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we are
focused
2005 Annual Report

Table of contents

  • Page 1
    we are focused 2005 Annual Report

  • Page 2
    2005 was another year of growth in our global markets and in our financial performance revenue and gross margin $ in billions $5.67 $4.88 $3.85 70% 71% (1) (5) research and development $ in billions $1.01 diluted net income (loss) per share (2) (5) $1.26 $1.03 $0.72 $2.68 $2.92 $0.52 67% ...

  • Page 3
    on executing our road maps we are focused 01 letter to stockholders 06 execution 16 innovation 22 partnerships 29 people

  • Page 4
    in cooperation with our partners and innovating new wireless technologies, products and services 31 awards and honors 32 financials

  • Page 5
    ... to drive stockholder value as we develop innovative products and technologies for our many customers in the wireless industry. We announced the shipment of our two billionth chip. Seven new customers selected our WCDMA (UMTS) chipsets for their WCDMA phone products, bringing the total number of...

  • Page 6
    ... developer of OFDM-based mobile wireless data products. Our MediaFLO™ division conducted the first live, over-theair demonstration of FLO™ technology. And we smoothly transitioned the management of the Company to a new leadership team. > we have become successful by aligning our business model...

  • Page 7
    ... Multicast, annual dividend history per share $0.32 $0.19 > the growing adoption of cdma-based 3g technology across many customer segments and regions around the world continues to drive strong financial results for qualcomm. $0.08 Note: The Company effected a two-for-one stock split in August...

  • Page 8
    ... year 2005 and repurchased 27.1 million shares of common stock for $953 million. QUALCOMM's total cash and marketable securities balance at fiscal year end grew to $8.7 billion. driving shareholder value The growing adoption of CDMA technology-based 3G standards across many customer segments and...

  • Page 9
    ...road maps and innovating new technologies, products and services in cooperation with our partners throughout the wireless industry. focused on the future As we look to the next chapter in QUALCOMM's development, we can proceed with the confidence that our executive team and board of directors have...

  • Page 10
    2g voice cdmaOne® 3g voice and data CDMA2000® 1X WCDMA > voice and high-speed data CDMA2000 1xEV-DO HSDPA convergence EV-DO Rev. A and Rev. B VoIP MediaFLO HSUPA DMMX and HMMX executing on our road maps 06 qualcomm 2005

  • Page 11
    ... deliver new products, open new markets and lead the industry with exciting and innovative wireless solutions. Committed to serving from the low end to the high end of the market, we are enabling the next generation of wireless progress with the right solutions at the right cost. qualcomm 2005 07

  • Page 12
    ...to commercialize a different kind of wireless technology called CDMA. company. Not to be deterred, the QUALCOMM team held true to its vision and committed its resources to innovating the new technology. 20 years of driving industry progress > 1985: A New Company QUALCOMM is 1988: First Product...

  • Page 13
    ... research and development efforts, QUALCOMM also invests in other > qualcomm has consistently had the vision to look beyond the immediate horizon...to anticipate and plan the future of wireless. companies engaged in wireless innovation. Whether through internal or external development, QUALCOMM is...

  • Page 14
    ... Company values collaboration with its customers and partners in the wireless industry and works closely with them to enable their success. This has been the guiding strategy behind QUALCOMM's semiconductor business (QCT) creates state-of-the-art 3G chipsets, systems software and development tools...

  • Page 15
    ...and more. This product line is designed to accelerate mainstream adoption of wireless multimedia in 3G. Value Platform Chipsets in the Value Platform enable voice and basic data phones and services for emerging markets such as India, China, Latin America and Southeast Asia. This platform introduces...

  • Page 16
    ... to support the long-term road maps of EV-DO and HSDPA. The Company's DMMX and HMMX platforms are a set of technology and product innovations based on three fundamental pillars: not only significantly improve the performance of 3G CDMA technology, they will also enable operators to deploy networks...

  • Page 17
    ..., QChatâ„¢ push-to-talk technology, the QPointâ„¢ location server solution and Eudora® email products. a ï¬,exible offering for making mobile data useful and profitable QUALCOMM's BREW solution was conceived to meet the need for an open and uniform applications and services platform for wireless...

  • Page 18
    ... employee > 3g benefits business customers by driving down their costs and increasing productivity. it also helps enable customer service improvements and can create new revenue opportunities. expertise in wireless solutions to help enterprise customers transform the way they do business. QUALCOMM...

  • Page 19
    ... Nextel, and Verizon Wireless, we were proud to work together with the Federal Emergency Management Agency and the U.S. military. Together, we provided deployable base station systems, Globalstar Satellite phones, OmniTRACS® vehicle tracking devices and other support services that enabled rescue...

  • Page 20
    technology leadership data leadership performance leadership low-cost initiatives tiered solutions innovating 16 qualcomm 2005 new capabilities

  • Page 21
    ... features to market. While successfully innovating new technologies, products and services, we are also working to reduce time to market and to drive down costs for our industry partners and for the consumers and enterprises who rely on wireless connectivity in their daily lives. qualcomm 2005 17

  • Page 22
    ... wireless telecommunications products and services. And through internal growth, investment, widespread licensing, strategic partnerships and acquisition, QUALCOMM remains committed to being the leader in the development of wireless technology far into the future. grants licenses to use the Company...

  • Page 23
    ... at QUALCOMM are augmenting the Company's core competencies in CDMA with a growing expertise in complementary wireless technologies, including OFDM. 02 03 Subscribers 04 09 estimated Sources: Infrastructure Revenue, Average of Gartner Group (09/04) and Strategy Analytics (12/05) Service Revenue...

  • Page 24
    ... supports significantly faster data rates. QUALCOMM was first to market with commercial solutions for the new technology and offers complete solutions for EV-DO Rev. A. QUALCOMM has also emerged as an a new division focused on next-generation display technology The new QUALCOMM MEMS Technologies...

  • Page 25
    ... any environment. This will enable new applications and open new market opportunities. FLO Technology, one of QUALCOMM's > IP datacasting, such as stock price information a new qualcomm subsidiary MediaFLOâ„¢ USA, Inc. is deploying and will operate a nationwide U.S. wireless multicast network...

  • Page 26
    ... "QUALCOMM continues to listen to our needs as an operator and advance the technological capabilities of the BREW ecosystem, enabling us to differentiate our services and offer wireless subscribers in Japan the most advanced data offerings." Seiichiro Sakai Director of Product Management Department...

  • Page 27
    ..., Pharm. D. Director, Pharmacy Management CareFirst BlueCross BlueShield a wireless solution > For delivering rich multimedia capabilities to network subscribers "We're amazed at the success we've seen so far with BREW. As a result of the great BREW technology...we're taking our customer experience...

  • Page 28
    ... and Enterprises Businesses and enterprises across all industries are discovering how to streamline operations, increase worker productivity and achieve compelling return on investment by leveraging 3G wireless into their work processes. QUALCOMM partners with these customers to build technology...

  • Page 29
    ...3G A-List Awards were created to honor mobility at work, recognizing innovative and successful commercially deployed enterprise wireless data solutions based on 3G CDMA standards. Small Company (less than 100 employees) Winner: LaserCraft Service Provider: Verizon Wireless CDMA2000 network Hardware...

  • Page 30
    ... to conduct Latin America's first public WCDMA trial. > In Peru, Telefonica Moviles Peru launched a mobile TV service via BREW in October 2005. > In Trinidad and Tobago, LaqTel and Nortel announced a $50 million contract to deploy CDMA2000 and EV-DO networks. north america > Verizon Wireless now...

  • Page 31
    ... Vodafone New Zealand launched WCDMA service in August 2005. > In Australia, Telstra launched EV-DO services and Vodafone Australia launched WCDMA services in late 2005. 222 million 3G subscribers 73 Operators of WCDMA networks 20 Operators of EV-DO networks reported worldwide qualcomm 2005 27

  • Page 32
    ... by 2008 (2) 1.5 billion wireless data users are estimated by 2009 (1) demand for nextgeneration services is growing rapidly growth driver > convergence The convergence of wireless multimedia technology and the Internet has created numerous opportunities for new enabling technologies and business...

  • Page 33
    ...on the pioneering spirit of our founders "QUALCOMM is grateful to all of our employees, whose hard work and commitment for the past 20 years have made the Company into one of the most innovative wireless industry leaders in the world today." Dr. Irwin Jacobs Chairman of the Board qualcomm 2005 29

  • Page 34
    ... natural program, QUALCOMM Cares, was developed to encourage employee involvement in the community and to connect our diverse employee base to local volunteer opportunities. From walk-a-thons to holiday drives, our employees are helping people with disabilities, improving the environment, feeding...

  • Page 35
    ... Development Program" > American Society of Training and Development's "BEST Award" Its unique work environment, dedicated workforce and expertise have also earned QUALCOMM a place among FORTUNE's list of "100 Best Companies to Work for in America" for seven consecutive years, FORTUNE's "America...

  • Page 36
    ... and other stockholder information selected financial data management's discussion and analysis market risk controls and financial reporting report of independent registered public accounting firm consolidated balance sheets consolidated statements of operations consolidated statements of cash...

  • Page 37
    ... 2001 Stock Option Plan (2001 Plan), we may grant options to selected employees, directors and consultants to purchase shares of our common stock at a price not less than the fair market value of the stock at the date of grant. The 2001 Plan provides for the grant of both incentive stock options and...

  • Page 38
    ... date. The Board of Directors may terminate the 2001 Plan and/or the 2001 Directors' Plan at any time though it must, nevertheless, honor any stock options previously granted pursuant to the plans. Additional information regarding our stock option plans and plan activity for fiscal 2005, 2004 and...

  • Page 39
    ... tax Accounting change, net of tax Net income (loss) Dividends per share announced Shares used in earnings per share calculations: Basic Diluted Balance Sheet Data: Cash, cash equivalents and marketable securities Total assets Long-term debt Total stockholders' equity (1) (2) (4) (4) Sept. 25, 2005...

  • Page 40
    ... 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, position reporting...

  • Page 41
    ... segments include the QUALCOMM Wireless Systems division, which sells products that operate on the Globalstar lowEarth-orbit satellite communications system and provides related services, the QUALCOMM MEMS Technologies division, comprised of the Iridigm business, a display technology company...

  • Page 42
    ... 21% in fiscal 2005, due primarily to increased royalties reported by licensees in Japan resulting from the growth of CDMA2000 and WCDMA in Japan as well as their success in exporting products worldwide. Combined revenues from customers in South Korea and the United States decreased as a percentage...

  • Page 43
    ... and its business plan, the investee's revenue and cost trends, the liquidity and cash position, including its cash burn rate and market acceptance of the investee's products and services. From time to time, we may consider third-party evaluations, valuation reports or advice from investment banks...

  • Page 44
    ... makes strategic investments to promote the worldwide adoption of CDMA products and services. QSI segment assets totaled $442 million at September 25, 2005, compared to $400 million at September 26, 2004. Our MediaFLO USA subsidiary, a wireless multimedia operator, is expected to begin commercial...

  • Page 45
    ... of reductions in average sales prices and changes in product mix. Revenues from the sale of satellite and terrestrial-based two-way data messaging systems and related messaging services increased $25 million and revenues from the sale of satellite portable phones that operate on the Globalstar low...

  • Page 46
    ... tax rate. The annual effective tax rate for fiscal 2005 was 11% lower than the United States federal statutory rate primarily due to benefits of approximately 10% related to foreign earnings taxed at less than the United States federal rate, 3% related to an increase in tax benefits resulting...

  • Page 47
    ...other segments was a result of higher average cash and marketable securities balances, partially offset by the impact of lower interest rates earned on interest-bearing securities, and $6 million in interest income recorded as a result of a refund from the United States Internal Revenue Service. The...

  • Page 48
    ... the result of a 45% increase in research and development expenses for fiscal 2005 as compared to fiscal 2004, mainly related to increased investment in new integrated circuit products and technology research and development initiatives to support lower cost phones, multimedia applications...

  • Page 49
    ... than the margins on messaging services, combined with an increase in equipment sales as a percentage of total QWBS revenue. The improvement in QIS gross margin percentage was primarily attributable to the increase in fees related to our expanded BREW customer base and products. qualcomm 2005 45

  • Page 50
    ...scal 2008. In fiscal 2005, our MediaFLO USA subsidiary, a wireless multimedia operator, began the development of a nationwide mediacast network based on our FLO technology and MediaFLO MDS. As part of this development, MediaFLO USA has executed a number of lease agreements at broadcast tower sites...

  • Page 51
    ...Accounting Requirements In December 2004, the FASB revised Statement No. 123 (FAS 123R), "Share-Based Payment," which requires companies to expense the estimated fair value of employee stock options and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule...

  • Page 52
    ...60 $ 60 608 $ 608 2006 2007 2008 2009 2010 Thereafter No Single Maturity Total Fair Value Equity Price Market Risk We invest in a number of diversified marketable securities and mutual fund shares subject to equity price risk. The recorded values of marketable equity securities increased to $1.16...

  • Page 53
    .... At September 25, 2005, the recorded values of our foreign currency option contracts that hedge the foreign currency risk on royalties earned from certain international licensees on their sales of CDMA and WCDMA products were $16 million. If our forecasted royalty revenues were to decline by...

  • Page 54
    ... public accounting firm that audited the financial consolidated statements included in this Annual Report, has also audited management's assessment of our internal control over financial reporting and the effectiveness of our internal control over financial reporting as of September 25, 2005...

  • Page 55
    ...with the standards of the Public Company Accounting Oversight Board (United States). Our opinions on QUALCOMM Incorporated's 2005, 2004 and 2003 consolidated financial statements and of its internal control over financial reporting as of September 25, 2005, based on our audits, are presented below...

  • Page 56
    ... Balance Sheets (in millions, except per share data) Sept. 25, 2005 Sept. 26, 2004 Assets Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net Inventories Deferred tax assets Other current assets Total current assets Marketable securities Property, plant...

  • Page 57
    ... (in millions, except per share data) Revenues: Equipment and services Licensing and royalty fees Operating expenses: Cost of equipment and services revenues Research and development Selling, general and administrative Total operating expenses Operating income Investment income (expense), net (Note...

  • Page 58
    ...cash used by investing activities Financing Activities: Proceeds from issuance of common stock Repurchase and retirement of common stock Proceeds from put options Dividends paid Net cash (used) provided by financing activities Net cash used by discontinued operations Effect of exchange rate changes...

  • Page 59
    ...-than-temporary losses on marketable securities included in net income, net of income taxes of $5 Total comprehensive income Exercise of stock options Tax benefit from exercise of stock options Issuance for Employee Stock Purchase and Executive Retirement Plans Dividends Balance at September 26...

  • Page 60
    ... provides the BREW (Binary Runtime Environment for Wireless) product and services to wireless network operators, handset manufacturers and application developers and support for developing and delivering over-the-air wireless applications and services. The Company also makes strategic investments to...

  • Page 61
    ...cant portion of the Company's revenues is concentrated with a limited number of customers as the worldwide market for wireless telecommunications products is dominated by a small number of large corporations. Revenues from LG Electronics, Samsung and Motorola, customers of the Company's QCT, QTL and...

  • Page 62
    ... and considers new products/services that the investee may have forthcoming that will improve its operating results. If events and circumstances indicate that a decline in the value of these assets has occurred and is other-than-temporary, the Company records a charge to investment income (expense...

  • Page 63
    ... an investment for an other-thantemporary decline in value, the Company considers such factors as, among other things, the share price from the investee's latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee's revenue...

  • Page 64
    ... no intrinsic value upon grant, and therefore no expense is recorded. Each quarter, the Company reports the potential dilutive impact of share-based payments in its diluted earnings per common share using the treasurystock method. Out-of-the-money stock options (i.e., the average stock price during...

  • Page 65
    ... the Company's share-based compensation plans and shares subject to written put options, and the weighted average number of common shares outstanding during the reporting period. The incremental dilutive common share equivalents, calculated using the treasury stock method, for fiscal 2005, 2004...

  • Page 66
    ... fair value of employee stock options and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R will be effective for the Company beginning...

  • Page 67
    ... enterprise securities, foreign government bonds, mortgage- and asset-backed securities and corporate bonds and notes. The unrealized losses on the Company's investments in investment grade debt securities were caused by interest rate increases. Due to the fact that the decline in market value...

  • Page 68
    ...reporting units included in the Company's reportable segments at September 25, 2005 as follows: $298 million in QUALCOMM CDMA Technologies, $73 million in QUALCOMM Technology Licensing, $72 million in QUALCOMM Wireless & Internet, and $128 million in QUALCOMM MEMS Technology (a nonreportable segment...

  • Page 69
    ... no later than May 14, 2008. The minimum purchase price will be approximately $66 million. In the event that the Other Investor's call option expires, or in certain other circumstances prior to that date, the Company will have the right to sell our equity and debt investments in Inquam to the Other...

  • Page 70
    ... par value per share, subject to adjustment for subsequent stock splits, at a purchase price of $180. The Rights are exercisable only if a person or group (an Acquiring Person) acquires beneficial ownership of 15% or more of the Company's outstanding shares of common stock without Board approval...

  • Page 71
    ... fiscal 2005, 2004 and 2003 was $27 million, $21 million and $20 million, respectively. Stock Option Plans The Company may grant options to selected employees, directors and consultants to the Company to purchase shares of the Company's common stock at a price not less than the fair market value of...

  • Page 72
    ... continued In fiscal 2005, the Company assumed 723,000 and 42,000 of the outstanding stock options under the Iridigm Display Corporation 2000 Stock Plan and the Spike Technologies, Inc. 1998 Stock Option Plan, respectively, related to those acquisitions (Note 11). Both plans expired on the dates...

  • Page 73
    ...Average Exercise Price $23.64 58.65 $24.35 Stock Options Less than $44.76 Above $44.76 Total outstanding Number of Shares 120,418 4,073 124,491 Number of Shares 78,295 8 78,303 Number of Shares 198,713 4,081 202,794 Employee Stock Purchase Plans The Company has two employee stock purchase plans...

  • Page 74
    ... in the action. QUALCOMM Incorporated v. Broadcom Corporation: On October 14, 2005, the Company filed an action in the United States District Court for the Southern District of California against Broadcom alleging infringement of two patents, each of which relates to video encoding and decoding for...

  • Page 75
    ... its BREW product and services, QChat and QPoint; > QUALCOMM Government Technologies (QGOV)-formerly QUALCOMM Digital Media, provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and > QUALCOMM Wireless Business...

  • Page 76
    ...* $153 $116 $ 79 Generally, revenues between segments are based on prevailing market rates for substantially similar products and services or an approximation thereof. Certain charges are allocated to the corporate functional department in the Company's management reports based on the decision that...

  • Page 77
    ...total cost of $295 million, which was paid primarily in cash: > Iridigm Display Corporation (Iridigm), a California-based display technology company. > Trigenix Limited, a United Kingdom-based developer of user interfaces for mobile phones. > Spike Technologies, Inc., a semiconductor design services...

  • Page 78
    ...and commercial acceptance of CDMA-based networks and CDMAbased technology, including CDMA2000 1X and WCDMA (UMTS), both domestically and internationally; growth of the wireless industry; our dependence on major customers and licensees, ï¬,uctuations in the demand for CDMA-based products, services or...

  • Page 79
    ... (QSI) segment to facilitate evaluation of the Company's ongoing core operating businesses, including QUALCOMM CDMA Technologies (QCT), QUALCOMM Technology Licensing (QTL) and QUALCOMM Wireless & Internet (QWI). QSI results relate to strategic investments for which the Company has exit strategies of...

  • Page 80
    ... assets Stock option payroll tax expense Globalstar Legal settlement Other Total pro forma adjustments before taxes One-time tax benefit recorded in fiscal 2005 related to fiscal 2004 Income tax benefit (expense) related to pro forma adjustments before taxes Accounting change, net of tax Total...

  • Page 81
    ... Chair: Audit Committee Member: Governance Committee Title: Self-Employed, Personal Investment Business Peter M. Sacerdote Chair: Finance Committee Member: Governance Committee Title: Advisory Director, Goldman Sachs & Co. General Brent Scowcroft Member: Governance and Strategic Committees Title...

  • Page 82
    ... Relations Department 5775 Morehouse Drive San Diego, CA 92121 Phone: (858) 658-4813 Fax: (858) 651-9303 Toll Free: (866) 658-4813 market information The common stock of the Company is traded on the NASDAQ Stock Market under the symbol "QCOM." qualcomm 2005 Annual Report QUALCOMM Headquarters...