Qualcomm 2002 Annual Report Download - page 42

Except for the historical information contained herein, the following discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results may differ substantially from those referred to herein due to a number
of factors, including but not limited to risks described in the section entitled Risk
Factors and elsewhere in this Annual Report. Our consolidated financial data
includes SnapTrack, Inc., Vésper Holding Ltd. and other consolidated subsidiaries.
OVERVIEW
We design, manufacture and market digital wireless telecommunications products
and services based on our CDMA and other technologies. We derive revenue princi-
pally from license fees and royalties from our intellectual property, from sales of
integrated circuit products, from services and related hardware sales and from software
development and related services. Operating expenses primarily consist of cost of
revenues, research and development, selling, general and administrative, amortization
of goodwill and other acquisition-related intangible assets, and asset impairment
and related charges.
Our QUALCOMM CDMA Technologies (QCT) segment is a leading developer and
supplier of CDMA-based integrated circuits and system software for wireless voice
and data communications and global positioning system products. QCT software
products are the interface link between the operating system that controls the phone
and the functionality embedded in our integrated circuit products. QCT products are
sold to many of the world’s leading wireless phone and infrastructure manufacturers.
QCT revenues comprised 52%, 51% and 39% of total consolidated revenues in fiscal
2002, 2001 and 2000, respectively. QCT’s operating margin was 28% in fiscal 2002,
compared to 22% in 2001 and 32% in 2000. The increase in operating margin in
2002 as compared to 2001 was primarily related to a change in product mix toward
higher end devices utilizing our CDMA2000 1X products. The decrease in operating
margin in 2001 as compared to 2000 was primarily related to increased research and
development costs associated with new integrated circuit product and technology
initiatives, as well as increased advertising expenses.
Our QUALCOMM Technology Licensing (QTL) segment receives license fees and
royalty payments for use of our CDMA technology by domestic and international wire-
less telecommunications equipment suppliers. QTL generates revenue from license
fees for our patented CDMA (e.g., cdmaOne, CDMA2000, WCDMA and TD-SCDMA)
technologies as well as ongoing royalties based on worldwide sales by licensees that
design, manufacture and sell products incorporating our CDMA technology. QTL
revenues comprised 28%, 29% and 22% of total consolidated revenues in fiscal 2002,
2001 and 2000, respectively. QTL’s operating margin was 89% in fiscal 2002, compared
to 90% in 2001 and 2000.
Our QUALCOMM Wireless & Internet (QWI) segment, which includes QUALCOMM
Wireless Business Solutions (QWBS), QUALCOMM Internet Services (QIS) and
QUALCOMM Digital Media (QDM), generates revenue primarily through mobile
communication products and services, software, and software development aimed at
support and delivery of wireless applications. QWI revenues comprised 14%, 16% and
14% of total consolidated revenues in fiscal 2002, 2001 and 2000, respectively. QWI’s
operating margin was a negative 2% in fiscal 2002, compared to positive 8% in 2001
and 19% in 2000. The decrease in operating margin from 2001 to 2002, and from 2000
to 2001, was primarily due to expenses incurred in the development, support and
marketing efforts related to the BREW product.
Our QUALCOMM Strategic Initiatives (QSI) segment makes strategic investments
to promote the worldwide adoption of CDMA products and services for wireless voice
and Internet data communications. Our strategy is to invest in CDMA carriers,
licensed device manufacturers and start-up companies that we believe open new
markets for CMDA technology, support the design and introduction of new CDMA-
based products or possess unique capabilities or technology to promote Internet data
communications. The QSI segment’s revenues relate primarily to the consolidation of
our investment in Vésper Holding. QSI revenues comprised 4% of fiscal 2002 total
consolidated revenues. QSI did not generate revenues in 2001 or 2000. QSI’s operat-
ing margin was negative 401% in 2002 and was not meaningful in 2001 or 2000.
Recent global economic weakness has had wide-ranging effects on markets that
we serve, particularly wireless communications equipment manufacturers and
network operators. We cannot predict whether a recovery will occur or what effects
negative events, such as war, may have on the economy. Further, an economic recov-
ery, if it occurs, may not benefit us in the near term. If it does not, our ability to
increase or maintain our revenues and operating results may be impaired. To
increase our revenues and market share in future periods, we are dependent upon
the adoption and commercial deployment of 3G wireless communications equipment,
products and services based on our CDMA technology. Although network operators
have commercially deployed CDMA2000 1X, we cannot predict the timing or success
of other commercial deployments. If existing deployments are not commercially
successful, or if new commercial deployments of CDMA2000 1X are delayed or
unsuccessful, our business and financial results may be harmed.
We currently face significant competition in our markets and expect that competition
will continue. Historically, this competition has resulted and is expected to continue
to result in reduced average selling prices for our products and those of our
customers and licensees. Reductions in the average selling price of our licensees’
products generally results in reduced average royalties. While this trend has, to a
large extent, been mitigated by the introduction of new features and functionality in
our licensees’ products, there is no guarantee that such mitigation will continue.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION