately $1.5
billion remained authorized for repurchases under the stock repurchase program, net of put options
outstanding. In the period from October 1, 2007 through November 7, 2007, we repurchased and
retired 12,720,000 shares of the Company’s common stock for approximately $525 million.
In connection with the Company’s stock repurchase program, the Company sold put options on its
own stock during fiscal 2007, 2006 and 2005. At September 30, 2007, the Company had two outstanding
put options enabling holders to sell 5,000,000 shares of the Company’s common stock to the Company
for approximately $189 million (net of the put option premiums received), and the recorded values
of the put option liabilities totaled $10 million. Any shares purchased upon the exercise of the
put options will be retired. During fiscal 2007 and 2006, the Company recognized $3 million and $29
million, respectively, in investment losses due to net increases in the fair values of put options,
net of premiums received of $17 million and $11 million, respectively. During fiscal 2005, the
Company recognized gains of $31 million in investment income due to decreases in the fair values
of put options, including premiums received of $15 million.
Dividends. The Company announced increases in its quarterly dividend per share of common stock
from $0.07 to $0.09 on March 8, 2005, from $0.09 to $0.12 on March 7, 2006 and from $0.12 to $0.14
on March 13, 2007. Cash dividends announced in fiscal 2007, 2006 and 2005 were as follows (in
millions, except per share data):
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| Per Share | Total | Per Share | Total | Per Share | Total | |||||||||||||||||||
First quarter |
$ | 0.12 | $ | 198 | $ | 0.09 | $ | 148 | $ | 0.07 | $ | 115 | ||||||||||||
Second quarter |
0.12 | 200 | 0.09 | 150 | 0.07 | 115 | ||||||||||||||||||
Third quarter |
0.14 | 234 | 0.12 | 202 | 0.09 | 147 | ||||||||||||||||||
Fourth quarter |
0.14 | 230 | 0.12 | 198 | 0.09 | 147 | ||||||||||||||||||
| $ | 0.52 | $ | 862 | $ | 0.42 | $ | 698 | $ | 0.32 | $ | 524 | |||||||||||||
F-20
Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 11, 2007, the Company announced a cash dividend of $0.14 per share on the Company’s
common stock, payable on January 4, 2008 to stockholders of record as of December 7, 2007, which
will be reflected in the consolidated financial statements in the first quarter of fiscal 2008.
Note 8. Employee Benefit Plans
Employee Savings and Retirement Plan. The Company has a 401(k) plan that allows eligible
employees to contribute up to 50% of their eligible compensation, subject to annual limits. The
Company matches a portion of the employee contributions and may, at its discretion, make additional
contributions based upon earnings. The Company’s contribution expense for fiscal 2007, 2006 and
2005 was $39 million, $33 million and $27 million, respectively.
Equity Compensation Plans. The Board of Directors may grant options to selected employees,
directors and consultants to the Company to purchase shares of the Company’s common stock at a
price not less than the fair market value of the stock at the date of grant. The 2006 Long-Term
Incentive Plan (the 2006 Plan) was adopted during the second quarter of fiscal 2006 and replaced
the 2001 Stock Option Plan and the 2001 Non-Employee Director Stock Option Plan and their
predecessor plans (the Prior Plans). The 2006 Plan provides for the grant of incentive and
nonstatutory stock options as well as stock appreciation rights, restricted stock, restricted stock
units, performance units and shares and other stock-based awards and will be the source of shares
issued under the Executive Retirement Matching Contribution Plan (ERMCP). The share reserve under
the 2006 Plan is equal to the shares available for future grant under the combined plans on the
date the 2006 Plan was approved by the Company’s stockholders, plus an additional 65,000,000 shares
for a total of approximately 280,192,000 shares reserved. This share amount is automatically
increased by the amount equal to the number of shares subject to any outstanding option under a
Prior Plan that is terminated or cancelled (but not an option under a Prior Plan that expires)
following the date that the 2006 Plan was approved by stockholders. Shares that are subject to an
award under the ERMCP and are returned to the Company because they fail to vest will again become
available for grant under the 2006 Plan. The Board of Directors of the Company may amend or
terminate the 2006 Plan at any time. Generally, options outstanding vest over periods not exceeding
five years and are exercisable for up to ten years from the grant date.
During fiscal 2006, the Company assumed a total of approximately 3,530,000 outstanding stock
options under the Flarion Technologies, Inc. 2000 Stock Option and Restricted Stock Purchase Plan,
the Berkana Wireless Inc. 2002 Stock Plan and 2002 Executive Stock Plan and under the Qualphone
Inc. 2004 Equity Incentive Plan (the Assumed Plans), as amended, as a result of the acquisitions
(Note 11). The Assumed Plans were suspended on the dates of acquisition, and no additional shares
may be granted under those plans. The Assumed Plans provided for the grant of both incentive stock
options and non-qualified stock options. Generally, options outstanding vest over periods not
exceeding four years and are exercisable for up to ten years from the grant date.
A summary of stock option transactions for all stock option plans follows:
| Weighted Average | Average Remaining | Aggregate Intrinsic | ||||||||||||||
| Number of Shares | Exercise | Contractual Term | Value | |||||||||||||
| (In thousands) | Price | (Years) | (In billions) | |||||||||||||
Outstanding at September 24, 2006 |
201,855 | $ | 29.20 | |||||||||||||
Options granted |
38,933 | 40.28 | ||||||||||||||
Options cancelled/forfeited/expired |
(5,855 | ) | 39.83 | |||||||||||||
Options exercised |
(28,479 | ) | 16.83 | |||||||||||||
Options outstanding at September 30, 2007 |
206,454 | $ | 32.69 | 6.14 | $ | 2.2 | ||||||||||
Exercisable at September 30, 2007 |
124,219 | $ | 28.15 | 4.70 | $ | 1.9 | ||||||||||
Net stock options, after forfeitures and cancellations, granted during fiscal 2007, 2006 and
2005 represented 2.0%, 1.9% and 1.8% of outstanding shares as of the beginning of each fiscal year,
respectively. Total stock options granted during fiscal 2007, 2006 and 2005 represented 2.3%, 2.1%
and 2.1%, respectively, of outstanding shares as of the end of each fiscal year.
The Company’s determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Company’s stock price as well as assumptions
regarding a number of highly
F-21
Table of Contents
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
complex and subjective variables. At September 30, 2007, total
unrecognized estimated compensation cost related to non-vested stock options granted prior to that
date was $1.3 billion, which is expected to be recognized over a weighted-average period of 3.4
years. Total share-based compensation cost capitalized as part of inventory and fixed assets was $1
million during both fiscal 2007 and 2006. The total intrinsic value of stock options exercised
during fiscal 2007 and 2006 was $708 million and $1.1 billion, respectively. The Company recorded
cash received from the exercise of stock options of $479 million and $608 million and related tax
benefits of $272 million and $421 million during fiscal 2007 and 2006, respectively. Upon option
exercise, the Company issues new shares of stock.
Employee Stock Purchase Plans. The Company has two employee stock purchase plans for all
eligible employees to purchase shares of common stock at 85% of the lower of the fair market value
on the first or the last day of each six-month offering period. Employees may authorize the Company
to withhold up to 15% of their compensation during any offering period, subject to certain
limitations. The 2001 Employee Stock Purchase Plan authorizes up to approximately 24,309,000 shares
to be granted. The 1996 Non-Qualified Employee Stock Purchase Plan authorizes up to 400,000 shares
to be granted. During fiscal 2007, 2006 and 2005, approximately 2,650,000, 2,220,000 and 1,786,000
shares were issued under the plans at an average price of $32.08, $31.10 and $29.63 per share,
respectively. At September 30, 2007, approximately 10,576,000 shares were reserved for future
issuance.
At September 30, 2007, total unrecognized estimated compensation cost related to non-vested
purchase rights granted prior to that date was $9 million. The Company recorded cash received from
the exercise of purchase rights of $85 million and $69 million during fiscal 2007 and 2006,
respectively.
Executive Retirement Plans. The Company has voluntary retirement plans that allow eligible
executives to defer up to 100% of their income on a pre-tax basis. On a quarterly basis, the
Company matches up to 10% of the participants’ deferral in Company common stock based on the
then-current market price, to be distributed to the participant upon eligible retirement. The
income deferred and the Company match held in trust are unsecured and subject to the claims of
general creditors of the Company. Company contributions begin vesting based on certain minimum
participation or service requirements and are fully vested at age 65. Participants who terminate
employment forfeit their unvested shares. During fiscal 2007, 2006 and 2005, approximately 126,000,
47,000 and 92,000 shares, respectively, were allocated under the plans. The Company recorded $5
million, $2 million and $3 million in compensation expense during fiscal 2007, 2006 and 2005,
respectively, related to its net matching contributions to the plans.
Note 9. Commitments and Contingencies
Litigation. Broadcom Corporation v. QUALCOMM Incorporated: On May 18, 2005, Broadcom filed
two actions in the United States District Court for the Central District of California against the
Company alleging infringement of ten patents and seeking monetary damages and injunctive relief
based thereon. On the same date, Broadcom also filed a complaint in the United States International
Trade Commission (ITC) alleging infringement of five of the same patents at issue in the Central
District Court cases seeking a determination and relief under Section 337 of the Tariff Act of
1930. On July 1, 2005, Broadcom filed an action in the United States District Court for the
District of New Jersey against the Company alleging violations of state and federal antitrust and
unfair competition laws as well as common law claims, generally relating to licensing and chip
sales activities, seeking monetary damages and injunctive relief based thereon. On September 1,
2006, the New Jersey District Court dismissed the complaint; Broadcom appealed. On September 4,
2007, the Court of Appeals for the Third Circuit reinstated two of
the eight federal claims and five pendant state
claims in Broadcom’s complaint and affirmed the dismissal of the remaining counts. On November 2,
2007, Broadcom filed an amended complaint in the New Jersey case, adding the allegations from a
state court case in California that had been stayed, as discussed below. On December 12, 2005, the
Central District Court in California ordered two of the Broadcom patent claims filed in the other
Central District patent action (which is stayed pending completion of the ITC action) to be
transferred to the Southern District of California to be considered in the case filed by the
Company on August 22, 2005. That case was subsequently dismissed by agreement of the parties. Trial
was held in May 2007 in one of the remaining Central District Court patent actions, and on May 29,
2007, the jury rendered a verdict finding willful infringement of three patents and awarding past
damages in the approximate amount of $20 million, which has been expensed pending appeals.
Following a change in the law governing the definition of willfulness, the Court issued a tentative
ruling that the jury’s finding of willfulness and inducement should be vacated. After a hearing on
October 15, 2007, the Court requested additional briefings by both parties, including briefing on
the question of whether the damages awarded
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the two patents must be vacated and indicated
that the Court would postpone any decision on an appropriate injunction remedy pending its final
decision on the jury’s finding of willfulness. The Court’s final ruling on these issues and the
appropriate remedy for the jury’s infringement findings is expected within the next several weeks.
On February 14, 2006, an ITC hearing also commenced as to three patents alleged by Broadcom to
be infringed by the Company. On October 10, 2006, the Administrative Law Judge (ALJ) issued an
initial determination in which he recommended against any downstream remedies and found no
infringement by the Company on two of the three remaining patents and most of the asserted claims
of the third patent. The ALJ did find infringement on some claims of one patent. The ALJ did not
recommend excluding chips accused by Broadcom but, instead, recommended a limited exclusion order
directed only to chips that are already programmed with a specific software module and recommended
a related cease and desist order. The Commission adopted the ALJ’s initial determination on
violation and, on June 7, 2007, issued a cease and desist order and an exclusion order directed at
chips programmed with specific software and certain downstream products first imported after the
date of the exclusion order. The Federal Circuit has issued stays of the exclusion order with
respect to the downstream products of all of the Company’s customers that requested the stay. The
Company is appealing both the infringement finding and the cease and desist order and the exclusion
order to the United States Court of Appeal for the Federal Circuit. On April 13, 2007, Broadcom filed a new complaint in California state court
against the Company alleging unfair competition, breach of contract and fraud,
and seeking injunctive and monetary relief. On October 5, 2007, the Court ordered the case
stayed pending resolution of the New Jersey case, referenced above.
QUALCOMM Incorporated v. Broadcom Corporation: On October 14, 2005, the Company filed an
action in the United States District Court for the Southern District of California against Broadcom
alleging infringement of two patents, each of which relates to video encoding and decoding for
high-end multimedia processing, and seeking monetary damages and injunctive relief based thereon.
In January 2007, a jury rendered a verdict finding the patents valid but not infringed. In a
subsequent ruling, the trial judge held that the Company was not guilty of inequitable conduct
before the Patent Office but the Company’s actions in a video-encoding standards development
organization amounted to a waiver of the right to enforce the patents under any circumstances. The
Court also ordered Qualcomm to pay Broadcom’s attorneys’ fees and costs for the case. Qualcomm and
Broadcom have each filed notices of appeal. The Court is also considering a motion for discovery
sanctions against Qualcomm for failing to produce certain documents in discovery.
Actions by the Company and its subsidiaries against Nokia Corporation and/or Nokia Inc.: On
November 4, 2005, the Company, along with its wholly-owned subsidiary, SnapTrack, filed an action
in the United States District Court for the Southern District of California against Nokia alleging
infringement of eleven Qualcomm patents and one SnapTrack patent relating to GSM/GPRS/EDGE and
position location and seeking monetary damages and injunctive relief. On May 24, 2006, the Company
filed an action in the Chancery Division of the High Court of Justice for England and Wales against
Nokia alleging infringement of two Qualcomm patents relating to GSM/GPRS/EDGE, seeking monetary
damages and injunctive relief. On June 9, 2006, the Company filed a complaint with the ITC against
Nokia alleging importation of products that infringe six Qualcomm patents relating to power
control, video encoding and decoding, and power conservation mode technologies and seeking an
exclusionary order and a cease and desist order. On July 7, 2006, the ITC commenced an
investigation. The Company subsequently withdrew three of the patents from the proceedings. The ITC
trial was completed in September 2007. The date for an initial determination from the ITC ALJ is
December 12, 2007, and the target date for resolution of the investigation is April 14, 2008. On
August 9, 2006, the Company filed an action in the District Court of Dusseldorf, Federal Republic
of Germany, against Nokia alleging infringement of two Qualcomm patents relating to GSM/GPRS/EDGE,
seeking monetary damages and injunctive relief. On October 9, 2006, the Company filed an action in
the High Court of Paris, France against Nokia alleging infringement of two patents relating to
GSM/GPRS/EDGE, seeking monetary damages and injunctive relief. On October 9, 2006, the Company
filed an action in the Milan Court, Italy against Nokia alleging infringement of two patents
relating to GSM/GPRS/EDGE, seeking monetary damages and injunctive relief. In February 2007, the
Company initiated proceedings in the People’s Republic of China against Nokia for infringement of
three patents by Nokia’s GSM/GPRS/EDGE products. On April 2, 2007, the Company filed suit against
Nokia in the Eastern District of Texas, Marshall Division for infringement of two patents and in
the Western District of Wisconsin for infringement of three patents. These cases are directed to
Nokia GSM/GPRS/EDGE cellular phones. In response, Nokia filed counterclaims alleging infringement
by the Company of six Nokia patents, two of which Nokia also asserted against the
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company’s subsidiary, MediaFLO USA, Inc. No trial date is set and discovery has not yet begun. On October 17,
2007, the Company and MediaFLO USA, Inc. filed a motion to stay Nokia’s infringement counterclaims
pending the arbitration proceeding filed on April 5, 2007, discussed below. On July 11, 2007, the
Wisconsin Court issued an order transferring that case to the United States District Court for the
Southern District of California and the parties have consolidated the matter with the San Diego
matter referenced above and stipulated to a stay of the proceedings pending final resolution of the
ITC matter referenced above. On April 5, 2007, the Company filed an arbitration demand with the
American Arbitration Association requesting a ruling that, among other things, Nokia’s continued
use of the Company’s patents in Nokia’s CDMA cellular handsets (including WCDMA) after April 9,
2007 constitutes an election by Nokia to extend its license under the parties’ existing agreement.
On July 9, 2007, the Company filed an amended demand for arbitration, alleging that Nokia’s
institution of certain patent infringement proceedings against the Company was a material breach of
the license agreement between the parties.
Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated: On August 9, 2006, Nokia
Corporation and Nokia Inc. filed a complaint in Delaware Chancery Court seeking declaratory and
injunctive relief relating to alleged commitments made by the Company to wireless industry
standards setting organizations. The Company has moved to dismiss the complaint. On April 12, 2007
and June 5, 2007, the Company filed counterclaims
seeking declarations that, among other things, the Company’s 2001 license agreement with Nokia
fulfilled and/or superseded any ostensible obligations to offer or grant patent licenses to Nokia
allegedly arising from the Company’s participation in certain standards setting organizations. Both
parties have moved to dismiss the other’s complaints. In March 2007, Nokia filed actions in Germany
and the Netherlands alleging that certain of the Company’s patents are exhausted with regards to
Nokia’s products placed on the European market that contain chipsets supplied to Nokia by Texas
Instruments. On October 23, 2007, the German court dismissed Nokia’s claims. On August 16, 2007,
Nokia Corporation and Nokia Inc. filed a complaint with the United States International Trade
Commission (ITC) alleging importation of products that infringe five Nokia patents and seeking an
exclusionary order and a cease and desist order. The ITC instituted an investigation on September
17, 2007. The Company filed a motion to terminate the investigation pending resolution of the
arbitration proceeding instituted by the Company on April 5,
2007. On October 18, 2007, the ALJ
issued an order recommending the Company’s motion be granted. The ALJ’s determination will become
the ITC’s final decision unless the ITC decides within 30 days to review the decision.
European Commission Complaint: On October 28, 2005, it was reported that six companies
(Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the
European Commission, alleging that the Company violated European Union competition law in its WCDMA
licensing practices. The Company has received the complaints and has submitted replies to the
allegations, as well as documents and other information requested by the European Commission. On
October 1, 2007, the European Commission announced that it was initiating a proceeding, though it
has not decided to issue a Statement of Objections, and it has not made any conclusions as to the
merits of the complaints.
Tessera, Inc. v. QUALCOMM Incorporated: On April 17, 2007, Tessera, Inc. filed a patent
infringement lawsuit in the United States District Court for the Eastern Division of Texas and a
complaint with the United States ITC pursuant to Section 337 of the Tariff Act of 1930 against the
Company and other companies, alleging infringement of two patents relating to semiconductor
packaging structures and seeking monetary damages and injunctive and other relief based hereon. The
ITC instituted the investigation on May 15, 2007. On July 11, 2007, the ITC issued an order that
set August 21, 2008 as the target date for completion of the investigation.
Other: The Company has been named, along with many other manufacturers of wireless phones,
wireless operators and industry-related organizations, as a defendant in several purported class
action lawsuits, and individually filed actions pending in Pennsylvania and Washington D.C.,
seeking monetary damages arising out of its sale of cellular phones. The courts that have reviewed
similar claims against other companies to date have held that there was insufficient scientific
basis for the plaintiffs’ claims in those cases.
It has been reported that two U.S. companies (Texas Instruments and Broadcom) and two South
Korean companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korea
Fair Trade Commission alleging that the Company’s business practices are, in some way, a violation
of South Korean anti-trust regulations. To date, the Company has not received the complaints but
has submitted information and documents to the Korea Fair Trade Commission.
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Japan Fair Trade Commission has also received unspecified complaints alleging the
Company’s business practices are, in some way, a violation of Japanese law. The Company has not
received the complaints but has submitted information and documents to the Japan Fair Trade
Commission.
Although there can be no assurance that unfavorable outcomes in any of the foregoing matters
would not have a material adverse effect on the Company’s operating results, liquidity or financial
position, the Company believes the claims made by other parties are without merit and will
vigorously defend the actions. Other than amounts relating to the Broadcom Corporation v. QUALCOMM
Incorporated and QUALCOMM Incorporated v. Broadcom Corporation matters, the Company has not
recorded any accrual for contingent liabilities associated with the other legal proceedings
described above, based on the Company’s belief that additional liabilities, while possible, are not
probable. Further, any possible range of loss cannot be estimated at this time. The Company is
engaged in numerous other legal actions arising in the ordinary course of its business and believes
that the ultimate outcome of these actions will not have a material adverse effect on its operating
results, liquidity or financial position.
Purchase Obligations. The Company has agreements with suppliers and other parties to purchase
inventory, other goods and services and long-lived assets and estimates its noncancelable
obligations under these agreements for fiscal 2008 to 2012 to be approximately $760 million, $118
million, $75 million, $59 million and $32 million, respectively, and $8 million thereafter. Of
these amounts, commitments to purchase integrated circuit product inventories for fiscal 2008 and
2009 comprised $586 million and $29 million, respectively.
Leases. The Company leases certain of its facilities and equipment under noncancelable
operating leases, with terms ranging from less than one year to 30 years and with provisions for
cost-of-living increases with certain leases. Rental expense for fiscal 2007, 2006 and 2005 was $60
million, $47 million and $39 million, respectively. The Company leases certain property under
capital lease agreements that expire at various dates through 2038. Capital lease obligations are
included in other liabilities. The future minimum lease payments for all capital leases and
operating leases as of September 30, 2007 are as follows (in millions):
| Capital | Operating | |||||||||||
| Leases | Leases | Total | ||||||||||
2008 |
$ | 6 | $ | 75 | $ | 81 | ||||||
2009 |
6 | 63 | 69 | |||||||||
2010 |
6 | 50 | 56 | |||||||||
2011 |
6 | 35 | 41 | |||||||||
2012 |
6 | 28 | 34 | |||||||||
Thereafter |
170 | 139 | 309 | |||||||||
Total minimum lease payments |
$ | 200 | $ | 390 | $ | 590 | ||||||
Deduct: Amounts representing interest |
(109 | ) | ||||||||||
Present value of minimum lease payments |
91 | |||||||||||
Deduct: Current portion of capital lease
obligations |
— | |||||||||||
Long-term portion of capital lease obligations |
$ | 91 | ||||||||||
Note 10. Segment Information
The Company is organized on the basis of products and services. The Company aggregates three
of its divisions into the Qualcomm Wireless & Internet segment. Reportable segments are as follows:
| • | Qualcomm CDMA Technologies (QCT) — develops and supplies CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products; |
| • | Qualcomm Technology Licensing (QTL) — grants licenses to use portions of the Company’s intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD and/or OFDMA standards and their derivatives, and collects license fees and royalties in partial consideration for such licenses; |
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| • | Qualcomm Wireless & Internet (QWI) — comprised of: |
| • | Qualcomm Internet Services (QIS) — provides technology to support and accelerate the convergence of the wireless data market, including its BREW and QChat products and services; |
| • | Qualcomm Government Technologies (QGOV) — provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and |
| • | Qualcomm Enterprise Services (QES) — formerly Qualcomm Wireless Business Solutions, provides satellite and terrestrial-based two-way data messaging, position reporting and wireless application services to transportation and logistics fleets, construction equipment fleets and other enterprise companies. QES also sells products that operate on the Globalstar low-Earth-orbit satellite-based telecommunications system and provides related services. |
| • | Qualcomm Strategic Initiatives (QSI) — manages the Company’s strategic investment activities, including MediaFLO USA, Inc. (MediaFLO USA), the Company’s wholly-owned wireless multimedia operator subsidiary. QSI makes strategic investments to promote the worldwide adoption of CDMA-based products and services. |
During the first quarter of fiscal 2007, the Company reassessed the intersegment royalty
charged to QCT by QTL and determined that the royalty should be eliminated starting in fiscal 2007
for management reporting purposes to, among other reasons, recognize other value that QTL has
increasingly been realizing from QCT. As a result, QCT did not record a royalty to QTL in fiscal
2007, and prior period segment information has been adjusted in the same manner for comparative
purposes.
During the first quarter of fiscal 2007, the Company also reorganized the Qualcomm Wireless
Systems (QWS) division, which sells products and services to Globalstar, into the QES division in
the QWI segment. Revenues and operating results related to the QWS business were included in other
nonreportable segments as a component of reconciling items through the end of fiscal 2006. Prior
period segment information has been adjusted to conform to the new segment presentation.
The Company evaluates the performance of its segments based on earnings (loss) before income
taxes (EBT). EBT includes the allocation of certain corporate expenses to the segments, including
depreciation and amortization expense related to unallocated corporate assets. Certain income and
charges are not allocated to segments in the Company’s management reports because they are not
considered in evaluating the segments’ operating performance. Unallocated income and charges
include certain investment income, certain share-based compensation and certain research and
development expenses and marketing expenses that were not deemed to be directly related to the
businesses of the segments. The table below presents revenues, EBT and total assets for reportable
segments (in millions):
| Reconciling | ||||||||||||||||||||||||
| QCT * | QTL * | QWI * | QSI | Items * | Total | |||||||||||||||||||
2007 |
||||||||||||||||||||||||
Revenues |
$ | 5,275 | $ | 2,772 | $ | 828 | $ | 1 | $ | (5 | ) | $ | 8,871 | |||||||||||
EBT |
1,547 | 2,340 | 88 | (240 | ) | (109 | ) | 3,626 | ||||||||||||||||
Total assets |
921 | 29 | 200 | 896 | 16,449 | 18,495 | ||||||||||||||||||
2006 |
||||||||||||||||||||||||
Revenues |
$ | 4,332 | $ | 2,467 | $ | 731 | $ | — | $ | (4 | ) | $ | 7,526 | |||||||||||
EBT |
1,298 | 2,233 | 78 | (133 | ) | (320 | ) | 3,156 | ||||||||||||||||
Total assets |
651 | 60 | 215 | 660 | 13,622 | 15,208 | ||||||||||||||||||
2005 |
||||||||||||||||||||||||
Revenues |
$ | 3,290 | $ | 1,711 | $ | 682 | $ | — | $ | (10 | ) | $ | 5,673 | |||||||||||
EBT |
980 | 1,535 | 62 | 10 | 222 | 2,809 | ||||||||||||||||||
Total assets |
518 | 16 | 169 | 442 | 11,334 | 12,479 | ||||||||||||||||||
| * | As adjusted |
Segment assets are comprised of accounts receivable and inventories for QCT, QTL and QWI. The
QSI segment assets include certain marketable securities, notes receivable, wireless licenses,
other investments and all
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets of QSI’s consolidated subsidiary, MediaFLO USA, including
property, plant and equipment. QSI’s assets
related to the MediaFLO USA business totaled $457 million, $329 million and $98 million at
September 30, 2007, September 24, 2006 and September 25, 2005, respectively. QSI’s assets also
included $16 million, $19 million and $61 million related to investments in equity method investees
at September 30, 2007, September 24, 2006 and September 25, 2005, respectively. Reconciling items
for total assets included $215 million, $228 million and $188 million at September 30, 2007,
September 24, 2006 and September 25, 2005, respectively, of goodwill and other assets related to
the Qualcomm MEMS Technologies division (QMT), a nonreportable segment developing display
technology for mobile devices and other applications. Total segment assets differ from total assets
on a consolidated basis as a result of unallocated corporate assets primarily comprised of cash,
cash equivalents, certain marketable securities, property, plant and equipment, deferred tax
assets, goodwill and certain other intangible assets of nonreportable segments. The net book values
of long-lived assets located outside of the United States were $89 million, $69 million and $44
million at September 30, 2007, September 24, 2006 and September 25, 2005, respectively. The net
book values of long-lived assets located in the United States were $1.7 billion, $1.4 billion and
$978 million at September 30, 2007, September 24, 2006 and September 25, 2005, respectively.
Revenues from each of the Company’s divisions aggregated into the QWI reportable segment were
as follows (in millions):
| 2007 | 2006* | 2005* | ||||||||||
QES |
$ | 501 | $ | 490 | $ | 479 | ||||||
QGOV |
57 | 47 | 50 | |||||||||
QIS |
272 | 194 | 153 | |||||||||
Eliminations |
(2 | ) | — | — | ||||||||
Total QWI |
$ | 828 | $ | 731 | $ | 682 | ||||||
| * | As adjusted |
Other reconciling items were comprised as follows (in millions):
| 2007 | 2006* | 2005* | ||||||||||
Revenues: |
||||||||||||
Elimination of intersegment revenues |
$ | (39 | ) | $ | (28 | ) | $ | (20 | ) | |||
Other nonreportable segments |
34 | 24 | 10 | |||||||||
| $ | (5 | ) | $ | (4 | ) | $ | (10 | ) | ||||
Earnings (loss) before income taxes: |
||||||||||||
Unallocated research and development expenses |
$ | (341 | ) | $ | (331 | ) | $ | (45 | ) | |||
Unallocated selling, general, and administrative
expenses |
(268 | ) | (298 | ) | (17 | ) | ||||||
Unallocated cost of equipment and services revenues |
(39 | ) | (41 | ) | — | |||||||
Unallocated investment income, net |
718 | 455 | 339 | |||||||||
Other nonreportable segments |
(158 | ) | (92 | ) | (50 | ) | ||||||
Intracompany eliminations |
(21 | ) | (13 | ) | (5 | ) | ||||||
| $ | (109 | ) | $ | (320 | ) | $ | 222 | |||||
| * | As adjusted |
During fiscal 2007, share-based compensation expense included in unallocated research and
development expenses and unallocated selling, general and administrative expenses totaled $221
million and $227 million,
respectively. During fiscal 2006, share-based compensation expense included in unallocated
research and development expenses and unallocated selling, general and administrative expenses
totaled $216 million and $238 million, respectively. Unallocated cost of equipment and services
revenues was comprised entirely of share-based compensation expense.
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specified items included in segment EBT were as follows (in millions):
| QCT | QTL | QWI | QSI | |||||||||||||
2007 |
||||||||||||||||
Revenues from external customers |
$ | 5,244 | $ | 2,771 | $ | 821 | $ | 1 | ||||||||
Intersegment revenues |
31 | 1 | 7 | — | ||||||||||||
Interest income |
2 | 14 | 1 | 7 | ||||||||||||
Interest expense |
— | — | 1 | 5 | ||||||||||||
2006 |
||||||||||||||||
Revenues from external customers |
$ | 4,314 | $ | 2,465 | $ | 723 | $ | — | ||||||||
Intersegment revenues |
18 | 2 | 8 | — | ||||||||||||
Interest income |
1 | 5 | 3 | 6 | ||||||||||||
Interest expense |
1 | — | 1 | 2 | ||||||||||||
2005 |
||||||||||||||||
Revenues from external customers |
$ | 3,281 | $ | 1,710 | $ | 672 | $ | — | ||||||||
Intersegment revenues |
9 | 1 | 10 | — | ||||||||||||
Interest income |
— | 5 | 2 | 4 | ||||||||||||
Interest expense |
— | 1 | 1 | — | ||||||||||||
Intersegment revenues are based on prevailing market rates for substantially similar products
and services or an approximation thereof, but the purchasing segment records the cost of revenues
(or inventory write-downs) at the selling segment’s original cost. The elimination of the selling
segment’s gross margin is included with other intersegment eliminations in reconciling items.
During fiscal 2007, $16 million of QCT’s intersegment revenues related to inventory that was fully
reserved by QWI, the purchasing segment. Effectively all equity in losses of investees (Note 5) was
recorded in QSI in fiscal 2007, 2006 and 2005.
The Company distinguishes revenues from external customers by geographic areas based on the
location to which its products, software or services are delivered and, for QTL’s licensing and
royalty revenue, the domicile of its licensees. Sales information by geographic area was as follows
(in millions):
| 2007 | 2006 | 2005 | ||||||||||
United States |
$ | 1,165 | $ | 984 | $ | 1,015 | ||||||
South Korea |
2,780 | 2,398 | 2,083 | |||||||||
Japan |
1,524 | 1,573 | 1,210 | |||||||||
China |
1,875 | 1,266 | 596 | |||||||||
Other foreign |
1,527 | 1,305 | 769 | |||||||||
| $ | 8,871 | $ | 7,526 | $ | 5,673 | |||||||
Note 11. Acquisitions
During fiscal 2007, the Company acquired three businesses for total cash consideration of $178
million. An additional $6 million in consideration payable in cash through June 2008 was held back
as security for certain indemnification obligations. The Company is in the process of finalizing
the accounting for the acquisitions and does not anticipate material adjustments to the preliminary
purchase price allocations. Goodwill recognized in
these transactions, of which $21 million is expected to be deductible for tax purposes, was
assigned to the QCT and QWI segments in the amounts of $74 million and $10 million, respectively.
Technology-based intangible assets recognized in the amount of $46 million are being amortized on a
straight-line basis over a weighted-average useful life of 3 years.
On January 18, 2006, the Company completed its acquisition of all of the outstanding capital
stock of Flarion Technologies, Inc. (Flarion), a privately held developer of OFDMA technology for
approximately $613 million in consideration. Upon achievement of certain agreed upon milestones
during the third quarter of fiscal 2006, the Company incurred additional aggregate consideration of
$195 million. Total consideration consisted of approximately $414 million in cash (of which $75
million was paid in fiscal 2007), $357 million in shares of QUALCOMM stock (of which $3 million was
issued in fiscal 2007) and the exchange of Flarion’s existing vested options and warrants with an
estimated aggregate fair value of approximately $37 million. In addition, the Company assumed
Flarion’s existing unvested options with an estimated aggregate fair value of $68 million, which is
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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded as share-based compensation over the requisite service period. During fiscal 2006, the
Company also acquired two other entities for a total cost of $73 million, including $4 million paid
in fiscal 2007 upon the achievement of certain milestones, which was paid primarily in cash.
Goodwill recognized in these three transactions, no amount of which is expected to be deductible
for tax purposes, was assigned to the QTL and QCT segments in the amounts of $616 million and $42
million, respectively. Technology-based intangible assets recognized in the amount of $165 million
are being amortized on a straight-line basis over a weighted-average useful life of seventeen
years. Purchased in-process technology in the amount of $22 million was charged to research and
development expense upon acquisition because technological feasibility had not been established and
no future alternative uses existed.
During fiscal 2005, the Company acquired four entities for a total cost of $299 million,
including $2 million paid in both fiscal 2007 and 2006 upon the achievement of certain milestones,
which was paid primarily in cash. Goodwill recognized in these transactions amounted to $220
million, of which $81 million is expected to be deductible for tax purposes. Goodwill was assigned
to the QMT, QIS and QCT segments in the amounts of $128 million, $81 million and $11 million,
respectively. Technology-based intangible assets recognized in the amount of $36 million have a
weighted-average useful life of seven years.
The consolidated financial statements include the operating results of these businesses from
their respective dates of acquisition. Pro forma results of operations have not been presented
because the effects of the acquisitions were not material.
Note 12. Summarized Quarterly Data (Unaudited)
The following financial information reflects all normal recurring adjustments that are, in the
opinion of management, necessary for a fair statement of the results of the interim periods.
The table below presents quarterly data for the years ended September 30, 2007 and September
24, 2006 (in millions, except per share data):
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
2007 |
||||||||||||||||
Revenues (1) |
$ | 2,019 | $ | 2,221 | $ | 2,325 | $ | 2,306 | ||||||||
Operating income (1) |
576 | 748 | 782 | 777 | ||||||||||||
Net income (1) |
648 | 726 | 798 | 1,131 | ||||||||||||
Basic earnings per common share (2) |
$ | 0.39 | $ | 0.44 | $ | 0.48 | $ | 0.68 | ||||||||
Diluted earnings per common share
(2) |
$ | 0.38 | $ | 0.43 | $ | 0.47 | $ | 0.67 | ||||||||
2006 |
||||||||||||||||
Revenues (1) |
$ | 1,741 | $ | 1,834 | $ | 1,951 | $ | 1,999 | ||||||||
Operating income (1) |
645 | 660 | 704 | 681 | ||||||||||||
Net income (1) |
620 | 593 | 643 | 614 | ||||||||||||
Basic earnings per common share (2) |
$ | 0.38 | $ | 0.36 | $ | 0.38 | $ | 0.37 | ||||||||
Diluted earnings per common share
(2) |
$ | 0.36 | $ | 0.34 | $ | 0.37 | $ | 0.36 | ||||||||
| (1) | Revenues, operating income and net income are rounded to millions each quarter. Therefore, the sum of the quarterly amounts may not equal the annual amounts reported. | |
| (2) | Earnings per share are computed independently for each quarter and the full year based upon respective average shares outstanding. Therefore, the sum of the quarterly earnings per share amounts may not equal the annual amounts reported. |
F-29
Table of Contents
SCHEDULE II
QUALCOMM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
| (Charged) | ||||||||||||||||||||
| Balance at | Credited to | Balance at | ||||||||||||||||||
| Beginning of | Costs and | End of | ||||||||||||||||||
| Period | Expenses | Deductions | Other | Period | ||||||||||||||||
Year ended September 25, 2005 |
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Allowances: |
||||||||||||||||||||
— trade receivables |
$ | (5 | ) | $ | (2 | ) | $ | 5 | $ | — | $ | (2 | ) | |||||||
— finance receivables |
(1 | ) | 1 | — | — | — | ||||||||||||||
— notes receivable |
(46 | ) | (41 | ) | 24 | — | (63 | ) | ||||||||||||
Valuation allowance on deferred tax assets |
(139 | ) | 76 | — | (6 | )(a) | (69 | ) | ||||||||||||
| $ | (191 | ) | $ | 34 | $ | 29 | $ | (6 | ) | $ | (134 | ) | ||||||||
Year ended September 24, 2006 |
||||||||||||||||||||
Allowances: |
||||||||||||||||||||
— trade receivables |
$ | (2 | ) | $ | — | $ | 1 | $ | — | $ | (1 | ) | ||||||||
— notes receivable |
(63 | ) | (15 | ) | — | — | (78 | ) | ||||||||||||
Valuation allowance on deferred tax assets |
(69 | ) | 46 | 14 | (13 | )(b) | (22 | ) | ||||||||||||
| $ | (134 | ) | $ | 31 | $ | 15 | $ | (13 | ) | $ | (101 | ) | ||||||||
Year ended September 30, 2007 |
||||||||||||||||||||
Allowances: |
||||||||||||||||||||
— trade receivables |
$ | (1 | ) | $ | (37 | ) | $ | 2 | $ | — | $ | (36 | ) | |||||||
— notes receivable |
(78 | ) | (13 | ) | 58 | — | (33 | ) | ||||||||||||
Valuation allowance on deferred tax assets |
(22 | ) | (1 | ) | 3 | — | (20 | ) | ||||||||||||
| $ | (101 | ) | $ | (51 | ) | $ | 63 | $ | — | $ | (89 | ) | ||||||||
| (a) | This amount is related to business acquisitions (See Note 11 to the Consolidated Financial Statements). | |
| (b) | This amount was charged to paid-in capital. |
S-1