Qualcomm 2004 Annual Report Download - page 41

QUALCOMM 37
In addition to historical information, 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 in the Company’s Annual Report on Form 10-K and elsewhere in this Annual Report.
OVERVIEW
Recent Highlights
Revenues for fiscal 2004 were $4.9 billion, with net income of $1.7 billion. The following recent developments during fiscal 2004 were key
for our business:
■Strong CDMA market growth throughout the world drove demand for our products and the products of our licensees. Enhanced multimedia
functionality, increased growth of 1xEV-DO, local number portability initiatives and improving competitive positioning of CDMA operators drove
worldwide growth in CDMA phone sales. Introduction of new CDMA networks in developing regions, as well as continued growth of networks
in China and India, also contributed to growth in CDMA sales. Worldwide, 1xEV-DO grew to over nine million subscribers in September 2004.
During fiscal 2004, we shipped approximately 137 million Mobile Station Modem (MSM) integrated circuits for mobile CDMA phones and data
modules, nearly all of which were third generation (3G), including CDMA2000 1X, 1xEV-DO and WCDMA.
■By calendar year end 2004, operators are expected to have launched 70 WCDMA networks as reported by GSMA (GSM Association). WCDMA
subscriber growth in Japan and Europe, and new network launches in Europe and Asia drove growth in WCDMA phone sales during fiscal 2004.
Thirteen subscriber licensees and eleven infrastructure licensees reported sales of WCDMA products in the fourth quarter of fiscal 2004. WCDMA
royalties grew from 12% of royalties reported in the first fiscal quarter of 2004 for licensee sales during the fourth fiscal quarter of 2003 to 26%
of royalties reported in the fourth fiscal quarter of fiscal 2004 for licensee sales during the third fiscal quarter of fiscal 2004. Currently, average
WCDMA phone prices aresignificantly higher than worldwide average CDMA2000 phone prices. During fiscal 2004, several leading manufac-
turers announced the selection of our WCDMA MSM integrated circuits for their WCDMA phone products, including Siemens, Samsung, LG
Electronics, Sanyo and Option.
■As a result of record demand for CDMA products, our integrated circuits business continued to experience supply constraints which resulted
in our inability to meet certain customer demands. To enable better supply of integrated circuit products, we have increased and extended
firmorders to our foundrysuppliers and areworking with them to increase capacity. Wearealso evaluating potential new suppliers to augment
our futureneeds.
■In the fourth quarter of fiscal 2004, we determined that, due to the global growth of WCDMA networks and the increasing variability of our
licensees’ market shares due to greater global competition, we would begin to recognize royalty revenues solely based on royalties reported
by licensees during the quarter, rather than continuing to estimate royalty revenues earned from certain licensees in advance of receiving their
royalty reports. Accordingly, we did not estimate royalty revenues earned in the fourth quarter of fiscal 2004, and royalties recorded as revenue
for fiscal 2004 do not reflect an entire year’s worth of royalties (some royalties reported in the first quarter of fiscal 2004 were recorded based
on estimates as revenue in the fourth quarter of fiscal 2003).
Our Business and Operating Segments
We design, manufacture and market digital wireless telecommunications products and services based on our CDMA technology and other
technologies. We derive revenue principally from sales of integrated circuit products, from license fees and royalties for use of our intellectual
property, from services and related hardware sales and from software development and related services. Operating expenses primarily consist
of cost of equipment and services, research and development, selling, general and administrative, amortization of acquisition-related intangible
assets, asset impairment charges and other expenses.
Weconduct business through four operating segments. These segments are: QUALCOMM CDMA Technologies, or QCT;QUALCOMM
Technology Licensing, or QTL; QUALCOMM Wireless & Internet, or QWI; and QUALCOMM Strategic Initiatives, or QSI.
QCT is a leading developer and supplier of integrated circuits and system software for wireless voice and data communications, multimedia
functions and global positioning. QCT’s integrated circuit products and software are used in wireless phones and infrastructure equipment.
The wireless phone integrated circuits include the Mobile Station Modem (MSM), Radio Frequency (RF) and Power Management (PM) devices.
The wireless phone integrated circuits and software perform voice and data communication, multimedia and global positioning functions, radio
conversion between radio and baseband signals and power management. The infrastructure equipment integrated circuits provide the core
baseband CDMA modem functionality in the operator’s equipment. QCT software products are the operating systems that control the phone
and the functionality imbedded in our integrated circuit products. QCT revenues comprised 63% of total consolidated revenues in both fiscal
2004 and 2003 and 54% of total consolidated revenues in fiscal 2002.
QTL grants licenses to use portions of our intellectual property portfolio, which includes certain patent rights essential to and/or useful in the
manufactureand sale of CDMA (including, without limitation, cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV,TD-SCDMA and WCDMA) products.
QTL receives license fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating our intellectual property.
QTL revenues comprised 27%, 26% and 29% of total consolidated revenues in fiscal 2004, 2003 and 2002, respectively.
QWI, which includes QUALCOMM Wireless Business Solutions (QWBS), QUALCOMM Internet Services (QIS) and QUALCOMM Government
Technologies (QGOV), generates revenue primarily through mobile communication products and services, software and software development
aimed at support and delivery of wireless applications. QWBS provides satellite and terrestrial-based two-way data messaging and position
Management’s Discussion and Analysis of Financial Condition and Results of Operations