Qualcomm 2005 Annual Report Download - page 46
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Please find page 46 of the 2005 Qualcomm annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Management’s Discussion and Analysis continued
42 qualcomm 2005
Cost of Equipment and Services. Cost of equipment and services
revenues for fi scal 2005 was $1.65 billion, compared to $1.48 billion
for fi scal 2004. Cost of equipment and services revenues as a percent-
age of equipment and services revenues was 44% for fi scal 2005,
compared to 42% for fi scal 2004. The margin percentage decline
in fi scal 2005 compared to fi scal 2004 was primarily due to a 1.3%
decrease in QCT margin percentage. Increases in product support
costs and the reserves for excess and obsolete inventory contributed
1.1% and 0.5%, respectively, to the total decrease in QCT margin
percentage. Cost of equipment and services revenues as a percentage
of equipment and services revenues may fl uctuate in future quarters
depending on the mix of products sold and services provided, com-
petitive pricing, new product introduction costs and other factors.
Research and Development Expenses. For fi scal 2005, research and
development expenses were $1.01 billion or 18% of revenues, com-
pared to $720 million or 15% of revenues for fi scal 2004. The dollar
and percentage increases in research and development expenses
primarily resulted from a $275 million increase in costs related to
integrated circuit products and other initiatives to support lower
cost phones, multimedia applications, high-speed wireless Internet
access and multimode, multiband, multinetwork products and tech-
nologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA,
GSM/GPRS/EDGE and OFDMA, and the development of our FLO
technology, MediaFLO MDS and iMoD display products using MEMS
technology. We expect that research and development costs will
increase in fi scal 2006 as we continue our active support of CDMA-
based technologies, products and network operations and other
product initiatives.
Selling, General and Administrative Expenses. For fi scal 2005, selling,
general and administrative expenses were $631 million or 11% of
revenues, compared to $547 million or 11% of revenues for fi scal
2004. The dollar increase was primarily due to a $38 million increase
in professional fees, primarily patent administration and outside
consultants, a $33 million increase in employee-related expenses,
and a $13 million decrease in other income.
Net Investment Income. Net investment income was $423 million for
fi scal 2005, compared to $184 million for fi scal 2004. The change
was primarily comprised as follows (in millions):
Year Ended
Sept. 25, Sept. 26,
2005 2004 Change
Interest and dividend income:
QSI $ 4 $ 14 $ (10)
Corporate and other segments 252 161 91
Interest expense (3) (2) (1)
Net realized gains on investments:
QSI 101 56 45
Corporate 78 32 46
Other-than-temporary losses
on investments (14) (12) (2)
Gains on derivative instruments 33 7 26
Equity in losses of investees (28) (72) 44
$423 $184 $239
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
corporate investments increased primarily as a result of an increase
in the positive performance of marketable equity securities as a per-
centage of total corporate investments in fi scal 2005, as compared to
fi scal 2004. The increase in net realized gains on strategic investments
in QSI 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 NextWave Telecom Inc. Gains and losses on
derivative instruments in both fi scal 2005 and 2004 related primarily
to changes in the fair values of put options sold in connection with our
stock repurchase program. Equity in losses of investees decreased
primarily due to a decrease in losses incurred by Inquam, of which our
share was $33 million for fi scal 2005 as compared to $59 million for
fi scal 2004.
Income Tax Expense. Income tax expense from continuing operations
was $666 million for fi scal 2005, compared to $588 million for fi scal
2004. The annual effective tax rate for continuing operations was
approximately 24% for fi scal 2005, compared to 25% for fi scal 2004.
The annual effective tax rate from continuing operations for fi scal
2005 was lower than the annual effective tax rate from continuing
operations for fi scal 2004 primarily due to an increase in foreign
earnings taxed at less than the United States federal tax rate.
The annual effective tax rate for fi scal 2005 was 11% lower than
the United States federal statutory rate primarily due to benefi ts of
approximately 10% related to foreign earnings taxed at less than the
United States federal rate, 3% related to an increase in tax benefi ts
resulting from our increased ability to use our capital loss carryfor-
wards and 2% related to research and development tax credits,
partially offset by state taxes of approximately 4%.
As of September 25, 2005, we had a valuation allowance of approx-
imately $62 million on previously incurred capital losses due to
uncertainty as to our ability to generate suffi cient capital gains to
utilize all capital losses. We will continue to assess the realizability
of capital losses. The amount of the valuation allowance on capital
losses may be adjusted in the future as our ability to utilize capital
losses changes. A change in the valuation allowance may impact the
provision for income taxes in the period the change occurs.
Fiscal 2004 Compared to Fiscal 2003
Revenues. Total revenues for fi scal 2004 were $4.88 billion, com-
pared to $3.85 billion for fi scal 2003. Revenues from Samsung, LG
Electronics and Motorola, customers of our QCT, QTL and QWI
segments, comprised an aggregate of 15%, 15% and 10% of total
consolidated revenues, respectively, in fi scal 2004, compared to
17%, 13% and 13% of total consolidated revenues, respectively,
in fi scal 2003.
Revenues from sales of equipment and services for fi scal 2004 were
$3.51 billion, compared to $2.86 billion for fi scal 2003. Revenues
from sales of integrated circuits increased $652 million, resulting