Qualcomm 2005 Annual Report Download - page 48
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44 qualcomm 2005
Our Segment Results for Fiscal 2005 Compared to Fiscal 2004
The following should be read in conjunction with the fi nancial results
of fi scal 2005 and 2004 for each reporting segment. See “Notes to
Consolidated Financial Statements, Note 10—Segment Information.”
QCT Segment. QCT revenues for fi scal 2005 were $3.29 billion,
compared to $3.11 billion for fi scal 2004. Equipment and services
revenues, primarily from MSM and accompanying RF integrated cir-
cuits, were $3.20 billion for fi scal 2005, compared to $3.04 billion for
fi scal 2004. The increase in integrated circuits revenue was comprised
of $396 million related to higher unit shipments, partially offset by
a decrease of $241 million related to the effects of reductions in
average sales prices and changes in product mix. Approximately
151 million MSM integrated circuits were sold during fi scal 2005,
compared to approximately 137 million for fi scal 2004.
QCT’s earnings before taxes for fi scal 2005 were $852 million, com-
pared to $1.05 billion for fi scal 2004. QCT’s operating income as a
percentage of its revenues (operating margin percentage) was 26%
in fi scal 2005, compared to 34% in fi scal 2004. The decline in oper-
ating margin percentage in fi scal 2005 as compared to fi scal 2004
was primarily the result of a 45% increase in research and develop-
ment expenses for fi scal 2005 as compared to fi scal 2004, mainly
related to increased investment in new integrated circuit products
and technology research and development initiatives to support lower
cost phones, multimedia applications, high-speed wireless Internet
access and multiband, multimode, multinetwork products and tech-
nologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and
GSM/GPRS/EDGE.
QTL Segment. QTL revenues for fi scal 2005 were $1.84 billion,
compared to $1.33 billion for fi scal 2004. QTL’s earnings before
taxes for fi scal 2005 were $1.66 billion, compared to $1.20 billion
for fi scal 2004. QTL’s operating margin percentage was 90% during
both fi scal 2005 and 2004. The increase in both revenues and earn-
ings before taxes primarily resulted from a $350 million increase in
royalties reported to us by our external licensees and the effect of
changing the timing of recognizing royalty revenues in the fourth
quarter of fi scal 2004. Royalty revenues recorded in fi scal 2004
excluded $151 million of royalties that were reported by external
licensees in the fi rst quarter of fi scal 2004, but estimated and
recorded as revenue in the fourth quarter of fi scal 2003. Royalties
reported to us by external licensees in fi scal 2005 were $1.64 billion,
as compared to $1.29 billion in fi scal 2004. The increase in royalties
reported to us by external licensees was primarily due to an increase
in sales of CDMA products by licensees, resulting from higher world-
wide demand for CDMA products at higher average selling prices due
primarily to the growth of higher priced WCDMA sales and shifts in
the geographic distribution of sales of CDMA products. Revenues
from license fees were $69 million in fi scal 2005, as compared to
$59 million in fi scal 2004. During fi scal 2005, we recognized $4 mil-
lion in revenue related to equity received as license fees, compared
to $5 million in fi scal 2004. Other revenues were comprised of inter-
segment royalties.
During the periods preceding the fourth quarter of fi scal 2004, we
estimated and recorded the royalty revenues earned for sales by
certain licensees (the Estimated Licensees) in the quarter in which
such sales occurred, but only when reasonable estimates of such
amounts could be made. Not all royalties earned were recorded
based on estimates. In the fourth quarter of fi scal 2004, we deter-
mined that, due to escalating and changing business trends, we no
longer had the ability to reliably estimate royalty revenues from the
Estimated Licensees. These escalating and changing trends included
the commercial launches and global expansion of WCDMA networks,
changes in market share among licensees due to increased global
competition, and increased variability in the integrated circuit and
fi nished product inventories of licensees. Starting in the fourth
quarter of fi scal 2004, we began recognizing royalty revenues solely
based on royalties reported by licensees during the quarter. The
change in the timing of recognizing royalty revenue was made pro-
spectively and had the initial one-time effect of reducing royalty
revenues recorded in the fourth quarter of fi scal 2004. Accordingly,
we did not estimate royalty revenues earned in fi scal 2005.
QWI Segment. QWI revenues for fi scal 2005 were $644 million, com-
pared to $571 million for fi scal 2004. Revenues increased primarily
due to a $37 million increase in QIS revenue and a $27 million increase
in QWBS revenue. The increase in QIS revenue was primarily attrib-
utable to a $41 million increase in fees related to our expanded BREW
customer base and products. The increase in QWBS revenue was
primarily attributable to a $16 million increase in equipment revenue,
net of a $24 million decrease in amortization of deferred revenues
related to historical equipment sales, and a $10 million increase in
related messaging services revenue. QWBS shipped approximately
46,800 satellite-based systems and 62,500 terrestrial-based
systems during fi scal 2005, compared to approximately 43,400
satellite-based systems and 10,000 terrestrial-based systems in
fi scal 2004.
QWI’s earnings before taxes for fi scal 2005 were $57 million, compared
to $19 million for fi scal 2004. QWI’s operating margin percentage
was 9% in fi scal 2005, compared to 3% in fi scal 2004. The increases
in QWI earnings before taxes and operating percentage were primar-
ily due to a $39 million increase in QIS gross margin largely resulting
from the increase in fees related to our expanded BREW customer
base and products.
During fi scal 2005, QWBS completed the process of moving high
volume, standard product manufacturing to Mexico to reduce
manufacturing costs. The low-volume, prototype and new product
manufacturing activities remains in San Diego. We continue to evalu-
ate other low-cost manufacturing opportunities.
QSI Segment. QSI’s earnings before taxes from continuing operations
for fi scal 2005 were $10 million, compared to losses before taxes
from continuing operations of $31 million for fi scal 2004. During
fi scal 2005, QSI recorded $101 million in realized gains on market-
able securities and other investments, compared to $56 million in
fi scal 2004. Equity in losses of investees decreased by $43 million
primarily due to a decrease in losses incurred by Inquam during fi scal
2005 as compared to fi scal 2004, of which our share was $33 million
for fi scal 2005 as compared to $59 million for fi scal 2004. These
improvements in QSI’s earnings before taxes from continuing opera-
tions were partially offset by a $42 million increase in MediaFLO USA
operating expenses.