Qualcomm 2005 Annual Report Download - page 47
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primarily from an increase of $994 million related to higher unit
shipments of MSM and accompanying RF integrated circuits, partially
offset by a decrease of $331 million related to the effects of reduc-
tions in average sales prices and changes in product mix.
Revenues from licensing and royalty fees for fi scal 2004 were
$1.37 billion, compared to $985 million for fi scal 2003. The increase
resulted primarily from higher QTL segment royalties, resulting pri-
marily from an increase in phone and infrastructure equipment sales
by our licensees at higher average selling prices, partially offset by
the effect of the change in timing of recognizing royalties to an “as
reported” method during the fourth quarter of fi scal 2004. Royalty
revenues recorded in fi scal 2004 excluded $151 million of royalties
that were reported by licensees in the fi rst quarter of fi scal 2004,
but estimated and recorded as revenue in the fourth quarter of fi scal
2003. Royalties reported to us by licensees in fi scal 2004 were
$1.29 billion as compared to $837 million in fi scal 2003.
Cost of Equipment and Services. Cost of equipment and services
revenues for fi scal 2004 was $1.48 billion, compared to $1.27 billion
for fi scal 2003. Cost of equipment and services revenues as a percent-
age of equipment and services revenues was 42% for fi scal 2004,
compared to 44% for fi scal 2003. The margin percentage improve-
ment in fi scal 2004 compared to fi scal 2003 was primarily due to
the increase in QCT revenues as a percentage of total equipment
and services revenues, resulting in increased QCT margin relative
to the total.
Research and Development Expenses. For fi scal 2004, research
and development expenses were $720 million or 15% of revenues,
compared to $523 million or 14% of revenues for fi scal 2003.
The dollar and percentage increases in research and development
expenses primarily resulted from a $187 million increase in costs
related to integrated circuit products and other initiatives to sup-
port multi media applications, high-speed wireless Internet access
and multimode, multiband, multinetwork products and technologies,
including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and GSM/
GPRS/EDGE, and the development of our FLO technology and
MediaFLO MDS.
Selling, General and Administrative Expenses. For fi scal 2004,
selling, general and administrative expenses were $547 million or
11% of revenues, compared to $483 million or 13% of revenues for
fi scal 2003. The dollar increase was primarily due to a $61 million
increase in employee-related expenses, a $21 million increase in
professional fees, primarily patent administration and outside
consultants, and a $12 million increase related to a charitable grant
to an educational institution for the primary purpose of furthering
the study of engineering and math, partially offset by the effect of a
$34 million impairment loss recorded in fi scal 2003 on our wireless
licenses in Australia due to developments that affected potential
strategic alternatives for using the spectrum. The impairment loss
recognized was the difference between the assets’ carrying values
and their estimated fair values.
Net Investment Income (Expense). Net investment income was
$184 million for fi scal 2004, compared to net investment expense
of $8 million for fi scal 2003. The change was primarily comprised
as follows (in millions):
Year Ended
Sept. 26, Sept. 28,
2004 2003 Change
Interest and dividend income:
QSI $ 14 $ 45 $ (31)
Corporate and other segments 161 113 48
Interest expense (2) (2) —
Net realized gains on investments:
QSI 56 63 (7)
Corporate 32 17 15
Other-than-temporary losses
on investments (12) (128) 116
Gains (losses) on derivative instruments 7 (3) 10
Equity in losses of investees (72) (113) 41
$184 $ (8) $192
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, partially offset by
the impact of lower interest rates earned on interest-bearing securi-
ties, and $6 million in interest income recorded as a result of a refund
from the United States Internal Revenue Service. The decrease in QSI
interest income was primarily the result of the prepayment on the
Pegaso debt facility in the fi rst quarter of fi scal 2004. The other-than-
temporary losses on investments during fi scal 2003 primarily related
to an $81 million impairment of our investment in a wireless operator
in South Korea and a $16 million impairment of our investment in a
provider of semiconductor packaging, test and distribution services.
Equity in losses of investees decreased primarily due to a decrease
in losses incurred by Inquam, of which our share was $59 million for
fi scal 2004 as compared to $99 million for fi scal 2003.
Income Tax Expense. Income tax expense from continuing operations
was $588 million for fi scal 2004, compared to $536 million for fi scal
2003. The annual effective tax rate for continuing operations was
approximately 25% for fi scal 2004, compared to 34% for fi scal 2003.
The annual effective tax rate for continuing operations for fi scal
2004 was lower than the 2003 effective tax rate for continuing
operations primarily due to an increase in foreign earnings taxed at
less than the United States federal tax rate, an increase in tax bene-
fi ts recorded arising from our increased ability to use capital loss
carryforwards and the reduction of QTL earnings, which are taxed
at a rate that is lower than our effective tax rate, as a percentage
of total earnings due to the change in the timing of recognizing QTL
royalties. Foreign earnings taxed at less than the United States fed-
eral rate were higher in fi scal 2004 primarily due to the adjustment
of an intercompany royalty agreement and an increase in foreign
earnings. The annual effective tax rate for continuing operations for
fi scal 2004 was 10% lower than the United States federal statutory
rate due primarily to a benefi t of approximately 14% related to
foreign earnings taxed at less than the United States federal rate,
research and development tax credits and our increased ability to
use capital loss carryforwards, partially offset by state taxes of 4%.