Qualcomm 2006 Annual Report Download - page 62

48 qualcomm 2006
Management’s Discussion and Analysis continued
products and technology research and development initiatives to
support lower cost phones, multimedia applications, high-speed
wireless Internet access and multiband, multimode, multinetwork
products and technologies, including CDMA2000 1X, 1xEV-DO,
WCDMA, HSDPA and GSM/GPRS/EDGE.
QTL Segment. QTL revenues for scal 2005 were $1.84 billion,
compared to $1.33 billion for scal 2004. QTL’s earnings before
taxes for scal 2005 were $1.66 billion, compared to $1.20 billion
for scal 2004. QTL’s operating margin percentage was 90% during
both scal 2005 and 2004. The increase in both revenues and
earnings before taxes primarily resulted 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 esti-
mated 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, 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 of higher priced WCDMA
sales and shifts in the geographic distribution of sales of CDMA
products. Revenues from amortized license fees were $69 million in
scal 2005, as compared to $59 million in scal 2004. Other revenues
were comprised of intersegment royalties.
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 vari-
ability 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. Accordingly, we did not
estimate royalty revenues earned in scal 2005.
QWI Segment. QWI revenues for scal 2005 were $644 million,
compared to $571 million for scal 2004. Revenues increased
primarily due to a $37 million increase in QIS revenue and a $27
million increase in QWBS revenue. The increase in QIS revenue was
primarily attributable to a $41 million increase in fees related to
our expanded BREW customer base and products. The increase
$19 million decrease in amortization of deferred revenues related to
historical equipment sales, partially offset by a $14 million increase
in messaging services revenue. QWBS shipped approximately 42,100
satellite-based systems and 39,600 terrestrial-based systems
during scal 2006, compared to approximately 46,800 satellite-
based systems and 62,500 terrestrial-based systems in scal 2005.
QWI’s earnings before taxes for scal 2006 were $80 million,
compared to $57 million for scal 2005. QWI’s operating margin
percentage was 12% in scal 2006, compared to 9% in scal
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 off-
set by the effect of a $13 million increase in QWI research and
development and selling, general and administrative expenses.
The increase in QWI’s operating margin percentage was primarily
due to the increase in QIS gross margin.
QSI Segment. QSI’s losses before taxes from continuing operations
for scal 2006 were $133 million, compared to earnings before
taxes from continuing operations of $10 million for scal 2005.
QSI’s losses before taxes from continuing operations included a
$55 million increase in our MediaFLO USA subsidiary’s operating
expenses. During scal 2006, QSI recorded $30 million in realized
gains on marketable securities and other investments, compared
to $101 million in scal 2005.
Our Segment Results for Fiscal 2005 Compared to Fiscal 2004
The following should be read in conjunction with the nancial results
of scal 2005 and 2004 for each reporting segment. See “Notes to
Consolidated Financial Statements, Note 10—Segment Information.”
QCT Segment. QCT revenues for scal 2005 were $3.29 billion,
compared to $3.11 billion for scal 2004. Equipment and services
revenues, primarily from MSM and accompanying RF integrated
circuits, were $3.20 billion for scal 2005, compared to $3.04 billion
for scal 2004. The increase in equipment and services revenue
was comprised of $396 million related to higher unit shipments,
partially offset by a decrease of $241 million related to the effects
of reductions in average sales prices and changes in product mix.
Approximately 151 million MSM integrated circuits were sold
during scal 2005, compared to approximately 137 million for
scal 2004.
QCT’s earnings before taxes for scal 2005 were $852 million,
compared to $1.05 billion for scal 2004. QCT’s operating income
as a percentage of its revenues (operating margin percentage) was
26% in scal 2005, compared to 34% in scal 2004. The decline
in operating margin percentage in scal 2005 as compared to scal
2004 was primarily the result of a 45% increase in research and
development expenses for scal 2005 as compared to scal 2004,
mainly related to increased investment in new integrated circuit