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| QCOM > SEC Filings for QCOM > Form 10-K on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Annual Report
• CDMA subscribers, including both 2G (cdmaOne) and 3G (CDMA2000 1X, 1xEV-DO, WCDMA and HSPA), are approximately 19% of total worldwide wireless subscribers to date.(1)
• 3G subscribers (all CDMA-based) grew to approximately 705 million worldwide by September 28, 2008, up approximately 33% year-over-year, including approximately 410 million CDMA2000 1X/1xEV-DO subscribers and approximately 295 million WCDMA/HSPA subscribers. (1)
• CDMA-based device shipments totaled approximately 433 million units, an increase of 28% over the 338 million units shipped in fiscal 2007. (2)
• In the handset market, CDMA-based unit shipments grew an estimated 27% year-over-year, compared to an estimated 14% year-over-year growth across all technologies. (3)
• The average selling price of CDMA-based devices was estimated to be approximately $219, up 2% from the prior year. (2)
• We shipped approximately 336 million Mobile Station Modem (MSM) integrated circuits for CDMA-based wireless devices, an increase of 33%, compared to approximately 253 million MSM integrated circuits in fiscal 2007.
During the fourth quarter of fiscal 2008:
• We entered into new license and settlement agreements with Nokia
Corporation/Nokia Inc. (Nokia) that cover GSM/GPRS/EDGE, CDMA2000, WCDMA
(including HSPA), TD-SCDMA, OFDMA (including LTE, UMB and WiMax) and other
products and resolve all pending litigation between the parties. Also, as
a result, Nokia withdrew its complaint with the European Commission as to
our licensing and other business practices. During the fourth quarter of
fiscal 2008, we recognized $560 million in revenues as a result of the
execution of the agreements. Consideration provided to us under the new
license agreement with Nokia included, among other things, a
non-refundable up-front payment of $2.5 billion, ongoing royalties and the
assignment of patents that we recorded in intangible assets in the amount
of $1.8 billion.
(1) According to Wireless Intelligence, an independent source of wireless operator data.
(2) Derived from reports provided by our licensees/manufacturers during the year and our own estimates of unreported activity.
(3) Based on current reports by Strategy Analytics, a global research and consulting firm, in their Global Handset Market Share Updates.
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 revenues principally from sales of integrated
circuit products, license fees and royalties for use of our intellectual
property, messaging and other services and related hardware sales, software
development and licensing and related services, software hosting services and
services related to delivery of multimedia content. Operating expenses primarily
consist of cost of equipment and services, research and development and selling,
general and administrative expenses.
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 Mobile Station Modem (MSM), Radio Frequency (RF) and Power
Management (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 devices 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. QCT revenues comprised 60%, 59% and
58% of total consolidated revenues in fiscal 2008, 2007 and 2006, 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.
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 die from semiconductor manufacturing foundries and contract with
separate 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,
GSM/GPRS/EDGE and/or OFDMA standards and their derivatives. QTL receives 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.), and/or based on a fixed per unit amount. QTL revenues comprised 33%,
31% and 33% of total consolidated revenues in fiscal 2008, 2007 and 2006,
respectively. The vast majority of such revenues have been generated through our
licensees' sales of cdmaOne, CDMA2000 and WCDMA products.
QWI, which includes Qualcomm Enterprise Services (QES), Qualcomm Internet
Services (QIS), Qualcomm Government Technologies (QGOV) and Firethorn, 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 2008, QES has shipped approximately 1,302,000 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. Firethorn builds and manages
software applications that enable financial institutions and wireless operators
to offer mobile commerce services. QWI revenues comprised 7%, 9% and 10% of
total consolidated revenues in fiscal 2008, 2007 and 2006, 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 operators, licensed device manufacturers and early-stage
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 its service over
our nationwide multicasting network based on our MediaFLO Media Distribution
System (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 service to retail wireless consumers continues
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 (regardless of whether they operate CDMA or
GSM/WCDMA networks) in the United States. Distribution, marketing, billing and
customer relationships remain functions that are provided primarily 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 interferometric modulator (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 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:
• We believe the recent global financial crisis and the resulting slowdown
in global economies is causing current contraction in the channel
inventory and will likely result in lower consumer demand and prices for
CDMA-based devices, among other things, adversely affecting our revenues
and operating results. In addition, the financial crisis has, and may
continue to have, an impact on the value of our marketable securities
portfolio and net investment income.
• The deployment and upgrading of CDMA2000 networks is expected to continue.
o More than 275 wireless operators have launched CDMA2000 1X; (1) and
o More than 100 wireless operators have deployed the higher data speeds of 1xEV-DO and more than 40 wireless operators have deployed commercial EV-DO Revision A networks. (1)
• GSM operators are expected to continue transitioning to WCDMA networks.
o More than 235 GSM operators have migrated their networks to WCDMA; (2) and
o More than 220 wireless operators have upgraded and launched commercial HSDPA networks, and more than 50 wireless operators have upgraded and launched commercial HSUPA networks. (2)
• We expect that CDMA-based 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 and EV-DO Revision A and as manufacturers introduce additional highly-featured, converged devices, 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 2009 will not reach commercialization until several years in the future.
• We expect demand for low-end wireless devices to continue to grow 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.
• 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:
o The continued evolution of CDMA-based technologies, including the long-term roadmaps of 1xEV-DO and High Speed Packet Access (HSPA);
o OFDM and OFDMA-based technologies;
o Our service applications platform, content delivery services and user interfaces;
o Our MediaFLO MDS and FLO technology for delivery of multimedia content; and
o 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 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. For example, we expect that we will continue
to be involved in litigation, including our ongoing disputes with
Broadcom, 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 to rebuff
efforts by companies seeking to gain competitive advantage or negotiating
leverage.
• We have been and will continue evaluating and providing reasonable assistance to our customers. This includes, in some cases, certain levels of financial support to minimize the impact of the litigation in which we are involved.
(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 2008 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 35%, 21%, 14% and 9%, respectively, of total consolidated revenues for
fiscal 2008, as compared to 31%, 21%, 17% and 13%, respectively, for fiscal
2007, and 32%, 17%, 21% and 13%, respectively, for fiscal 2006. 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 invoiced addresses of our licensees. The increase in
revenues from customers in South Korea from 32% and 31% of total revenues in
fiscal 2006 and 2007, respectively, to 35% in fiscal 2008 is primarily
attributable to increased shipments of integrated circuits to CDMA device
manufacturers with locations in South Korea and royalty revenues from customers
in South Korea. Combined revenues from customers in Japan and the United States
decreased as a percentage of total revenues, from 34% in fiscal 2006 to 30% in
fiscal 2007 and 23% in fiscal 2008, primarily due to the increased activity by
manufacturers with locations in South Korea.
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 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, royalties and license fees for our intellectual property,
messaging and other services and related hardware sales, software development
and licensing and related services, software hosting services and services
related to delivery of multimedia content. 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. 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 benefit to the
licensee, typically five to fifteen years. We earn royalties on such licensed
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. We recognize
royalty revenues based on royalties reported by licensees during the quarter and
when other revenue recognition criteria are met. From time to time, licensees
will not report royalties timely due to legal disputes, and when this occurs,
the timing and comparability of royalty revenues 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. We also
acquire intangible assets in other types of transactions. As of September 28,
2008, our goodwill and intangible assets, net of accumulated amortization, were
$1.5 billion and $3.1 billion, respectively. The determination of the value of
such intangible assets requires management to make estimates and assumptions
that affect our consolidated financial statements. For intangible assets
purchased in a business combination or received in a non-monetary exchange, the
estimated fair values of the assets received (or, for non-monetary exchanges,
the estimated fair values of the assets transferred if more clearly evident) are
used to establish their recorded values, except when neither the values of the
assets received or the assets transferred in non-monetary exchanges are
determinable within reasonable limits. Valuation techniques consistent with the
market approach, income approach and/or cost approach are used to measure fair
value. An estimate of fair value can be affected by many assumptions which
require significant judgment. For example, the income approach generally
requires assumptions related to the appropriate business model to be used to
estimate cash flows, total addressable market, pricing and share forecasts,
competition, technology obsolescence, future tax rates and discount rates. Our
estimate of the fair value of certain assets may differ materially from that
determined by others who use different assumptions or utilize different business
models. New information may arise in the future that affects our fair value
estimates and could result in adjustments to our estimates in the future, which
could have an adverse impact on our results of operations.
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 or asset group 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 are 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 and
exchange traded funds, corporate bonds and notes, auction rate securities and
mortgage- and 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 28, 2008. We record impairment charges through the statement of
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. 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. 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 below its original cost, the
extent of the general decline in prices or an increase in the default or
recovery rates of securities in an asset class, negative events such as a
bankruptcy filing or a need to raise capital or seek financial support from the
government or others, the performance and pricing of the investee's securities
in relation to the securities of its competitors within the industry and 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. If we determine that a security price
decline is other than temporary, we may record an impairment loss, which could
have an adverse impact on our results of operations. During fiscal 2008, 2007
and 2006, we recorded $502 million, $16 million and $20 million, respectively,
in other-than-temporary losses on our investments in marketable securities.
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. Share-based compensation expense recognized under FAS 123R for fiscal 2008, 2007 and 2006 was $543 million, $493 million and $495 million, respectively. At September 28, 2008, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $1.6 billion, which is expected to be recognized over a weighted-average period of 3.5 years. Net stock options, after forfeitures and cancellations, granted during fiscal 2008 represented 2.7% of outstanding shares as of the beginning of the fiscal period. Total stock options granted during fiscal 2008 represented 3.2% of outstanding shares as of . . .
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