Qualcomm 2002 Annual Report Download - page 43

PAGE 41
The wireless communications industry has experienced consolidation of partici-
pants, and this trend may continue. If wireless carriers consolidate with companies
that utilize technologies that compete with CDMA, then CDMA may lose market share
unless the surviving entity continues to deploy CDMA. This consolidation could also
result in delays in or cancellation of purchasing decisions by the merged companies,
negatively affecting our revenues and operating results.
We will continue to expand our international sales operations and enter new inter-
national markets. This expansion will require significant management attention and
financial resources to successfully develop direct and indirect international sales and
support channels, and we cannot assure you that we will be successful or that our
expenditures in this effort will not exceed the amount of any resulting revenues. If we
are not able to maintain or increase international market demand for our products
and technologies, then we may not be able to maintain an acceptable rate of growth
in our business.
Revenues from customers in the United States, South Korea, and Japan com-
prised 30%, 37% and 18%, respectively, of total consolidated revenues in fiscal 2002,
as compared to 35%, 35%, and 22%, respectively, in fiscal 2001, and 53%, 22% and
13%, respectively, in fiscal 2000. We distinguish revenue from external customers by
geographic areas based on customer location. The decreases in revenues from cus-
tomers in the United States, as a percentage of the total, is primarily attributed to the
sale of the terrestrial-based CDMA wireless consumer phone business in February
2000 and a decrease in revenues related to business with Globalstar. The increases in
revenues from customers in South Korea, as a percentage of the total, is primarily
attributed to the commercial deployment of our 3G CDMA2000 1X technology in
October 2000 in South Korea where 15 million, or 46%, of the nation’s total mobile
service users were using this technology by the end of October 2002. The general
increase in revenues from customers in Japan as a percentage of the total is primarily
attributed to an ongoing migration to 3G services, illustrated by KDDI’s expectation of
7 million, or 40%, of their subscriber base using 3G services by March 2003, as
reported by the CDG.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our results of operations and liquidity and capital
resources are based on our consolidated financial statements which have been pre-
pared in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates and judgments, including those related to revenue recog-
nition, adequacy of allowances for doubtful accounts, valuation of intangible assets
and investments, 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 may differ
from our estimates. We believe that the following significant accounting policies and
assumptions may involve a higher degree of judgment and complexity than others.
REVENUE RECOGNITION
We derive revenue principally from royalties, from sales of integrated circuit prod-
ucts, from services and related hardware sales, from software development and
related services, and from license fees for intellectual property. The timing of revenue
recognition and the amount of revenue actually recognized in each case depends
upon a variety of factors, including the specific terms of each arrangement and the
nature of our deliverables and obligations. Determination of the appropriate method
of revenue recognition involves judgments and estimates that we believe are reason-
able, but it is possible that actual results may differ from our estimates.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial
Statements” which we adopted in the fourth quarter of fiscal 2001 and applied
retroactively to the first quarter of fiscal 2001. We recognized $66 million and $95 million
during fiscal 2002 and 2001, respectively, in net income before income taxes and
accounting changes related to revenue and expense that was recognized in prior
years. We continue to monitor developments in Emerging Issues Task Force discus-
sions of Issue 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables” and Issue 02-G, “Recognition of Revenue from Licensing Arrangements
on Intellectual Property,” to determine what, if any, impact a final consensus may
have on our revenue recognition policy.
We license rights to use our intellectual property portfolio, which includes patent
rights to use cdmaOne, CDMA2000, CDMA2000 1X, CDMA2000 1x EV-DO, TD-SCDMA
and WCDMA technologies. Licensees typically pay a non-refundable license fee and
on-going royalties on their sales of products incorporating our intellectual property.
License fees are generally recognized over the estimated period of future benefit to
the average licensee, typically five to seven years. We generally recognize royalty rev-
enue as earned when reasonable estimates of such amounts can be made. Certain
royalty revenues are accrued based on estimates prior to the reporting of such
revenues by our licensees. Estimates of royalty revenues are based on analyses of
historical royalty data by licensee, the relationship between the timing of our sales of
integrated circuits to our licensees and our licensees’ sales of CDMA phones and
infrastructure equipment, average sales price forecasts, and current market and eco-
nomic trends. When our licensees report royalties for which we accrued revenues
QUALCOMM 2002 ANNUAL REPORT