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What inspires us?
Annual Report 2006

Table of contents

  • Page 1
    What inspires us? Annual Report 2006

  • Page 2
    ... now, we've been innovating with new ideas and executing on our vision. Together with our many partners, we are growing a vital and competitive industry that includes equipment manufacturers, network operators, applications developers and content publishers. Our wireless technologies are making...

  • Page 3
    ... everyday life. south korea Realtime Healthcare for Diabetes Patients The "diabetes phone" uses a BREW® application and wireless technology to report glucose levels to medical teams, enabling realtime consultation and care. Blood test data is stored on the phone and sent via Short Message Service...

  • Page 4
    Wireless communications technology is fundamentally changing and improving people's lives worldwide. product manager, qualcomm internet services Martin Kropat "People are always looking for new ways to use their mobile phones. Every day I help developers turn ideas into new applications."

  • Page 5
    ... a difference in everyday life. north america Bones in Motion (A Personal Fitness Program) Taking advantage of location-based services that are made possible by QUALCOMM's BREW and gpsOne® solutions, the company Bones in Motion has created a wireless subscription service called BiM Active that...

  • Page 6
    ... worldwide. senior director, qualcomm international government affairs Shawn Covell "QUALCOMM's Wireless Reachâ„¢ initiative is helping people around the globe to improve their lives with 3G. Being a part of Wireless Reach and seeing the positive impact of wireless technology-that's when my job...

  • Page 7
    ... a difference in everyday life. china Enabling Rural Innovation As part of the global Wireless Reach initiative, QUALCOMM and its partners in China are delivering free wireless phones and service vouchers to disadvantaged groups in underserved rural areas of China. Working with PlaNet Finance...

  • Page 8
    ...and improving people's lives worldwide. senior staff engineer /manager, qualcomm cdma technologies Eddie Choy "It simply makes sense to combine portable music players and mobile handsets. And it's rewarding to know that we're enhancing the music listening experience for millions of mobile users."

  • Page 9
    ... life. japan 300 Million Music Downloads Downloading mobile music is enormously popular in Japan. Approximately four million full-length songs are now being downloaded per month on KDDI's BREW application, Chaku Uta Full. Since the initial launch of the music service in late 2002, customers...

  • Page 10
    Wireless communications technology is fundamentally changing and improving people's lives worldwide. senior manager, business development, qualcomm wireless business solutions David Van Driel "It's exciting to have the opportunity to unite two dynamic companies for a common purpose. That ...

  • Page 11
    ... Solutions® formed an alliance this year with John Deere Construction & Forestry Company to create a monitoring and information delivery system that leverages our GlobalTRACS® equipment management system, providing vital information about equipment location, machine health and service status...

  • Page 12
    ... people's lives worldwide. engineer, qualcomm cdma technologies Uma Chilakapati "The chipsets we create bring wireless data to life. It's the challenge of creating quality designs...the problems to be overcome...and the insights to be gained. That's what motivates me to come to work every day."

  • Page 13
    ... the first to launch CDMA-based mobile services in India. Today, operating under the brand name Tata Indicom, the company offers a broad range of services, including BSE (Bombay Stock Exchange) Portfolio Tracker. Enabled by QUALCOMM's BREW solution, this popular stock portfolio application enables...

  • Page 14
    Wireless communications technology is fundamentally changing and improving people's lives worldwide. Dr. Paul E. Jacobs, CEO (left) Steven R. Altman, President (right)

  • Page 15
    ... provide manufacturers and operators the richest set of choices on which to profitably build their businesses, and providing users with ever more compelling wireless applications and services. Our strategy is to continue supporting a broad range of technology and software platforms. To that end, our...

  • Page 16
    ... North America, South Korea, Japan and Europe, consumers and enterprises continue to upgrade to feature-rich 3G CDMA devices and services. Global demand for 3G wireless surged this year and QUALCOMM technology continues to be the key driver with industry-leading solutions targeting all addressable...

  • Page 17
    We achieved record results in fiscal 2006. revenue and gross margin ($ in billions) (1) (2) * research and development * ($ in billions) diluted earnings per share (gaap) (2) (3) * 33% increase from 2005 71% 52% increase from 2005 $1.54 2006 $1.01 2005 $0.72 2004 $0.52 2003 $0.45 2002 15% ...

  • Page 18
    ...100 Best Companies to Work For in America" FORTUNE's list of "Most Admired Companies" Fabless Semiconductor Association's Forbes Platinum List Financial Times "Best Financially Managed Company" "The Best Big Companies" "List of Most Valuable Global Companies" 4 qualcomm 04 qualcomm 2006 2006...

  • Page 19
    ... QUALCOMM's employees and partners worldwide for their outstanding performance this year. With their help, and with support from our investors, we will continue to innovate and invest in the future of wireless. Dr. Paul E. Jacobs Chief Executive Officer Steven R. Altman President qualcomm 2006...

  • Page 20
    QUALCOMM Technology 6 qualcomm 06 qualcomm 2006 2006

  • Page 21
    ...and processing power of our chipset solutions, thereby enabling a broader market for wireless broadband. Through our robust technology roadmaps, we are providing a wide range of choices to our industry partners and helping drive the advancement of mobile broadband, rich multimedia services, location...

  • Page 22
    QUALCOMM Offers Complete Technology Roadmaps for the Future EV-DO/UMB Mobile Broadband Evolution Commercialized in 2006 EV-DO Rev. A Building on EV-DO Rel. 0, EV-DO Rev. A adds support for broadband data rates and increased capacity in the uplink as well as support for advanced realtime services ...

  • Page 23
    ...-managed support and delivery of advanced wireless data content and services. QPointâ„¢ location server that enables locationbased services (LBS). BREW and MediaFLO are QUALCOMM innovations that help wireless operators differentiate their services with premium content. qualcomm technology driving...

  • Page 24
    ... offering flarion technologies technology OFDMA iridigm display corporation Affordable, lowpower displays for tomorrow's wireless devices A new division, QUALCOMM MEMS2 Technology, mediaflo usa A nationwide multicast network and services operator Lower cost video and multimedia content delivered...

  • Page 25
    ... Advanced wireless services in key emerging markets trigenix technology User interface customization embedded client software solutions for mobile devices Accelerated delivery of multimedia-capable, feature-rich wireless chipset solutions Enhancements to our chipset solutions help manufacturers...

  • Page 26
    Global Growth 12 qualcomm 2006

  • Page 27
    ... announce deployments of the full BREW system. In India and China, users with low-end devices are taking advantage of 3G data services, leading to increased operator revenues. 1 Based on estimates from Strategy Analytics, Yankee Group and QUALCOMM. Yankee Q2, 2006 India Handset Analysis report. 2

  • Page 28
    ...were launches of CDMA450 networks this year in Latin America, Southeast Asia and Europe. Russia is rapidly embracing this technology and there are now 32 CDMA450 operators nationwide. Our global development team opened an office in Johannesburg, South Africa this year to support our growing presence...

  • Page 29
    ..., a program aimed at empowering underserved communities worldwide via advanced wireless connectivity. An estimated one billion people will have access to more than 120 3G mobile broadband networks by the end of calendar 2006. Source: 3G Americas, November 2006. qualcomm 2006 15 global growth

  • Page 30
    ... 200 million mobile handsets worldwide have shipped featuring QUALCOMM's gpsOne technology. 1 1 QUALCOMM's gpsOne Assisted-GPS solution provides the position-location technology behind the vast majority of the location services at more than 50 major network operators worldwide. 16 qualcomm 2006

  • Page 31
    ...range of new services, including instant messaging with multimedia content, and packet-switched all-IP VoIP. By the end of the second quarter of 2006, 10 million customers were taking advantage of Verizon Wireless' existing EV-DO service using phones, PDAs and laptops with PC cards or embedded EV-DO...

  • Page 32
    Business Units 18 qualcomm 2006

  • Page 33
    ... qualcomm 2006 19 business units: qct qualcomm cdma technologies (qct) broadband with unsurpassed mobile processing power and battery life. We also sampled our first-generation QSC solutions, introduced the world's first universal mobile TV chip, and announced advanced chipsets that enable global...

  • Page 34
    ... network operators deploy advanced wireless services using existing spectrum. smart technologies QCT continues to redefine mobile capabilities by delivering industry-leading solutions. Our Convergence Platform MSM7xxxâ„¢-series chipsets are seeing strong traction, and the first commercial devices...

  • Page 35
    .... mobile multimedia center Increasingly advanced wireless devices incorporate ever more sophisticated home electronics capabilities, including very high-resolution photo and video cameras that can be projected to flat-panel televisions for home and business viewing. QUALCOMM's Chipsets Support All...

  • Page 36
    ...wireless technology, our licensing business model fosters a healthy and competitive worldwide wireless marketplace. Our inventions drive new revenue streams for all our partners, enabling continuing investments throughout the wireless value chain. While QUALCOMM has substantially grown the number of...

  • Page 37
    ...large expenditures on their own R&D programs. The result of our business model is a very competitive environment that helps new manufacturers enter the market and enables a wide array of new products and features for consumers. More information about QUALCOMM Technology Licensing is available at www...

  • Page 38
    ... BREW 3D games as part of its "V CAST" service. And the company's BREW-enabled Get It Now subscriber base has increased by more than sixfold over the last 36 months. sm 1 1 Source: The Yankee Group, "Mobile Content Market Will Accelerate Technology Innovation," January 2006. 24 qualcomm 2006

  • Page 39
    ... this year's sold-out BREW Conference, QIS unveiled the new BREW Gaming Signature Solution, a comprehensive solution that accelerates revenue generation throughout the value chain, enabling wireless operators to deliver a compelling consumer gaming experience, and publishers and developers to create...

  • Page 40
    ... wireless operators and advertisers. The company is on schedule for commercial launch with Verizon Wireless in 2007. With TV-quality video, an easy-to-navigate user interface, familiar full-length programs and exclusive made-for-mobile content, MediaFLO USA brings new experiences that take media and...

  • Page 41
    ...Stat-June, 2006 worldwide subscription. qualcomm 2006 27 business units: mediaflo "The combination of QUALCOMM's wireless leadership and MediaFLO USA's multicasting expertise and relationships with world-class content providers has uniquely positioned us to lead the mobile media services market."

  • Page 42
    ... solutions 6,000+ Customers worldwide utilize QWBS products and services 733,000+ Mobile units shipped to businesses in 40 countries on four continents* 12.5+ million Data transactions per day processed by the QWBS Network Operations Centers 28 qualcomm 2006 *Cumulative through fiscal 2006...

  • Page 43
    ... government technologies business units: qwbs, qgov qualcomm government technologies (qgov) to support first responders during last year's hurricane season, QGOV continues to work with federal, state and local agencies and critical industry partners to provide COP solutions for vehicles, assets...

  • Page 44
    QUALCOMM Culture 30 qualcomm 2006

  • Page 45
    ..., collaborative environment that promotes innovation and teamwork. To support our global mission of providing advanced wireless technologies everywhere, we employ a highly diverse workforce and maintain a worldwide network of offices and facilities. Our company values are innovation, execution and...

  • Page 46
    ...'s "Top 500 Technology Companies" Institutional Investor's America's Most ShareholderFriendly Companies: 2006 NASDAQ 100â„¢ Company S&P 500 Index global diversity and inclusion United States Department of Labor's "Secretary of Labor's Opportunity Award" San Diego Business Journal's "Multicultural...

  • Page 47
    QUALCOMM Financial Information Selected Financial Data Management's Discussion and Analysis Market Risk Controls and Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows ...

  • Page 48
    ... 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...

  • Page 49
    ...Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) 5,641,028 1,000,000 1,000,000 7,641,028 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3) $1,098 1,050 1,001 $1,001 Total Number of Shares Purchased June 26, 2006 to July 23, 2006...

  • Page 50
    ... and Results of Operations in this Annual Report for more information. Long-term debt for the years ended September 24, 2006 and September 25, 2005 consisted of capital lease obligations, which are included in other liabilities in the consolidated balance sheets. (2) (3) (4) (5) 36 qualcomm 2006

  • Page 51
    ... licensing and related services. 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...

  • Page 52
    ... data messaging, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. QIS provides BREW-based (Binary Runtime Environment for Wireless) products that include user interface and content delivery...

  • Page 53
    ... and expand beyond Japan and Western Europe into the United States and China. To meet growing demand for advanced 3G phones and increased multimedia MSM functionality, we intend to continue to invest significant resources toward the development of multimedia products, software and services for the...

  • Page 54
    ...of their products in international markets for low priced CDMA2000 phones and WCDMA phones. Combined revenues from customers in South Korea, Japan and the United States decreased as a percentage of total revenues, from 82% in fiscal 2004 to 76% in fiscal 2005 and 66% in fiscal 2006, primarily due to...

  • Page 55
    ... common stock to our employees and directors under our stock option 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...

  • Page 56
    ... fair value of stock options granted during fiscal 2006 by $0.89 per share, or 6%. 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...

  • Page 57
    ...fair value of stock options granted during fiscal 2006 by $1.06 per share, or 7%. 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...

  • Page 58
    ... to begin commercial operations in 2007. QSI's assets related to MediaFLO USA totaled $329 million and $98 million at September 24, 2006 and September 25, 2005, respectively. We also enter into strategic relationships with CDMA wireless operators and developers of innovative technologies or products...

  • Page 59
    ... effect of $41 million in share-based compensation during fiscal 2006 as a result of the adoption of FAS 123R during fiscal 2006 and a decrease in QCT margin percentage resulting primarily from an increase in product support costs. Cost of equipment and services revenues as a percentage of equipment...

  • Page 60
    ... in average sales prices and changes in product mix. Revenues from the sale of satellite- and terrestrial-based two-way data messaging systems and related messaging services increased $25 million and revenues from the sale of satellite portable phones that operate on the Globalstar low-Earth-orbit...

  • Page 61
    ...earnings taxed at less than the United States federal rate, 3% related to an increase in tax benefits resulting from our increased ability to use our capital loss carryforwards and 2% related to research and development tax credits, partially offset by state taxes of approximately 4%. qualcomm 2006...

  • Page 62
    ... 12% 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...

  • Page 63
    ... related to our expanded BREW customer base and products. During fiscal 2005, QWBS completed the process of moving high-volume, standard product manufacturing to Mexico to reduce manufacturing costs. The low-volume, prototype and new product manufacturing activities remain in San Diego. QSI Segment...

  • Page 64
    .... 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 determining the effect, if any, the adoption of FIN 48 will have on our consolidated financial statements. 50 qualcomm 2006

  • Page 65
    ... exceed the fair value of the shares by $21 million, net of the $6 million in premiums received. 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. qualcomm 2006 51

  • Page 66
    .... At September 24, 2006, the net recorded value of 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 was a liability of $2 million. If our forecasted royalty revenues were to...

  • Page 67
    ... Annual Report, has also audited management's assessment of our internal control over financial reporting and the effectiveness of our internal control over financial reporting as of September 24, 2006, as stated in their report which appears on page 54. Inherent Limitations Over Internal Controls...

  • Page 68
    ... balance sheets and the related consolidated statements of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of QUALCOMM Incorporated and its subsidiaries (the Company) at September 24, 2006 and September 25, 2005, and the results...

  • Page 69
    ... Balance Sheets Sept. 24, 2006 Sept. 25, 2005 (In millions, except per share data) Assets Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net Inventories Deferred tax assets Other current assets Total current assets Marketable securities Property, plant...

  • Page 70
    ... of Operations Year Ended (In millions, except per share data) Revenues: Equipment and services Licensing and royalty fees Total revenues Operating expenses: Cost of equipment and services revenues Research and development Selling, general and administrative Total operating expenses Operating income...

  • Page 71
    ... to reconcile net income to net cash provided by operating activities: Depreciation and amortization Net realized gains on marketable securities and other investments Share-based compensation expense Incremental tax benefits from stock options exercised Losses (gains) on derivative instruments Other...

  • Page 72
    ... of stock options Issuance for Employee Stock Purchase and Executive Retirement Plans Share-based compensation Repurchase and retirement of common stock Dividends Value of common stock issued for acquisition Value of options exchanged for acquisitions Balance at September 24, 2006 See accompanying...

  • Page 73
    ... 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...

  • Page 74
    ... of development and other 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...

  • Page 75
    ... 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...

  • Page 76
    ... 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...

  • Page 77
    ... more capable of incorporating the features of the Company's employee stock options than closed-form models such as the Black-Scholes model. The weighted-average estimated fair value of employee stock options granted during fiscal 2006 was $15.73 per share using the binomial model with the following...

  • Page 78
    ... grants made by the Company. The expected life of employee stock options granted during fiscal 2006 derived from the binomial model was 5.8 years. As share-based compensation expense recognized in the consolidated statement of operations for fiscal 2006 is based on awards ultimately expected to vest...

  • Page 79
    ..., as reported Add: Share-based employee compensation expense included in reported net income, net of related tax benefits Deduct: Share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects Pro forma net income Earnings per common...

  • Page 80
    ...Held-to-maturity: Government-sponsored enterprise securities Corporate bonds and notes Available-for-sale: U.S. Treasury securities Government-sponsored enterprise securities Municipal bonds Foreign government bonds Corporate bonds and notes Mortgage- and asset-backed securities Non-investment grade...

  • Page 81
    ... Work-in-process Finished goods Investment Grade Debt Securities The Company's investments in investment grade debt securities consist primarily of investments in certificates of deposit, U.S. Treasury securities, government-sponsored enterprise securities, municipal bonds, foreign government bonds...

  • Page 82
    ...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 24, 2006 as follows: $339 million in QUALCOMM CDMA Technologies...

  • Page 83
    ... (in millions): Year Ended Sept. 24, 2006 United States Foreign $1,445 1,711 $3,156 Sept. 25, 2005 $1,570 1,239 $2,809 Sept. 26, 2004 $1,571 742 $2,313 During fiscal 2006, the Internal Revenue Service and the California Franchise Tax Board completed audits of the Company's tax returns for fiscal...

  • Page 84
    ... 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...

  • Page 85
    ... 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...

  • Page 86
    ... 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 complex and subjective variables. At September 24, 2006, total unrecognized estimated compensation cost related to...

  • Page 87
    ... October 14, 2005, the Company filed another 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...

  • Page 88
    ...the Company filed an action in the Milan Court, Italy against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated: On August 9, 2006, Nokia Corporation and Nokia, Inc...

  • Page 89
    ... Solutions (QWBS)-provides satellite- and terrestrial-based two-way data messaging, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. QUALCOMM Strategic Initiatives (QSI)-manages the Company...

  • Page 90
    ... assets related to the QUALCOMM MEMS Technologies division (QMT), a nonreportable segment developing display technology for mobile devices and other applications. Revenues from each of the Company's divisions aggregated into the QWI reportable segment were as follows (in millions): Fiscal Year 2006...

  • Page 91
    ... phones. Spike Technologies, Inc., a semiconductor design services company based primarily in India. ELATA, Ltd., a United Kingdom-based developer of mobile content delivery and device management software systems. An additional $2 million in consideration is payable in cash through November 2006...

  • Page 92
    ... 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 24, 2006 and September 25, 2005 (in millions, except per share data): 1st Qtr 2006 Revenues(1) Operating income(1) Net income(1) Basic earnings...

  • Page 93
    ... non-operational volatility of share-based compensation. As a result, management compensation decisions and the review of executive compensation by the Compensation Committee of the Board of Directors focus primarily on pro forma financial measures applicable to the Company and its business segments...

  • Page 94
    ... are comprised of: 2006 Estimated share-based compensation Acquired in-process research and development Adjustment to reflect the new method of recording royalty revenue(1) Amortization of goodwill and other intangible assets Stock option payroll tax expense Globalstar Other Total pro forma...

  • Page 95
    ... are presented as discontinued operations. As such, revenue and gross margin results presented do not include the results from these discontinued operations. In the fourth quarter of fiscal 2004, the Company adopted a new method of recording royalties, based solely on reports received from licensees...

  • Page 96
    ... technology, the MDS and related equipment; the ability of MediaFLO USA to establish the necessary partnerships and deliver in a timely manner the intended services; developments in current and future litigation as well as other risks detailed from time-to-time in our SEC reports. 82 qualcomm 2006

  • Page 97
    ... and International Studies marc i. stern Chair: Governance Committee Member: Compensation Committee Title: Chairman of Société Générale's Global Investment Management and Services (GIMS) North America unit dr. paul e. jacobs Member: Strategic Committee Title: Chief Executive Officer, QUALCOMM...

  • Page 98
    ... under the symbol "QCOM." Investor Relations Department 5775 Morehouse Drive San Diego, CA 92121 Phone: (858) 658-4813 Fax: (858) 651-9303 Toll Free: (866) 658-4813 You can also contact us by sending an email to [email protected] or by visiting the Investor Relations page on the Company's Website at...