Qualcomm 2006 Annual Report Download - page 60

46 qualcomm 2006
Management’s Discussion and Analysis continued
The increase in royalty revenue year to year resulted primarily from
a $350 million increase in royalties reported to us by our external
licensees and the effect of changing the timing of recognizing royalty
revenues in the fourth quarter of scal 2004. Royalty revenues
recorded in scal 2004 excluded $151 million of royalties that
were reported by external licensees in the rst quarter of scal
2004, but estimated and recorded as revenue in the fourth quarter
of scal 2003. Royalties reported to us by external licensees in
scal 2005 were $1.64 billion, as compared to $1.29 billion in
scal 2004. The increase in royalties reported to us by external
licensees was primarily due to an increase in sales of CDMA products
by licensees, resulting from higher worldwide demand for CDMA
products at higher average selling prices due primarily to the
growth in sales of high-end WCDMA products and shifts in the
geographic distribution of sales of CDMA products.
Cost of Equipment and Services. Cost of equipment and services
revenues for scal 2005 was $1.65 billion, compared to $1.48
billion for scal 2004. Cost of equipment and services revenues as
a percentage of equipment and services revenues was 44% for scal
2005, compared to 42% for scal 2004. The margin percentage
decline in scal 2005 compared to 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.
Research and Development Expenses. For scal 2005, research
and development expenses were $1.01 billion or 18% of revenues,
compared to $720 million or 15% of revenues for scal 2004.
The dollar and percentage increases in research and development
expenses primarily resulted from a $275 million increase in costs
related to the development of integrated circuit products and other
initiatives to support lower cost phones, multimedia applications,
high-speed wireless Internet access and multimode, multiband,
multinetwork products and technologies, 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.
Selling, General and Administrative Expenses. For scal 2005,
selling, general and administrative expenses were $631 million or
11% of revenues, compared to $547 million or 11% of revenues for
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.
Income Tax Expense. Income tax expense from continuing operations
was $686 million for scal 2006, compared to $666 million for scal
2005. The annual effective tax rate for continuing operations was
approximately 22% for scal 2006, compared to 24% for scal
2005. The annual effective tax rate from continuing operations
for scal 2006 was lower than the annual effective tax rate from
continuing operations for scal 2005 primarily due to an increase in
foreign earnings taxed at less than the United States federal tax rate.
The annual effective tax rate for scal 2006 was 13% lower than
the United States federal statutory rate primarily due to benets
of approximately 17% related to foreign earnings taxed at less
than the United States federal rate, 1% related to an increase in
tax benets resulting from our increased ability to use our capital
loss carryforwards and 1% related to research and development
tax credits, partially offset by state taxes of approximately 5% and
other permanent differences of 1%.
As of September 24, 2006, we had a valuation allowance of $16 mil-
lion on previously incurred capital losses due to uncertainty as to
our ability to generate suf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 2005 Compared to Fiscal 2004
Revenues. Total revenues for scal 2005 were $5.67 billion,
compared to $4.88 billion for scal 2004. Revenues from three
customers of our QCT, QTL and QWI segments comprised an
aggregate of 39% of total consolidated revenues in scal 2005,
compared to 40% of total consolidated revenues in scal 2004.
Revenues from sales of equipment and services for scal 2005
were $3.74 billion, compared to $3.51 billion for scal 2004.
Revenues from sales of integrated circuits increased $165 million,
resulting primarily from an increase of $396 million related to
higher unit shipments of MSM and accompanying RF integrated
circuits, partially offset by a decrease of $241 million related to the
effects of reductions 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 satellite
communications system increased $19 million.
Revenues from licensing and royalty fees for scal 2005 were $1.93
billion, compared to $1.37 billion for scal 2004. During scal 2005,
the QTL segment recorded royalty revenues solely based on royal-
ties reported by licensees during the year, as compared to the
method used during the rst three quarters of scal 2004 of
recording royalty revenues from certain licensees based on estimates
of royalty revenues earned by those licensees during the quarter.