Qualcomm 2006 Annual Report Download - page 54

40 qualcomm 2006
Management’s Discussion and Analysis continued
Such reductions to revenue are estimates, based on a number of
factors, including our assumptions related to historical and pro-
jected customer sales volumes and the contractual provisions of
our customer agreements.
We license rights to use portions of our intellectual property port-
folio, 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 benet to
the average licensee, typically ve 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 made on a
semi-annual basis. During the periods preceding the fourth quarter
of scal 2004, we estimated and recorded the royalty revenues
earned for sales by certain licensees (the Estimated Licensees) in
the quarter in which such sales occurred, but only when reasonable
estimates of such amounts could be made. Not all royalties earned
were recorded based on estimates.
In the fourth quarter of scal 2004, we determined that, due to
escalating and changing business trends, we no longer had the
ability to reliably estimate royalty revenues from the Estimated
Licensees. These escalating and changing trends included the
commercial launches and global expansion of WCDMA networks,
changes in market share among licensees due to increased global
competition, and increased variability in the integrated circuit and
nished product inventories of licensees. Starting in the fourth
quarter of scal 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 scal 2004.
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 24, 2006, our
goodwill and intangible assets, net of accumulated amortization,
were $1.2 billion and $450 million, respectively. The determination
of the value of such intangible assets requires management to
make estimates and assumptions that affect our consolidated
nancial statements. We assess potential impairments to intangible
assets when there is evidence that events or changes in circum-
stances indicate that the carrying amount of an asset may not be
recovered. Our judgments regarding the existence of impairment
indicators and future cash ows related to intangible assets are
based on operational performance of our businesses, market con-
ditions and other factors. Although there are inherent uncertainties
in this assessment process, the estimates and assumptions we use,
including estimates of future cash ows, volumes, market penetra-
tion and discount rates, are consistent with our internal planning.
Revenue Concentrations
Revenues from customers in South Korea, Japan, China and the
United States comprised 32%, 21%, 17% and 13%, respectively,
of total consolidated revenues in scal 2006 as compared to 37%,
21%, 11% and 18%, respectively, in scal 2005, and 43%, 18%, 7%
and 21%, respectively, in scal 2004. We distinguish revenue from
external customers by geographic areas based on customer location.
Revenues from customers in China increased as a percentage of
total revenues in scal 2006 and in scal 2005, as compared to the
prior years, primarily due to the maturing of CDMA-based manu-
facturers in China that are experiencing wider adoption 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 scal 2004 to 76% in scal 2005 and
66% in scal 2006, primarily due to increases in the percentage
of revenues from WCDMA manufacturers in Western Europe and
increased activity by manufacturers 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
nancial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these nancial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and disclo-
sure 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 invest-
ments, 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 signi-
cant adverse effect on our operating results and nancial
position. We believe that the following signicant 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 specic 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 it is possible that
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.