Qualcomm 2004 Annual Report Download - page 50

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Management’s Discussion and Analysis continued
Leap Wireless bonds and common stock, respectively. The losses on derivative instruments during fiscal 2002 primarily resulted from movements
in the price of Leap Wireless common stock, which affected the fair values of our warrants to acquire Leap Wireless stock. Equity in losses of
investees primarily increased due to an increase in losses incurred by Inquam, of which our share was $99 million for fiscal 2003 as compared
to $45 million for fiscal 2002.
Income Tax Expense. Income tax expense from continuing operations was $536 million for fiscal 2003, compared to $97 million for fiscal 2002.
The annual effective tax rate from continuing operations was approximately 34% for fiscal 2003, compared to a rate of 16% for fiscal 2002. The
annual effective tax rate for continuing operations for fiscal 2003 was lower than the combined federal and state statutory tax rate of approximately
39%, primarily due to foreign earnings that were taxed at less than the United States federal rate. The reduction was partially offset by capital
losses for which we had not recorded a tax benefit. The fiscal 2003 effective tax rate for continuing operations was higher than the fiscal 2002
effective tax rate for continuing operations primarily due to the reduction of valuation allowances in fiscal 2002 that were previously charged to
income tax expense, partially offset by the amortization of non-deductible goodwill in fiscal 2002.
Our Segment Results for Fiscal 2004 Compared to Fiscal 2003
The following should be read in conjunction with the financial results of fiscal 2004 and 2003 for each reporting segment. See “Notes to
Consolidated Financial Statements — Note 10 — Segment Information.”
QCT Segment. QCT revenues for fiscal 2004 were $3,094 million, compared to $2,406 million for fiscal 2003. Equipment and services revenues,
primarily from MSM and accompanying RF integrated circuits, were $3,026 million for fiscal 2004, compared to $2,374 million for fiscal 2003.
The increase in MSM and accompanying RF integrated circuits revenue was comprised of $994 million related to higher unit shipments, partially
offset by a decrease of $331 million related to the effects of reductions in average sales prices and changes in product mix. Approximately
137 million MSM integrated circuits were sold during fiscal 2004, compared to approximately 99 million for fiscal 2003.
QCT’s earnings before taxes for fiscal 2004 were $1,043 million, compared to $797 million for fiscal 2003. QCT’s operating income as a percent-
age of its revenues (operating margin percentage) was 34% in fiscal 2004, compared to 33% in fiscal 2003. The operating margin percentage
in fiscal 2004 as compared to fiscal 2003 increased slightly primarily as a result of the increase in gross margin percentage, partially offset by
a40% increase in research and development and selling, general and administrative expenses. Research and development and selling, general
and administrative expenses were $154 million higher and $54 million higher, respectively, for fiscal 2004 as compared to fiscal 2003 primarily
associated with increased investment in new integrated circuit products and technology research, development and marketing initiatives to
supportmultimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products including CDMA2000
1xEV-DO, WCDMA and HSDPA.
QTL Segment. QTL revenues for fiscal 2004 were$1,331 million, compared to $1,000 million for fiscal 2003. Royalty revenues from external
licensees were $1,141 million in fiscal 2004, compared to $838 million in fiscal 2003. Royalty revenues recorded in fiscal 2004 excluded
$151 million of royalties that were reported by external licensees in the first quarter of fiscal 2004, but estimated and recorded as revenue in
the fourth quarter of fiscal 2003. Royalties reported to us by external licensees in fiscal 2004 were $1,292 million, as compared to $837 million
in fiscal 2003. Revenues from license fees were $59 million in both fiscal 2004 and 2003. Other revenues were comprised of intersegment
royalties. During each of fiscal 2004 and 2003, we recognized $5 million in revenue related to equity received as license fees.
The following table summarizes royalty related data for external licensees (in millions):
Years Ended September 30,
2004 2003
Estimate recorded for the fourth quarter of the prior year (Prior Year Fourth Quarter) for Estimated Licensees $ 151 $150
Royalties reported in the first quarter of the current year by Estimated Licensees for Prior Year Fourth Quarter 208 167
Prior Year Fourth Quarter variance included in current year 57 17
Other royalties reported in current year 1,084 670
Estimate recorded for the fourth quarter of the current year for Estimated Licensees — 151
Total current year royalty revenues from external licensees $1,141 $838
For example, for fiscal 2003, we estimated royalties of $151 million from the Estimated Licensees for the fourth quarter of fiscal 2003. The
actual royalties reported to us by the Estimated Licensees, on a one quarter lag basis, during the first quarter of fiscal 2004 were $208 million.
The variance of $57 million recorded in royalty revenues in the first quarter of fiscal 2004 was primarily attributable to greater phone sales at
higher average prices by our Estimated Licensees than we had anticipated. Toachieve these phone unit volumes, we believe that our Estimated
Licensees reduced their integrated circuit inventories in our fourth quarter of fiscal 2003. Total royalty revenues from licensees for fiscal 2004
of $1,141 million included: 1) the prior year fourth quarter variance of $57 million and 2) other royalties reported by licensees during fiscal 2004
of $1,084 million. We did not estimate royalty revenues for the fourth quarter of fiscal 2004 as we no longer believe that we have the ability to
reliably estimate such amounts.
QTL’s earnings before taxes for fiscal 2004 were $1,195 million, compared to $897 million for fiscal 2003. QTL’s operating margin percentage
was 90% in fiscal 2004, compared to 89% in fiscal 2003. The increase in both revenues and earnings before taxes was primarily due to an
increase in sales of CDMA products by licensees, resulting from higher demand for CDMA products across all major regions of CDMA deploy-
ment at higher average selling prices, partially offset by the change in our ability to estimate royalties.