Qualcomm 2005 Annual Report Download - page 49
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Our Segment Results for Fiscal 2004 Compared to Fiscal 2003
The following should be read in conjunction with the fi nancial results
of fi scal 2004 and 2003 for each reporting segment. See “Notes to
Consolidated Financial Statements, Note 10—Segment Information.”
QCT Segment. QCT revenues for fi scal 2004 were $3.11 billion,
compared to $2.43 billion for fi scal 2003. Equipment and services
revenues, primarily from MSM and accompanying RF integrated cir-
cuits, were $3.04 billion for fi scal 2004, compared to $2.39 billion for
fi scal 2003. The increase in 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 fi scal 2004,
compared to approximately 99 million for fi scal 2003.
QCT’s earnings before taxes for fi scal 2004 were $1.05 billion,
compared to $805 million for fi scal 2003. QCT’s operating income
as a percentage of its revenues (operating margin percentage) was
34% in fi scal 2004, compared to 33% in fi scal 2003. The operating
margin percentage in fi scal 2004 as compared to fi scal 2003 increased
slightly primarily as a result of the increase in gross margin percentage,
partially offset by a 40% increase in research and development and
selling, general and administrative expenses. Research and develop-
ment and selling, general and administrative expenses were $153
million higher and $55 million higher, respectively, for fi scal 2004 as
compared to fi scal 2003 primarily associated with increased invest-
ment in new integrated circuit products and technology research,
development and marketing initiatives to support multimedia
applications, high-speed wireless Internet access and multiband,
multimode, multinetwork products and technologies, including
CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and GSM/GPRS/EDGE.
QTL Segment. QTL revenues for fi scal 2004 were $1.33 billion,
compared to $1.00 billion for fi scal 2003. Royalty revenues from
external licensees were $1.14 billion in fi scal 2004, compared to
$838 million in fi scal 2003. QTL’s earnings before taxes for fi scal
2004 were $1.20 billion, compared to $897 million for fi scal 2003.
QTL’s operating margin percentage was 90% in fi scal 2004, compared
to 89% in fi scal 2003. The increase in both revenues and earnings
before taxes primarily resulted from a $455 million increase in roy-
alties reported to us by our external licensees, partially offset by
the change in our ability to estimate royalties. 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 2004
were $1.29 billion, as compared to $837 million in fi scal 2003. The
increase in royalties reported to us by external licensees was pri-
marily due to an increase in sales of CDMA products by licensees,
resulting from higher demand for CDMA products across all major
regions of CDMA deployment at higher average selling prices.
Revenues from license fees were $59 million in both fi scal 2004 and
2003. During each of fi scal 2004 and 2003, we recognized $5 million
in revenue related to equity received as license fees. Other revenues
were comprised of intersegment 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 determined
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 com-
mercial 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 prospectively and had the
initial one-time effect of reducing royalty revenues recorded in the
fourth quarter of fi scal 2004.
QWI Segment. QWI revenues for fi scal 2004 were $571 million, com-
pared to $484 million for fi scal 2003. Revenues increased primarily
due to a $58 million increase in QWBS revenue and a $37 million
increase in QIS revenue. The increase in QWBS revenue was primarily
attributable to a $14 million increase in messaging revenue as a result
of a larger installed base and a $44 million increase in equipment
revenue, net of an $19 million decrease in amortization of deferred
revenues related to historical equipment sales. QWBS shipped approx-
imately 43,400 satellite-based systems and 10,000 terrestrial-based
systems during fi scal 2004, compared to approximately 32,200
satellite-based systems and 5,300 terrestrial-based systems in
fi scal 2003. The increase in QIS revenue is primarily attributable to a
$53 million increase in fees related to our expanded BREW customer
base and products, partially offset by a $19 million decrease in QChat
revenue resulting from the wind down of development efforts under
the licensing agreement with Nextel.
QWI’s earnings before taxes for fi scal 2004 were $19 million,
compared to $15 million for fi scal 2003. QWI’s operating margin
percentage was 3% in both fi scal 2004 and 2003. The increase
in QWI’s earnings before taxes was primarily due to a $31 million
increase in QIS gross margin largely resulting from the increase in
fees related to our expanded BREW customer base and products,
offset by a $29 million increase in QWI research and development
and selling, general and administrative expenses. QWI’s operating
margin percentage remained fl at in fi scal 2004 as compared to fi scal
2003 primarily due to a decline in QWBS gross margin percentage,
offset by an improvement in QIS gross margin percentage. The decline
in QWBS gross margin percentage in fi scal 2004 as compared to fi s-
cal 2003 was primarily attributable to a decline in the gross margin
percentage on equipment sales, which are lower 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.