UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-19528
QUALCOMM Incorporated
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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95-3685934
(I.R.S. Employer
Identification No.) |
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5775 Morehouse Dr., San Diego, California
(Address of principal executive offices)
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92121-1714
(Zip Code) |
(858) 587-1121
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past ninety days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
The number of shares outstanding of each of the issuers classes of common stock, as of the
close of business on January 21, 2008, were as follows:
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Class |
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Number of Shares |
Common Stock, $0.0001 per share par value
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1,612,288,172 |
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUALCOMM Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
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December 30, |
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September 30, |
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2007 |
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2007 |
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ASSETS |
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Current assets: |
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|
|
|
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Cash and cash equivalents |
|
$ |
2,968 |
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$ |
2,411 |
|
Marketable securities |
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4,100 |
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|
4,170 |
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Accounts receivable, net |
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703 |
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|
715 |
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Inventories |
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522 |
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|
469 |
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Deferred tax assets |
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327 |
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|
435 |
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Collateral held under securities lending |
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283 |
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|
421 |
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Other current assets |
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195 |
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|
200 |
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|
|
|
|
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Total current assets |
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|
9,098 |
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|
8,821 |
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Marketable securities |
|
|
4,265 |
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|
5,234 |
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Property, plant and equipment, net |
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|
1,794 |
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|
1,788 |
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Goodwill |
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|
1,499 |
|
|
|
1,325 |
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Deferred tax assets |
|
|
606 |
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|
318 |
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Other assets |
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|
1,086 |
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|
1,009 |
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Total assets |
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$ |
18,348 |
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$ |
18,495 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Trade accounts payable |
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$ |
536 |
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$ |
635 |
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Payroll and other benefits related liabilities |
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299 |
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|
311 |
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Dividends payable |
|
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228 |
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Unearned revenues |
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|
206 |
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|
218 |
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Income taxes payable |
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52 |
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|
119 |
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Obligations under securities lending |
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283 |
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|
421 |
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Other current liabilities |
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513 |
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554 |
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|
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Total current liabilities |
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2,117 |
|
|
|
2,258 |
|
Unearned revenues |
|
|
137 |
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|
|
142 |
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Income taxes payable |
|
|
194 |
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|
|
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Other liabilities |
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|
290 |
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|
260 |
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Total liabilities |
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2,738 |
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2,660 |
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Commitments and contingencies (Note 6) |
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Stockholders equity: |
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Preferred stock, $0.0001 par value; issuable in series;
8 shares authorized; none outstanding at
December 30, 2007 and September 30, 2007 |
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Common stock, $0.0001 par value; 6,000 shares
authorized; 1,629 and 1,646 shares issued and
outstanding at December 30, 2007 and September 30, 2007,
respectively |
|
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|
|
|
|
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Paid-in capital |
|
|
6,400 |
|
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|
7,057 |
|
Retained earnings |
|
|
9,076 |
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|
8,541 |
|
Accumulated other comprehensive income |
|
|
134 |
|
|
|
237 |
|
|
|
|
|
|
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Total stockholders equity |
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15,610 |
|
|
|
15,835 |
|
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|
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Total liabilities and stockholders equity |
|
$ |
18,348 |
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|
$ |
18,495 |
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|
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See Notes to Condensed Consolidated Financial Statements.
3
QUALCOMM Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
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Three Months Ended |
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December 30, |
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December 31, |
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2007 |
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2006 |
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Revenues: |
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Equipment and services |
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$ |
1,703 |
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$ |
1,342 |
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Licensing and royalty fees |
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737 |
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677 |
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Total revenues |
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2,440 |
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|
2,019 |
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Operating expenses: |
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Cost of equipment and services revenues |
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783 |
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|
634 |
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Research and development |
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511 |
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440 |
|
Selling, general and administrative |
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|
389 |
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369 |
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Total operating expenses |
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1,683 |
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|
1,443 |
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Operating income |
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757 |
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|
576 |
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Investment income, net (Note 3) |
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173 |
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|
203 |
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|
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Income before income taxes |
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|
930 |
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|
779 |
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Income tax expense |
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|
(163 |
) |
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|
(131 |
) |
|
|
|
|
|
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Net income |
|
$ |
767 |
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|
$ |
648 |
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Basic earnings per common share |
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$ |
0.47 |
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$ |
0.39 |
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Diluted earnings per common share |
|
$ |
0.46 |
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$ |
0.38 |
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Shares used in per share calculations: |
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Basic |
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1,635 |
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|
1,653 |
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Diluted |
|
|
1,664 |
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|
1,685 |
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Dividends per share announced |
|
$ |
0.14 |
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$ |
0.12 |
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See Notes to Condensed Consolidated Financial Statements.
4
QUALCOMM Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
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Three Months Ended |
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December 30, |
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December 31, |
|
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2007 |
|
|
2006 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
767 |
|
|
$ |
648 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
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|
|
|
|
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Depreciation and amortization |
|
|
108 |
|
|
|
91 |
|
Non-cash income tax expense |
|
|
72 |
|
|
|
54 |
|
Non-cash portion of share-based compensation expense |
|
|
125 |
|
|
|
130 |
|
Incremental tax benefits from stock options exercised |
|
|
(48 |
) |
|
|
(32 |
) |
Net realized gains on marketable securities and other investments |
|
|
(82 |
) |
|
|
(64 |
) |
Other-than-temporary losses on marketable securities and other investments |
|
|
57 |
|
|
|
1 |
|
Other items, net |
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|
4 |
|
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|
4 |
|
Changes in assets and liabilities, net of effects of acquisitions (Note 8): |
|
|
|
|
|
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Accounts receivable, net |
|
|
43 |
|
|
|
(9 |
) |
Inventories |
|
|
(47 |
) |
|
|
(81 |
) |
Other assets |
|
|
11 |
|
|
|
(98 |
) |
Trade accounts payable |
|
|
(77 |
) |
|
|
47 |
|
Payroll, benefits and other liabilities |
|
|
(35 |
) |
|
|
38 |
|
Unearned revenues |
|
|
(18 |
) |
|
|
60 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
880 |
|
|
|
789 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(127 |
) |
|
|
(322 |
) |
Purchases of available-for-sale securities |
|
|
(1,684 |
) |
|
|
(1,673 |
) |
Proceeds from sale of available-for-sale securities |
|
|
2,492 |
|
|
|
2,436 |
|
Other investments and acquisitions, net of cash acquired |
|
|
(229 |
) |
|
|
(220 |
) |
Change in collateral held under securities lending |
|
|
138 |
|
|
|
|
|
Other items, net |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
590 |
|
|
|
219 |
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
77 |
|
|
|
97 |
|
Incremental tax benefits from stock options exercised |
|
|
48 |
|
|
|
32 |
|
Repurchase and retirement of common stock |
|
|
(900 |
) |
|
|
(96 |
) |
Change in obligations under securities lending |
|
|
(138 |
) |
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|
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|
Other items, net |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
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|
Net cash (used) provided by financing activities |
|
|
(914 |
) |
|
|
33 |
|
|
|
|
|
|
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|
Effect of exchange rate changes on cash |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
557 |
|
|
|
1,042 |
|
Cash and cash equivalents at beginning of period |
|
|
2,411 |
|
|
|
1,607 |
|
|
|
|
|
|
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|
Cash and cash equivalents at end of period |
|
$ |
2,968 |
|
|
$ |
2,649 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
Financial Statement Preparation. The accompanying interim condensed consolidated financial
statements have been prepared by QUALCOMM Incorporated (the Company or QUALCOMM), without audit, in
accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all
information and footnotes necessary for a fair presentation of its consolidated financial position,
results of operations and cash flows in accordance with accounting principles generally accepted in
the United States. The condensed consolidated balance sheet at September 30, 2007 was derived from
the audited financial statements at that date but may not include all disclosures required by
accounting principles generally accepted in the United States. The Company operates and reports
using a 52-53 week fiscal year ending on the last Sunday in September. The three-month periods
ended December 30, 2007 and December 31, 2006 included 13 weeks and 14 weeks, respectively.
In the opinion of management, the unaudited financial information for the interim periods
presented reflects all adjustments, which are only normal and recurring, necessary for a fair
statement of results of operations, financial position and cash flows. These condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements
included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2007.
Operating results for interim periods are not necessarily indicative of operating results for an
entire fiscal year.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts and the disclosure of contingent amounts in the Companys financial statements and
the accompanying notes. Actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform to the current year presentation.
Principles of Consolidation. The Companys condensed consolidated financial statements include
the assets, liabilities and operating results of majority-owned subsidiaries. The ownership of the
other interest holders of consolidated subsidiaries is reflected as minority interest and is not
significant. All significant intercompany accounts and transactions have been eliminated. Certain
of the Companys foreign subsidiaries are included in the consolidated financial statements one
month in arrears to facilitate the timely inclusion of such entities in the Companys condensed
consolidated financial statements. The Company does not have any investments in entities it
believes are variable interest entities for which the Company is the primary beneficiary.
Income Taxes. In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which prescribes a
recognition threshold and measurement process for recording in the financial statements uncertain
tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance
on the derecognition, classification, accounting in interim periods and disclosure requirements for
uncertain tax positions. The accounting provisions of FIN 48 were effective for the Company
beginning October 1, 2007. See Note 4 for additional information, including the effects of adoption
on the Companys condensed consolidated financial statements.
Earnings Per Common Share. Basic earnings per common share is computed by dividing net income
by the weighted-average number of common shares outstanding during the reporting period. Diluted
earnings per common share is computed by dividing net income by the combination of dilutive common
share equivalents, comprised of shares issuable under the Companys share-based compensation plans
and shares subject to written put options, and the weighted-average number of common shares
outstanding during the reporting period. Dilutive common share equivalents include the dilutive
effect of in-the-money share equivalents, which is calculated based on the average share price for
each period using the treasury stock method. Under the treasury stock method, the exercise price of
an option, the amount of compensation cost, if any, for future service that the Company has not yet
recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when
the option is exercised are assumed to be used to repurchase shares in the current period. The
incremental dilutive common share equivalents, calculated using the treasury stock method, for the
three months ended December 30, 2007 and December 31, 2006 were 28,465,000 and 32,063,000,
respectively.
Employee stock options to purchase approximately 117,474,000 and 104,145,000 shares of common
stock during the three months ended December 30, 2007 and December 31, 2006, respectively, were
outstanding but not included in the computation of diluted earnings per common share because the
effect on diluted earnings per share would be anti-dilutive. A put option outstanding at December
30, 2007 to purchase 2,500,000 shares of common
stock was not included in the diluted earnings per common share computation because the put
options exercise
6
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
price was less than the average market price of the common stock while it was
outstanding, and therefore, the effect on diluted earnings per common share would be anti-dilutive.
Comprehensive Income. Total comprehensive income consisted of the following (in millions):
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|
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Three Months Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
767 |
|
|
$ |
648 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
10 |
|
|
|
6 |
|
Net unrealized (losses) gains on securities and derivative
instruments, net of income taxes |
|
|
(99 |
) |
|
|
166 |
|
Reclassification adjustment for net realized gains
on securities and derivative instruments
included in net income, net of income taxes |
|
|
(49 |
) |
|
|
(38 |
) |
Reclassification adjustment for other-than-temporary
losses on marketable securities included in net
income, net of income taxes |
|
|
35 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income |
|
|
(103 |
) |
|
|
135 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
664 |
|
|
$ |
783 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
Net unrealized gains on marketable securities and
derivative instruments, net of income taxes |
|
$ |
127 |
|
|
$ |
240 |
|
Foreign currency translation |
|
|
7 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
$ |
134 |
|
|
$ |
237 |
|
|
|
|
|
|
|
|
Share-Based Payments. Total estimated share-based compensation expense was as follows (in
millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Cost of equipment and services revenues |
|
$ |
9 |
|
|
$ |
10 |
|
Research and development |
|
|
57 |
|
|
|
58 |
|
Selling, general and administrative |
|
|
60 |
|
|
|
64 |
|
|
|
|
|
|
|
|
Share-based compensation expense before taxes |
|
|
126 |
|
|
|
132 |
|
Related income tax benefits |
|
|
(41 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
Share-based compensation expense, net of taxes |
|
$ |
85 |
|
|
$ |
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense, per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
The Company recorded $13 million and $10 million in share-based compensation expense during
the three months ended December 30, 2007 and December 31, 2006, respectively, related to
share-based awards granted during those periods. In addition, for the three months ended December
30, 2007 and December 31, 2006, $48 million and $32 million, respectively, was reclassified to
reduce net cash provided by operating activities with an offsetting increase in net cash provided
by financing activities to reflect the incremental tax benefits from stock options exercised in
those periods. At December 30, 2007, total unrecognized estimated compensation cost related to
non-vested stock options granted prior to that date was $1.6 billion, which is expected to be
recognized over a
7
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
weighted-average period of 3.6 years. Net stock options, after forfeitures and
cancellations, granted during the three months ended December 30, 2007 and December 31, 2006
represented 1.4% and 1.2%, respectively, of outstanding shares as of the beginning of each fiscal
period. Total stock options granted during the three months ended December 30, 2007 and December
31, 2006 represented 1.5% and 1.3%, respectively, of outstanding shares as of the end of each
fiscal period.
Future Accounting Requirements. In September 2006, the FASB issued FASB Statement No. 157 (FAS
157), Fair Value Measurements, which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about assets and liabilities measured at fair value in the
financial statements. FAS 157 does not require any new fair value measurements, but applies to
other accounting pronouncements that require or permit fair value measurements. In February 2007,
the FASB issued FASB Statement No. 159 (FAS 159), The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115, which provides companies
the irrevocable option to measure many financial assets and liabilities at fair value with the
changes in fair value recognized in earnings resulting in an opportunity to mitigate volatility in
earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The accounting provisions of FAS 157 and FAS 159 will be
effective for the Companys fiscal 2009 beginning September 29, 2008. The Company is in the process
of determining the effects, if any, the adoption of FAS 157 and FAS 159 will have on its
consolidated financial statements.
Note 2 Composition of Certain Financial Statement Items
Marketable Securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Noncurrent |
|
|
|
December 30, |
|
|
September 30, |
|
|
December 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
155 |
|
|
$ |
58 |
|
|
$ |
|
|
|
$ |
|
|
Government-sponsored enterprise
securities |
|
|
93 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
Foreign government bonds |
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
|
2,599 |
|
|
|
2,939 |
|
|
|
34 |
|
|
|
21 |
|
Mortgage- and asset-backed securities |
|
|
871 |
|
|
|
573 |
|
|
|
|
|
|
|
|
|
Non-investment grade debt securities |
|
|
19 |
|
|
|
19 |
|
|
|
1,840 |
|
|
|
1,812 |
|
Equity securities |
|
|
209 |
|
|
|
203 |
|
|
|
1,008 |
|
|
|
1,316 |
|
Equity mutual funds and exchange
traded funds |
|
|
|
|
|
|
|
|
|
|
1,383 |
|
|
|
1,871 |
|
Debt mutual funds |
|
|
149 |
|
|
|
151 |
|
|
|
|
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,100 |
|
|
$ |
4,170 |
|
|
$ |
4,265 |
|
|
$ |
5,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 30, 2007 and September 30, 2007, marketable securities included $277 million and $411
million, respectively, of securities that were loaned under the Companys securities lending
program. At December 30, 2007, marketable securities included $273 million of corporate bonds and
notes and mortgage- and asset-backed securities that were hybrid financial instruments measured at
fair value with changes recognized in earnings; there were none at September 30, 2007. At December
30, 2007 and September 30, 2007, unrealized gains on marketable securities were $343 million
and $510 million, respectively, and unrealized losses were $133 million and $89 million,
respectively. At January 18, 2008, unrealized gains were $220 million, and unrealized
losses were $235 million.
8
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property, Plant and Equipment.
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
Land |
|
$ |
124 |
|
|
$ |
124 |
|
Buildings and improvements |
|
|
968 |
|
|
|
954 |
|
Computer equipment |
|
|
819 |
|
|
|
800 |
|
Machinery and equipment |
|
|
1,052 |
|
|
|
999 |
|
Furniture and office equipment |
|
|
50 |
|
|
|
48 |
|
Leasehold improvements |
|
|
207 |
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
3,220 |
|
|
|
3,130 |
|
Less accumulated depreciation
and amortization |
|
|
(1,426 |
) |
|
|
(1,342 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,794 |
|
|
$ |
1,788 |
|
|
|
|
|
|
|
|
The net book values of property under capital leases included in buildings and improvements
totaled $92 million and $91 million at December 30, 2007 and September 30, 2007, respectively.
Capital lease additions were $6 million and $8 million during the three months ended December 30,
2007 and December 31, 2006, respectively.
Intangible Assets. Net technology-based intangible assets, which are included in other assets,
increased to $453 million at December 30, 2007 from $405 million at September 30, 2007. The
increase in technology-based intangible assets resulted primarily from business acquisitions during
the three months ended December 30, 2007 (Note 8). The weighted-average amortization period for
technology-based intangible assets decreased to 11 years at December 30, 2007 from 12 years at
September 30, 2007.
Note 3 Investment Income, Net
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Interest and dividend income |
|
$ |
153 |
|
|
$ |
143 |
|
Interest expense |
|
|
(7 |
) |
|
|
(2 |
) |
Net realized gains on marketable securities |
|
|
82 |
|
|
|
64 |
|
Other-than-temporary losses on marketable securities |
|
|
(57 |
) |
|
|
(1 |
) |
Gains (losses) on derivative instruments |
|
|
2 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
$ |
173 |
|
|
$ |
203 |
|
|
|
|
|
|
|
|
Note 4 Income Taxes
The Company currently estimates its annual effective income tax rate to be approximately 17%
for fiscal 2008, compared to the 9% effective income tax rate in fiscal 2007. The effective tax
rate for the first quarter of fiscal 2008 was slightly higher than the estimated annual effective
tax rate for fiscal 2008 due to the effect of discrete items, primarily the revaluation of deferred
tax assets to reflect changes in the blended state tax rate. The estimated annual effective tax
rate for fiscal 2008 is higher than the annual effective tax rate for fiscal 2007 primarily due to
the impacts of prior year audits completed and the retroactive extension of the federal research
and development tax credit during fiscal 2007.
The estimated annual effective tax rate for fiscal 2008 is 18% lower than the United States
federal statutory rate primarily due to benefits of approximately 22% related to foreign earnings
taxed at less than the United States federal rate and 1% related to research and development tax
credits, partially offset by state taxes of approximately 5%. The prior fiscal year rate was lower
than the United States federal statutory rate primarily due to benefits related to foreign earnings
taxed at less than the United States federal rate, the impact of tax audits completed during the
year and the generation of research and development credits, partially offset by state taxes.
On October 1, 2007, the Company adopted FIN 48, which prescribes a comprehensive model for the
financial statement recognition, measurement, classification and disclosure of uncertain tax
positions. In the first step of the
9
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
two-step
process prescribed in the interpretation, the Company evaluates the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. In the second step, the
Company measures the tax benefit as the largest amount that is more than 50% likely of being
realized upon settlement. As a result of the adoption, the Company increased its liabilities
related to uncertain tax positions by $2 million and accounted for the cumulative effect of this
change as a decrease to retained earnings. The Company historically classified such liabilities as
reductions to deferred tax assets or as current income taxes payable. Upon adoption, the Company
reclassified $174 million in unrecognized tax benefits for which the Company does not anticipate
payment or receipt of cash within one year to noncurrent income taxes
payable. The total amount of gross unrecognized tax benefits as
of the date of adoption of FIN 48 was $224 million, of which $159 million would affect the
effective tax rate if recognized.
The Companys policy of including interest and penalties related to income taxes, including
unrecognized tax benefits, within the provision for income taxes did not change as a result of
implementing FIN 48. As of the date of adoption, the amounts recognized in income tax expense and
income taxes payable for interest and penalties relating to unrecognized tax benefits were nominal.
The Company files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. As of October 1, 2007, the Company is no longer subject to U.S. federal
examinations by taxing authorities for years prior to fiscal 2004. The Internal Revenue Service is
currently conducting an examination of the Companys U.S. income tax returns for fiscal 2005 and
2006, which is anticipated to be completed by August 2009. The Company is subject to examination by
the California Franchise Tax Board for fiscal 2003 through 2006. The Company is also subject to
income taxes in many state and local taxing jurisdictions in the U.S. and around the world, many of
which are open to tax examinations for periods after fiscal 2002. Although the timing and ultimate
resolution of audits is uncertain, the Company does not believe it is reasonably possible that the
total amounts of unrecognized tax benefits will materially change in the next 12 months.
The Company has not provided United States income taxes nor foreign withholding taxes on a
cumulative total of approximately $5.1 billion of undistributed earnings of certain non-United
States subsidiaries indefinitely invested outside the United States. Should the Company decide to
repatriate foreign earnings, the Company would have to adjust the income tax provision in the
period management determined that the earnings will no longer be indefinitely invested outside the
United States.
The Company believes, more likely than not, that it will have sufficient taxable income after
share-based related deductions to utilize the majority of its deferred tax assets. As of December
30, 2007, the Company has provided a valuation allowance of $6 million related to previously
incurred capital losses. This valuation allowance reflects the uncertainty surrounding the
Companys ability to generate sufficient capital gains to utilize all capital losses. In addition,
the Company has provided a valuation allowance of $14 million related to foreign net operating loss
carryforwards that are expected to expire unutilized. Deferred tax assets, net of valuation
allowance, increased by approximately $187 million from September 30, 2007 to December 30, 2007,
primarily due to the adoption of FIN 48, changes in unrealized marketable securities gains and
losses and tax benefits from share-based compensation expense, partially offset by the use of tax
credits as a result of continued profitable operations.
Note 5 Stockholders Equity
Changes in stockholders equity for the three months ended December 30, 2007 were as follows
(in millions):
10
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
Balance at September 30, 2007 |
|
$ |
15,835 |
|
Net income |
|
|
767 |
|
Other comprehensive loss |
|
|
(103 |
) |
Repurchase of common stock |
|
|
(899 |
) |
Net proceeds from the issuance of common stock |
|
|
69 |
|
Share-based compensation |
|
|
124 |
|
Tax benefits from exercise of stock options |
|
|
45 |
|
Value of
stock options exchanged for acquisitions |
|
|
2 |
|
Dividends |
|
|
(228 |
) |
Cumulative effect of adopting FIN 48 |
|
|
(2 |
) |
|
|
|
|
Balance at December 30, 2007 |
|
$ |
15,610 |
|
|
|
|
|
Stock Repurchase Program. On May 22, 2007, the Company announced that it had been authorized
to repurchase up to $3.0 billion of the Companys common stock. The stock repurchase program has no
expiration date. In connection with the Companys stock repurchase program, the Company sold a put
option on its own stock during fiscal 2007, which was exercised during the three months ended
December 30, 2007 requiring the Company to repurchase and retire 2,500,000 shares of its common
stock for approximately $95 million (net of the put option premium received). During the three
months ended December 30, 2007, the Company repurchased and retired 22,389,000 shares of the
Companys common stock for $894 million (net of the premium
received related to the put option that was
exercised). At December 30, 2007, the Company had one outstanding put option that may enable the
holder, in March 2008, to sell 2,500,000 shares of the Companys common stock to the Company for
approximately $94 million (net of the put option premium received), and the recorded value of the
put option liability was $7 million at December 30, 2007. At December 30, 2007, approximately $670
million remained authorized for repurchase under the stock repurchase program, net of the put
option outstanding. Since December 30, 2007, the Company has repurchased and retired 17,727,000
shares of the Companys common stock for $668 million.
Dividends. Cash dividends announced in the three months ended December 30, 2007 and December
31, 2006 were $0.14 and $0.12 per share, respectively. During the three months ended December 30,
2007 and December 31, 2006, dividends charged to retained earnings were $228 million and $198
million, respectively. On January 16, 2008, the Company announced a cash dividend of $0.14 per
share on the Companys common stock, payable on March 28, 2008 to stockholders of record as of
February 29, 2008, which will be recorded in the second fiscal quarter.
Note 6 Commitments and Contingencies
Litigation. Broadcom Corporation v. QUALCOMM Incorporated: On May 18, 2005, Broadcom filed
two actions in the United States District Court for the Central District of California against the
Company alleging infringement of ten patents and seeking monetary damages and injunctive relief
based thereon. On the same date, Broadcom also filed a complaint in the United States International
Trade Commission (ITC) alleging infringement of five of the same patents at issue in the Central
District Court cases seeking a determination and relief under Section 337 of the Tariff Act of
1930. On July 1, 2005, Broadcom filed an action in the United States District Court for the
District of New Jersey against the Company alleging violations of state and federal antitrust and
unfair competition laws as well as common law claims, generally relating to licensing and chip
sales activities, seeking monetary damages and injunctive relief based thereon. On September 1,
2006, the New Jersey District Court dismissed the complaint; Broadcom appealed. On September 4,
2007, the Court of Appeals for the Third Circuit reinstated two of the eight federal claims and
five pendant state claims in Broadcoms complaint and affirmed the dismissal of the remaining
counts. On November 2, 2007, Broadcom filed an amended complaint in the New Jersey case, adding the
allegations from a state court case in California that had been stayed, as discussed below, and a
federal antitrust claim based on the California allegations. Two of the Broadcom patent claims
filed in the other Central District patent action (which is stayed pending completion of the ITC
action) have been dismissed by agreement of the parties. Trial was held in May 2007 in one of the
remaining Central District Court patent actions, and on May 29, 2007, the jury rendered a verdict
finding willful infringement of three patents and awarding past damages in the approximate amount
of $20 million, which has been expensed pending appeals. On December 31, 2007, the Court issued an
order enjoining the Company from making, using, selling, shipping, supporting or marketing products
that were found to infringe on Broadcoms patents, subject to a specified limited license through
January 2009 on two of the three patents and with respect to the third patent, a limited license as
to one set of
11
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
products. The immediately enjoined products are those WCDMA products that relate to patent
number 6,847,686 (the 686 patent). With respect to EVDO
products involving the 686 patent (as well
as products relating to the two remaining patents), the judges
order provides for a permanent injunction, but stays the effect of that injunction until January 31, 2009,
with respect to companies that purchased these
enjoined products as of May 29, 2007. The stay is subject to certain conditions, including the Companys
payment of ongoing royalties. The Company has filed a motion with the District Court to stay the
order pending appeal, as well as a motion to clarify certain aspects of the order. These motions
will be heard on January 28, 2008.
On February 14, 2006, an ITC hearing also commenced as to three patents alleged by Broadcom to
be infringed by the Company. On October 10, 2006, the Administrative Law Judge (ALJ) issued an
initial determination in which he recommended against any downstream remedies and found no
infringement by the Company on two of the three remaining patents and most of the asserted claims
of the third patent. The ALJ did find infringement on some claims of one patent. The ALJ did not
recommend excluding chips accused by Broadcom but, instead, recommended a limited exclusion order
directed only to chips that are already programmed with a specific software module and recommended
a related cease and desist order. The Commission adopted the ALJs initial determination on
violation and, on June 7, 2007, issued a cease and desist order and an exclusion order directed at
chips programmed with specific software and certain downstream products first imported after the
date of the exclusion order. The Federal Circuit has issued stays of the exclusion order with
respect to the downstream products of all of the Companys customers that requested the stay. The
Company is appealing both the infringement finding and the cease and desist order and the exclusion
order to the United States Court of Appeal for the Federal Circuit, and Broadcom is appealing
certain rulings of the ALJ. The Company filed its opening brief in the Federal Circuit on November
1, 2007. On November 9, 2007, Broadcom filed an enforcement complaint in the ITC, alleging
violations of the ITCs Cease and Desist Order by the Company. The ITC instituted formal
enforcement proceedings and referred the matter to the original ALJ who has scheduled a hearing on
the matter commencing on April 22, 2008. The target date for completion of the investigation is
November 28, 2008. On April 13, 2007, Broadcom filed a new complaint in California state court
against the Company alleging unfair competition, breach of contract and fraud, and seeking
injunctive and monetary relief. On October 5, 2007, the Court ordered the case stayed pending
resolution of the New Jersey case, referenced above.
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
high-end multimedia processing, and seeking monetary damages and injunctive relief based thereon.
In January 2007, a jury rendered a verdict finding the patents valid but not infringed. In a
subsequent ruling, the trial judge held that the Company was not guilty of inequitable conduct
before the Patent Office but the Companys actions in a video-encoding standards development
organization amounted to a waiver of the right to enforce the patents under any circumstances. The
Court also ordered QUALCOMM to pay Broadcoms attorneys fees and costs for the case. QUALCOMM and
Broadcom have each filed notices of appeal. On December 13, 2007, the Company filed its opening
brief with the Court of Appeals for the Federal Circuit. On January 7, 2008, the Magistrate Judge
considering Broadcoms motions for sanctions against the Company for discovery violations issued an
Order sanctioning the Company and eight of its retained outside attorneys for those discovery
violations. The Magistrate Judge referred the eight outside attorneys to the California State Bar
for an investigation into possible ethics violations and ordered the Company to participate in a
process to create a model discovery protocol. The Magistrate Judge reaffirmed the District Courts
previous award of Broadcoms attorneys fees.
Actions by the Company and its subsidiaries against Nokia Corporation and/or Nokia Inc.: On
November 4, 2005, the Company, along with its wholly-owned subsidiary, SnapTrack, filed an action
in the United States District Court for the Southern District of California against Nokia alleging
infringement of eleven QUALCOMM patents and one SnapTrack patent relating to GSM/GPRS/EDGE and
position location and seeking monetary damages and injunctive relief. The case has been stayed
pending resolution of the ITC case referred to below. On May 24, 2006, the Company filed an action
in the Chancery Division of the High Court of Justice for England and Wales against Nokia alleging
infringement of two QUALCOMM patents relating to GSM/GPRS/EDGE, seeking monetary damages and
injunctive relief. The technical issues in the case were tried in December 2007 and are awaiting
the decision of the Court. On June 9, 2006, the Company filed a complaint with the ITC against
Nokia alleging importation of products that infringe six QUALCOMM patents relating to power
control, video encoding and decoding, and power conservation mode technologies and seeking an
exclusionary order and a cease and desist order. On July 7, 2006,
12
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the ITC commenced an investigation, and the Company subsequently withdrew three of the patents
from the proceedings. The trial was completed in September 2007, and the ITC ALJ issued an Initial
Determination on December 12, 2007 of no violation by Nokia. Both parties have filed petitions for
Commission review of the Initial Determination. The target date for issuance of the Final
Determination by the Commission is expected on April 14, 2008. On August 9, 2006, the Company filed
an action in the District Court of Dusseldorf, Federal Republic of Germany, against Nokia alleging
infringement of two QUALCOMM patents relating to GSM/GPRS/EDGE, seeking monetary damages and
injunctive relief. On October 9, 2006, the Company filed an action in the High Court of Paris,
France against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE, seeking
monetary damages and injunctive relief. On October 9, 2006, the Company filed an action in the
Milan Court, Italy against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE,
seeking monetary damages and injunctive relief. In February 2007, the Company initiated proceedings
in the Peoples Republic of China against Nokia for infringement of three patents by Nokias
GSM/GPRS/EDGE products. On April 2, 2007, the Company filed suit against Nokia in the Eastern
District of Texas, Marshall Division for infringement of three patents and in the Western District of
Wisconsin for infringement of two patents. These cases are directed to Nokia GSM/GPRS/EDGE
cellular phones. In response, Nokia filed counterclaims alleging infringement by the Company of six
Nokia patents, two of which Nokia also asserted against the Companys subsidiary, MediaFLO USA,
Inc. Trial in the Texas case is set for August 3, 2009, and discovery began in January 2008. Nokia
has filed petitions with the United States Patent & Trademark Office (USPTO) seeking
reexamination of the three patents at issue in the Texas case. In response, the USPTO has initiated
reexamination proceedings but to date has not issued any office actions. On October 17, 2007, the
Company and MediaFLO USA, Inc. filed a motion to stay Nokias infringement counterclaims pending
the arbitration proceeding filed on April 5, 2007, discussed below. On November 16, 2007, Nokia
filed a motion to stay the Companys infringement claims pending the reexamination proceedings
identified above. On July 11, 2007, the Wisconsin Court issued an order transferring that case to
the United States District Court for the Southern District of California and the parties have
consolidated the matter with the San Diego matter referenced above and stipulated to a stay of the
proceedings pending final resolution of the ITC matter referenced above. On April 5, 2007, the
Company filed an arbitration demand with the American Arbitration Association requesting a ruling
that, among other things, Nokias continued use of the Companys patents in Nokias CDMA cellular
devices (including WCDMA) after April 9, 2007 constitutes an election by Nokia to extend its
license under the parties existing agreement. On July 9, 2007, the Company filed an amended demand
for arbitration, alleging that Nokias institution of certain patent infringement proceedings
against the Company was a material breach of the license agreement between the parties. An
arbitration panel has been selected by the parties, and the arbitrators have issued an order
scheduling the first phase of the arbitration for July 2008.
Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated: On August 9, 2006, Nokia
Corporation and Nokia Inc. filed a complaint in Delaware Chancery Court seeking declaratory and
injunctive relief relating to alleged commitments made by the Company to wireless industry
standards setting organizations. The Company has moved to dismiss the complaint. On April 12, 2007
and June 5, 2007, the Company filed counterclaims seeking declarations that, among other things,
the Companys 2001 license agreement with Nokia fulfilled and/or superseded any ostensible
obligations to offer or grant patent licenses to Nokia allegedly arising from the Companys
participation in certain standards setting organizations. Both parties have moved to dismiss the
others complaints, but the parties have also discussed and are negotiating, at the Courts
suggestion, an agreement in which the arbitration filed by the Company would be consolidated into
the Delaware case discussed above. In March 2007, Nokia filed actions in Germany and the
Netherlands alleging that certain of the Companys patents are exhausted with regard to Nokias
products placed on the European market that contain chipsets supplied to Nokia by Texas
Instruments. On October 23, 2007, the German court dismissed Nokias claims. Nokia has filed an
appeal. On November 14, 2007, the Dutch court dismissed Nokias claims. On August 16, 2007, Nokia
Corporation and Nokia Inc. filed a complaint with the United States International Trade Commission
(ITC) alleging importation of products that infringe five Nokia patents and seeking an exclusionary
order and a cease and desist order. The ITC instituted an investigation on September 17, 2007. The
Company filed a motion to terminate the investigation pending resolution of the arbitration
proceeding instituted by the Company on April 5, 2007. On October 18, 2007, the ALJ issued an order
recommending the Companys motion be granted. On November 21, 2007, the ITC announced that it would
not review the ALJs determination, thus rendering that determination final.
European Commission Complaint: On October 28, 2005, it was reported that six companies
(Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the
European Commission, alleging that the Company violated European Union competition law in its WCDMA
licensing practices. The Company has received
13
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the complaints and has submitted replies to the allegations, as well as documents and other
information requested by the European Commission. On October 1, 2007, the European Commission
announced that it was initiating a proceeding, though it has not decided to issue a Statement of
Objections, and it has not made any conclusions as to the merits of the complaints.
Tessera, Inc. v. QUALCOMM Incorporated: On April 17, 2007, Tessera, Inc. filed a patent
infringement lawsuit in the United States District Court for the Eastern Division of Texas and a
complaint with the United States ITC pursuant to Section 337 of the Tariff Act of 1930 against the
Company and other companies, alleging infringement of two patents relating to semiconductor
packaging structures and seeking monetary damages and injunctive and other relief based hereon. The
District Court suit for damages is stayed pending resolution of the ITC proceeding. The ITC
instituted the investigation on May 15, 2007. On July 11, 2007, the ITC issued an order that set
August 21, 2008 as the target date for completion of the investigation. The hearing is scheduled to
begin on February 25, 2008.
Other: The Company has been named, along with many other manufacturers of wireless phones,
wireless operators and industry-related organizations, as a defendant in several purported class
action lawsuits, and individually filed actions pending in Pennsylvania and Washington D.C.,
seeking monetary damages arising out of its sale of cellular phones. The courts that have reviewed
similar claims against other companies to date have held that there was insufficient scientific
basis for the plaintiffs claims in those cases.
It has been reported that two U.S. companies (Texas Instruments and Broadcom) and two South
Korean companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korea
Fair Trade Commission alleging that the Companys business practices are, in some way, a violation
of South Korean anti-trust regulations. To date, the Company has not received the complaints but
has submitted information and documents to the Korea Fair Trade Commission.
The Japan Fair Trade Commission has also received unspecified complaints alleging the
Companys business practices are, in some way, a violation of Japanese law. The Company has not
received the complaints but has submitted information and documents to the Japan Fair Trade
Commission.
Although there can be no assurance that unfavorable outcomes in any of the foregoing matters
would not have a material adverse effect on the Companys operating results, liquidity or financial
position, the Company believes the claims made by other parties are without merit and will
vigorously defend the actions. Other than amounts relating to the Broadcom Corporation v. QUALCOMM
Incorporated and QUALCOMM Incorporated v. Broadcom Corporation matters, the Company has not
recorded any accrual for contingent liabilities associated with the other legal proceedings
described above, based on the Companys belief that additional liabilities, while possible, are not
probable. Further, any possible range of loss cannot be estimated at this time. The Company is
engaged in numerous other legal actions arising in the ordinary course of its business and believes
that the ultimate outcome of these actions will not have a material adverse effect on its operating
results, liquidity or financial position.
Purchase Obligations. The Company has agreements with suppliers and other parties to purchase
inventory, other goods and services and long-lived assets. Noncancelable obligations under these
agreements as of December 30, 2007 for the remainder of fiscal 2008 and for each of the subsequent
four years from fiscal 2009 through 2012 were approximately $936 million, $125 million, $80
million, $59 million and $32 million, respectively, and $8 million thereafter. Of these amounts,
for the remainder of fiscal 2008 and for fiscal 2009, commitments to purchase integrated circuit
product inventories comprised $688 million and $28 million, respectively.
Leases. The Company leases certain of its facilities and equipment under noncancelable
operating leases, with terms ranging from less than one year to 30 years and with provisions in
certain leases for cost-of-living increases. The Company leases certain property under capital
lease agreements that expire at various dates through 2039. Capital lease obligations are included
in other liabilities. The future minimum lease payments for all capital leases and operating leases
as of December 30, 2007 were as follows (in millions):
14
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
|
|
|
Leases |
|
|
Leases |
|
|
Total |
|
Remainder of fiscal 2008 |
|
$ |
5 |
|
|
$ |
54 |
|
|
$ |
59 |
|
2009 |
|
|
6 |
|
|
|
67 |
|
|
|
73 |
|
2010 |
|
|
6 |
|
|
|
54 |
|
|
|
60 |
|
2011 |
|
|
6 |
|
|
|
38 |
|
|
|
44 |
|
2012 |
|
|
7 |
|
|
|
30 |
|
|
|
37 |
|
Thereafter |
|
|
183 |
|
|
|
163 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
213 |
|
|
$ |
406 |
|
|
$ |
619 |
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Amounts representing interest |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
97 |
|
|
|
|
|
|
|
|
|
Deduct: Current portion of capital lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Segment Information
The Company is organized on the basis of products and services. The Company aggregates four of
its divisions into the Qualcomm Wireless & Internet segment. Reportable segments are as follows:
|
|
|
Qualcomm CDMA Technologies (QCT) develops and supplies integrated circuits and
system software for wireless voice and data communications, multimedia functions and
global positioning system products based on our CDMA technology and other technologies; |
|
|
|
|
Qualcomm Technology Licensing (QTL) grants licenses to use portions of the
Companys intellectual property portfolio, which includes certain patent rights
essential to and/or useful in the manufacture and sale of certain wireless products,
including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD
and/or OFDMA standards and their derivatives, and collects license fees and royalties in
partial consideration for such licenses; |
|
|
|
|
Qualcomm Wireless & Internet (QWI) comprised of: |
|
|
|
Qualcomm Internet Services (QIS) provides technology to support
and accelerate the convergence of the wireless data market, including its BREW
and QChat products and services; |
|
|
|
|
Qualcomm Government Technologies (QGOV) provides development,
hardware and analytical expertise to United States government agencies involving
wireless communications technologies; and |
|
|
|
|
Qualcomm Enterprise Services (QES) provides satellite and
terrestrial-based two-way data messaging, position reporting and wireless
application services to transportation companies, private fleets, construction
equipment fleets and other enterprise companies. QES also sells products that
operate on the Globalstar low-Earth-orbit satellite-based telecommunications
system and provides related services. |
|
|
|
|
Firethorn builds and manages software applications that enable
financial institutions and wireless operators to offer mobile commerce
capabilities. |
|
|
|
Qualcomm Strategic Initiatives (QSI) manages the Companys strategic investment
activities, including MediaFLO USA, Inc. (MediaFLO USA), the Companys wholly-owned
wireless multimedia operator subsidiary. QSI also makes strategic investments to promote
the worldwide adoption of CDMA-based products and services. |
The Company evaluates the performance of its segments based on earnings (loss) before income
taxes (EBT). EBT includes the allocation of certain corporate expenses to the segments, including
depreciation and amortization expense related to unallocated corporate assets. Certain income and
charges are not allocated to segments in the Companys management reports because they are not
considered in evaluating the segments operating performance. The table below presents revenues and
EBT for reportable segments (in millions):
15
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling |
|
|
|
|
QCT |
|
QTL |
|
QWI |
|
QSI |
|
Items |
|
Total |
For the three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,574 |
|
|
$ |
650 |
|
|
$ |
210 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
2,440 |
|
EBT |
|
|
470 |
|
|
|
541 |
|
|
|
24 |
|
|
|
(55 |
) |
|
|
(50 |
) |
|
|
930 |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,230 |
|
|
$ |
600 |
|
|
$ |
188 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
2,019 |
|
EBT |
|
|
316 |
|
|
|
498 |
|
|
|
20 |
|
|
|
(43 |
) |
|
|
(12 |
) |
|
|
779 |
|
Reconciling items in the previous table were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
|
|
|
|
|
|
|
Elimination of intersegment revenue |
|
$ |
(3 |
) |
|
$ |
(7 |
) |
Other nonreportable segments |
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Reconciling items |
|
$ |
5 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) before income taxes |
|
|
|
|
|
|
|
|
Unallocated research and development expenses |
|
$ |
(76 |
) |
|
$ |
(82 |
) |
Unallocated selling, general and administrative expenses |
|
|
(82 |
) |
|
|
(80 |
) |
Unallocated cost of equipment and services revenues |
|
|
(9 |
) |
|
|
(10 |
) |
Unallocated investment income, net |
|
|
161 |
|
|
|
199 |
|
Other nonreportable segments |
|
|
(43 |
) |
|
|
(35 |
) |
Intracompany eliminations |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
Reconciling items |
|
$ |
(50 |
) |
|
$ |
(12 |
) |
|
|
|
|
|
|
|
During the three months ended December 30, 2007 and December 31, 2006, unallocated research
and development expenses included $57 million and $58 million, respectively, and unallocated
selling, general and administrative expenses included $58 million and $63 million, respectively, of
share-based compensation expense. Unallocated cost of equipment and services revenues was comprised
entirely of share-based compensation expense.
Revenues from external customers and intersegment revenues were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCT |
|
QTL |
|
QWI |
|
QSI |
For the three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,573 |
|
|
$ |
650 |
|
|
$ |
208 |
|
|
$ |
1 |
|
Intersegment revenues |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,225 |
|
|
$ |
600 |
|
|
$ |
186 |
|
|
$ |
|
|
Intersegment revenues |
|
|
5 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Intersegment revenues are based on prevailing market rates for substantially similar products
and services or an approximation thereof, and the purchasing segment records the cost of revenues
(or inventory write-downs) at the selling segments original cost. The elimination of the selling
segments gross margin is included with other intersegment eliminations in reconciling items.
Segment assets are comprised of accounts receivable and inventories for QCT, QTL and QWI. The
QSI segment assets include certain marketable securities, notes receivable, wireless licenses,
other investments and all assets of QSIs consolidated subsidiary, MediaFLO USA, including
property, plant and equipment. QSIs assets related to the MediaFLO USA business totaled $485
million and $457 million at December 30, 2007 and September 30, 2007, respectively. Reconciling
items for total assets included $216 million and $215 million at December 30, 2007 and September
30, 2007, respectively, of goodwill and other assets related to the Qualcomm MEMS Technologies
16
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
division, a nonreportable segment developing display technology for mobile devices and other
applications. Total segment assets differ from total assets on a consolidated basis as a result of
unallocated corporate assets primarily comprised of cash, cash equivalents, certain marketable
securities, property, plant and equipment, deferred tax assets, goodwill and certain intangible and
other assets of nonreportable segments. Segment assets and reconciling items were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
QCT |
|
$ |
957 |
|
|
$ |
921 |
|
QTL |
|
|
13 |
|
|
|
29 |
|
QWI |
|
|
202 |
|
|
|
200 |
|
QSI |
|
|
914 |
|
|
|
896 |
|
Reconciling items |
|
|
16,262 |
|
|
|
16,449 |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
18,348 |
|
|
$ |
18,495 |
|
|
|
|
|
|
|
|
Note 8 Acquisitions
During the three months ended December 30, 2007, the Company acquired three businesses for total cash
consideration of $226 million. Approximately $3 million in consideration payable in cash through
June 2009 was held back as security for certain indemnification obligations. The Company is in the
process of finalizing the accounting for the acquisitions and does not anticipate material
adjustments to the preliminary purchase price allocations. Goodwill recognized in these
transactions, of which $151 million is expected to be deductible for tax purposes, was assigned to
the QWI and QCT segments in the amounts of $151 million and $20 million, respectively.
Technology-based intangible assets recognized in the amount of $58 million are being amortized on a
straight-line basis over a weighted-average amortization period of six years. The condensed
consolidated financial statements include the operating results of these businesses from their
respective dates of acquisition. Pro forma results of operations have not been presented because
the effects of the acquisitions were not material.
17
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the condensed consolidated financial
statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the
audited consolidated financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations for the year ended September 30, 2007
contained in our 2007 Annual Report on Form 10-K.
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 and elsewhere in this Quarterly Report.
Overview
Recent Developments
Revenues for the first quarter of fiscal 2008 were $2.4 billion, with net income of $767
million. The following recent developments occurred with respect to key elements of our business or
our industry during the first quarter of fiscal 2008:
|
|
|
Worldwide wireless subscribers grew by more than 4% to reach approximately 3.3
billion.(1) |
|
|
|
|
CDMA subscribers, including both 2G (cdmaOne) and 3G (CDMA2000 1X, 1xEV-DO and
WCDMA), are approximately 17% of total worldwide wireless subscribers to date.
(1) |
|
|
|
|
3G subscribers (all CDMA-based) grew to approximately 560 million worldwide by
December 30, 2007, including approximately 385 million CDMA2000 1X/1xEV-DO subscribers
and approximately 175 million WCDMA/HSPA subscribers. (1) |
18
|
|
|
CDMA-based device shipments totaled approximately 95 million units, an increase of
28% over the 74 million units shipped in the year ago quarter. (2) (4) |
|
|
|
|
CDMA-based device shipments grew faster than total worldwide devices and represent an
estimated 33% of the total (287 million) worldwide device shipments, compared to 29% of
the total (254 million) shipments in the year ago quarter. (2) (3) |
|
|
|
|
The average selling price of CDMA-based devices was estimated to be approximately
$211, up 1% from the year ago quarter. (2) (4) |
|
|
|
|
We shipped approximately 79 million Mobile Station Modem (MSM) integrated circuits
for CDMA-based wireless devices and data modules, an increase of 34%, compared to
approximately 59 million MSM integrated circuits in the year ago quarter. |
|
|
|
|
We continue to invest in new emerging technologies and services through acquisitions
and research and development. In the first quarter of fiscal 2008, we completed the
acquisition of Firethorn Holdings, LLC, a mobile commerce enabler, SoftMax Inc., a
developer of noise reduction technology for mobile devices, and Open Interface North
America, Inc., a developer of enabled Bluetooth software. |
|
|
|
|
We are engaged in multiple disputes with Nokia Corp., including arbitration over
Nokias obligation to pay royalties for the use of certain of our patents. As a result,
under generally accepted accounting principles, we are not recording royalty revenue
attributable to Nokias sales after April 9, 2007 until an arbitrator (or court) awards
damages or the disputes are otherwise resolved by agreement with Nokia, resulting in a
negative impact on royalty revenues reported by our QTL segment. We expect legal
activity in this area to remain high during 2008. |
|
|
|
|
We continue to be engaged in litigation with Broadcom Corporation in various forums.
On December 31, 2007, the Federal District Court in Santa Ana, California issued an
injunction as to certain of our products, while enjoining but mandating a limited
license with respect to other products. We continue the effort to design products to
avoid the claims of the patents found by the jury to infringe Broadcoms patents. We have already announced that we expect devices to be available before the end of the first calendar
quarter of 2008 that incorporate chipsets which do not include the accused function of the
6,847,686 patent. We
have filed a motion for stay and a motion asking that the judge clarify certain portions
of his ruling, and we will appeal the adverse findings in this case. |
|
|
|
(1) |
|
According to Wireless Intelligence, an independent source of wireless operator data. |
|
(2) |
|
First quarter of fiscal 2008 information was derived from reports provided by our
licensees/manufacturers during the quarter and our own estimates of unreported activity.
First quarter of fiscal 2007 information was derived from reports provided by our
licensees/manufacturers during the quarter. |
|
(3) |
|
Based on current reports by Strategy Analytics, a global research and consulting firm,
in their Global Handset Market Share Updates. |
|
(4) |
|
We perform periodic audits of the royalties payable by our licensees. As a result of
our audit process, we determined during the fourth quarter of fiscal 2007 that total
CDMA-based device shipments and average selling prices (ASPs) should be adjusted for
certain periods. Historical units and ASPs for the first quarter of fiscal 2007 have been
revised to reflect these adjustments. The adjustments related only to device shipments and
ASPs and did not impact the amount or timing of our revenue. |
Our Business and Operating Segments
We design, manufacture, have manufactured on our behalf 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 licensing and related services. Operating expenses primarily consist of
cost of equipment and services, research and development and selling, general and administrative
expenses.
We conduct business primarily through four reportable 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 CDMA-based integrated circuits and system software
for wireless voice and data communications, multimedia functions and global positioning system
products. QCTs integrated circuit products and system software are used in wireless devices,
particularly mobile phones, data cards and infrastructure equipment. The integrated circuits for
wireless devices include the Mobile Station Modem (MSM),
19
Radio Frequency (RF) and Power Management (PM) devices. These integrated circuits for wireless
devices and system software perform voice and data communication, multimedia and global positioning
functions, radio conversion between RF and baseband signals and power management. QCTs system
software enables the other device components to interface with the integrated circuit products and
is the foundation software enabling phone manufacturers to develop devices utilizing the
functionality within the integrated circuits. The infrastructure equipment integrated circuits and
system software perform the core baseband CDMA modem functionality in the wireless operators base
station equipment. In addition to the key components in a wireless system, QCT provides system
reference designs and development tools to assist in customizing wireless devices and user
interfaces, to integrate our products with components developed by others, and to test
interoperability with existing and planned networks. QCT revenues comprised 65% and 61% of total
consolidated revenues in the first quarter of fiscal 2008 and 2007, respectively.
QCT utilizes a fabless production business model, which means that we do not own or operate
foundries for the production of silicon wafers from which our integrated circuits are made. We rely
on independent third party suppliers to perform the manufacturing and assembly, and most of the
testing, of our integrated circuits. Our suppliers are also responsible for the procurement of most
of the raw materials used in the production of our integrated circuits. We employ both turnkey and
two-stage manufacturing business models to purchase our integrated circuits. Turnkey is when our
foundry suppliers are responsible for delivering fully assembled and tested integrated circuits.
Under the two-stage manufacturing business model, we purchase completed die directly from
semiconductor manufacturing foundries and contract directly with third party manufacturers for
back-end assembly and test services. We refer to this two-stage manufacturing business model as
Integrated Fabless Manufacturing (IFM).
QTL grants licenses to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of certain wireless
products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD,
GPRS/EDGE and/or OFDMA standards and their derivatives. QTL receives revenue from license fees as
well as ongoing royalties based on worldwide sales by licensees of products incorporating or using
our intellectual property. License fees are fixed amounts paid in one or more installments. Ongoing
royalties are generally based upon a percentage of the wholesale selling price of licensed
products, net of certain permissible deductions (e.g. certain shipping costs, packing costs, VAT,
etc.). QTL revenues comprised 27% and 30% of total consolidated revenues in the first quarter of
fiscal 2008 and 2007, respectively. The vast majority of such revenues have been generated through
our licensees sales of cdmaOne, CDMA2000 and WCDMA products.
QWI, which includes Qualcomm Enterprise Services (QES), Qualcomm Internet Services (QIS),
Qualcomm Government Technologies (QGOV) and Firethorn, generates revenues primarily through mobile
communication products and services, software and software development aimed at support and
delivery of wireless applications. QES sells equipment, software and services used by
transportation and other companies to connect wirelessly with their assets, products and workforce.
QES also sells products that operate on the Globalstar low-Earth-orbit satellite-based
telecommunications system and provides related services. Through December 2007, QES has shipped
approximately 1,229,000 terrestrial-based and satellite-based communications systems. QIS provides
BREW-based (Binary Runtime Environment for Wireless) products that include user interface and
content delivery and management products and services for the wireless industry. QIS also provides
QChat, which enables virtually instantaneous push-to-talk functionality on CDMA-based wireless
devices. The QGOV division provides development, hardware and analytical expertise involving
wireless communications technologies to United States government agencies. Firethorn builds and
manages software applications that enable financial institutions and wireless operators to offer
mobile commerce capabilities. QWI revenues comprised 9% of total consolidated revenues in the first
quarter of both fiscal 2008 and 2007.
QSI manages the Companys strategic investment activities, including MediaFLO USA, Inc.
(MediaFLO USA), the Companys wholly-owned wireless multimedia operator subsidiary. QSI also makes
strategic investments to promote the worldwide adoption of CDMA-based products and services. Our
strategy is to invest in CDMA-based operators, licensed device manufacturers and start-up companies
that we believe open new markets for CDMA technology, support the design and introduction of new
CDMA-based products or possess unique capabilities or technology. Our MediaFLO USA subsidiary
offers services over our nationwide multicasting network based on our MediaFLO MDS and FLO
technology. This network is utilized as a shared resource for wireless operators and their
customers in the United States. The commercial availability of the MediaFLO USA network and service
will
20
continue to be determined by our wireless operator partners. MediaFLO USAs network uses the
700 MHz spectrum for which we hold licenses nationwide. Additionally, MediaFLO USA has and will continue to
procure, aggregate and distribute content in service packages which we will make available on a
wholesale basis to our wireless operator customers (whether they operate on CDMA or GSM/WCDMA
networks) in the United States. Distribution, marketing, billing and customer relationships remain
functions that are provided by our wireless operator partners. As part of our strategic investment
activities, we intend to pursue various exit strategies at some point in the future, which may
include distribution of our ownership interest in MediaFLO USA to our stockholders in a spin-off
transaction.
Nonreportable segments include: the Qualcomm MEMS Technologies division, which is developing
an interferometric modulator (IMOD) display technology based on micro-electro-mechanical-system
(MEMS) structure combined with thin film optics; the Qualcomm Flarion Technologies division, which
is developing OFDM/OFDMA technologies; the MediaFLO Technologies division, which is developing our
MediaFLO MDS and FLO technology and markets MediaFLO for deployment outside of the United States;
and other product initiatives.
Looking Forward
The deployment of 3G networks (CDMA2000 and WCDMA) enables higher voice capacity and data
rates, thereby supporting more minutes of use and data intensive applications like multimedia. As a
result, we expect continued growth in demand for 3G products and services around the world. As we
look forward to the next several months, the following items are likely to have an impact on our
business:
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The deployment and upgrading of CDMA2000 networks is expected to continue. |
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More than 240 operators have launched CDMA2000 1X; (1) |
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More than 80 operators have deployed the higher data speeds of
1xEV-DO and more than 15 operators have deployed, and several more are preparing
to deploy EV-DO Revision A. (1) |
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GSM operators are expected to continue transitioning to WCDMA networks. |
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More than 195 GSM operators have migrated their networks to WCDMA; (2) |
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More than 165 operators have launched commercial HSDPA networks,
and more than 25 operators have launched commercial HSUPA networks.
(2) |
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We expect WCDMA device prices will continue to segment into high and low end due to
high volumes and vibrant competition in marketplaces around the world. As more operators
deploy the higher data speeds of HSPA, we expect consumer demand for advanced 3G devices
to accelerate. |
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To meet growing demand for advanced 3G wireless devices and increased multimedia MSM
functionality, we intend to continue to invest significant resources toward the
development of multimedia products, software and services for the wireless industry.
However, we expect that a considerable portion of our research and development
initiatives in fiscal 2008 will not reach commercialization until several years in the
future. |
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We expect demand for low-end wireless devices to continue to grow and have developed
a family of Qualcomm Single Chip (QSC) products, which integrate the baseband, radio
frequency and power management functions into one chip, lowering component counts and
enabling faster time-to-market for our customers. While we continue to invest resources
aggressively to expand our QSC product family to address the low-end market more
effectively with CDMA-based products, we still face significant competition from
GSM-based products, particularly in emerging markets. |
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We will continue to invest in the evolution of CDMA and a broad range of other
technologies as part of our vision to enable a range of technologies, each optimized for
specific services, including the following products and technologies: |
21
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The continued evolution of CDMA-based technologies, including the
long-term roadmaps of 1xEV-DO and High Speed Packet Access (HSPA); |
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OFDM and OFDMA-based technologies; |
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Our BREW applications platform, content delivery services and user interfaces; |
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Our MediaFLO MDS and FLO technology for delivery of multimedia content; and |
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Our IMOD display technology. |
In addition to the foregoing business and market-based matters, the following items are likely
to have an impact on our business and results of operations over the next several months:
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We expect that we will continue to be involved in litigation, including our ongoing
disputes with Broadcom and Nokia, and to appear in front of administrative and
regulatory bodies, including the European Commission, the Korea Fair Trade Commission
and the Japan Fair Trade Commission to defend our business model and, in some cases, to
rebuff efforts by companies to gain competitive advantage or negotiating leverage. |
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We have been and will continue evaluating and providing reasonable assistance to our
customers. This includes, in some cases, certain levels of financial support to minimize
the impact of the litigation in which we are involved. |
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We will continue to devote resources to working with and educating all participants
in the wireless value chain as to the benefits of our business model in promoting a
highly competitive and innovative wireless market. However, we expect that certain
companies may continue to be dissatisfied with the need to pay reasonable royalties for
the use of our technology and not welcome the success of our business model in enabling
new, highly cost-effective competitors to their products. We expect that such companies
will continue to challenge our business model in various forums throughout the world. |
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(1) |
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According to public reports made available at www.cdg.org. |
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(2) |
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As reported by the Global mobile Suppliers Association, an international organization of
WCDMA and GSM (Global System for Mobile Communications) suppliers in their January 2008
reports. |
Further discussion of risks related to our business is presented in the Risk Factors included
in this Quarterly Report.
Revenue Concentrations
Revenues from customers in South Korea, China, Japan and the United States comprised 35%, 24%,
16% and 11%, respectively, of total consolidated revenues for the first three months of fiscal
2008, as compared to 29%, 23%, 17% and 13%, respectively, for the first three months of fiscal
2007. We distinguish revenues from external customers by geographic areas based on the location to
which our products, software or services are delivered and, for QTLs licensing and royalty
revenues, the invoiced addresses of our licensees. The increase in revenues from customers in South
Korea from 29% to 35% of total revenues is primarily attributable to increased shipments of
integrated circuits to CDMA device manufacturers with locations in South Korea and royalty revenue
from customers in South Korea. Combined revenues from customers in Japan and the United States
decreased as a percentage of total revenues, from 30% to 27%, primarily due to increased activity
by manufacturers with locations in South Korea.
Critical Accounting Policies and Estimates
Income Taxes. On October 1, 2007, we adopted the accounting provisions of FASB Interpretation
No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes. As a result of the adoption, we
increased our liabilities related to uncertain tax positions by $2 million and accounted for the cumulative effect
of this change as a decrease to retained earnings. See Notes to Condensed Consolidated Financial
Statements, Note 4 Income Taxes for additional information. As of December 30, 2007, our
liability for net unrecognized tax benefits was $194 million.
Our income tax returns are based on calculations and assumptions that are subject to
examination by the Internal Revenue Service and other tax authorities. In addition, the calculation
of our tax liabilities involves dealing with
22
uncertainties in the application of complex tax regulations. As a result of the implementation
of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process
prescribed in the interpretation. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon settlement. While we believe we have appropriate support for
the positions taken on our tax returns, we regularly assess the potential outcomes of these
examinations and any future examinations for the current or prior years in determining the adequacy
of our provision for income taxes. Although the timing and ultimate resolution of audits is
uncertain, we do not believe it is reasonably possible that the total amounts of unrecognized tax
benefits will materially change in the next 12 months.
First Quarter of Fiscal 2008 Compared to First Quarter of Fiscal 2007
Revenues. Total revenues for the first quarter of fiscal 2008 were $2.44 billion, compared to
$2.02 billion for the first quarter of fiscal 2007.
Revenues from sales of equipment and services for the first quarter of fiscal 2008 were $1.70
billion, compared to $1.34 billion for the first quarter of fiscal 2007. Revenues from sales of
integrated circuit products increased $339 million, resulting primarily from an increase of $296
million related to higher unit shipments, mostly consisting of MSM and accompanying RF and PM
integrated circuits, and an increase of $60 million related to the net effects of changes in
product mix and the average sales prices of such products.
Revenues from licensing and royalty fees for the first quarter of fiscal 2008 were $737
million, compared to $677 million for the first quarter of fiscal 2007. Revenues from licensing and
royalty fees increased primarily as a result of a $54 million increase in QTL royalties related to
an increase in sales of CDMA-based products by licensees, partially offset by the effect of Nokias
failure to report royalties on its sales after April 9, 2007.
Cost of Equipment and Services. Cost of equipment and services revenues for the first quarter
of fiscal 2008 was $783 million, compared to $634 million for the first quarter of fiscal 2007.
Cost of equipment and services revenues as a percentage of equipment and services revenues was 46%
for the first quarter of fiscal 2008, compared to 47% for the first quarter of fiscal 2007. The
improvement in margin percentage in the first quarter of fiscal 2008 compared to fiscal 2007 was
primarily attributable to an improvement in QCT gross margin, partially offset by the effect
related to the commencement of our MediaFLO services in March 2007. Cost of equipment and services
revenues in the first quarter of fiscal 2008 included $9 million in share-based compensation,
compared to $10 million in the first quarter of fiscal 2007. Cost of equipment and services
revenues as a percentage of equipment and services revenues may fluctuate in future quarters
depending on the mix of products sold and services provided, competitive pricing, new product
introduction costs and other factors.
Research and Development Expenses. For the first quarter of fiscal 2008, research and
development expenses were $511 million or 21% of revenues, compared to $440 million or 22% of
revenues for the first quarter of fiscal 2007. The dollar increase was primarily attributable to a
$63 million increase in costs related to integrated circuit products, next generation CDMA and
OFDMA technologies, the expansion of our intellectual property portfolio and other initiatives to
support the acceleration of advanced wireless products and services, including lower cost devices,
the integration of wireless with consumer electronics and computing, the convergence of multiband,
multimode, multinetwork products and technologies, third party operating systems and services
platforms. The technologies supporting these initiatives may include CDMA2000 1X, 1xEV-DO, EV-DO
Revision A, EV-DO Revision B, WCDMA (including GSM/GPRS/EDGE), HSDPA, HSUPA and OFDMA. The increase
in research and development expenses incurred also related to the development of our FLO
technology, MediaFLO MDS and IMOD display products using MEMS technology. Research and development
expenses for the first quarter of fiscal 2008 included share-based compensation of $57 million,
compared to $58 million in the first quarter of fiscal 2007.
Selling, General and Administrative Expenses. For the first quarter of fiscal 2008, selling,
general and administrative expenses were $389 million or 16% of revenues, compared to $369 million
or 18% of revenues for the first quarter of fiscal 2007. The dollar increase was primarily
attributable to a $32 million increase in employee related expenses, partially offset by a $15
million decrease in bad debt expense. Selling, general and administrative expenses for the first
quarter of fiscal 2008 included share-based compensation of $60 million, compared to $64 million in
the first quarter of fiscal 2007.
23
Net Investment Income. Net investment income was $173 million for the first quarter of fiscal
2008, compared to $203 million for the first quarter of fiscal 2007. The net decrease was primarily
comprised as follows (in millions):
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Three Months Ended |
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December 30, |
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December 31, |
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2007 |
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2006 |
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Change |
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Interest and dividend income: |
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Corporate and other segments |
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$ |
152 |
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$ |
142 |
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$ |
10 |
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QSI |
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1 |
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1 |
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Interest expense |
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(7 |
) |
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(2 |
) |
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(5 |
) |
Net realized gains on investments: |
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Corporate |
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71 |
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63 |
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8 |
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QSI |
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11 |
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1 |
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10 |
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Other-than-temporary losses on investments |
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(57 |
) |
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(1 |
) |
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(56 |
) |
Gains (losses) on derivative instruments |
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2 |
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(1 |
) |
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3 |
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$ |
173 |
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$ |
203 |
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$ |
(30 |
) |
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The increase in interest and dividend income on cash and marketable securities held by
corporate and other segments was primarily a result of higher average cash and marketable
securities balances. Other-than-temporary losses in the first quarter of fiscal 2008 generally
related to market liquidity concerns that have depressed securities values over the past few
months. Net realized gains on corporate investments increased primarily due to sales of securities
to reallocate certain portfolio assets.
Income Tax Expense. Income tax expense was $163 million for the first quarter of fiscal 2008,
compared to $131 million for the first quarter of fiscal 2007. The effective tax rate for the first
quarter of fiscal 2008 was 18%, as compared to 17% for the first quarter of fiscal 2007. The
effective tax rate for the first quarter of fiscal 2008 was slightly higher than the 17% estimated
annual effective rate for fiscal 2008 due to the effect of discrete items, primarily the
revaluation of deferred tax assets to reflect changes in the blended state tax rate.
The estimated annual effective tax rate for fiscal 2008 is 18% lower than the United States
federal statutory rate primarily due to benefits of approximately 22% related to foreign earnings
taxed at less than the United States federal rate and 1% related to research and development tax
credits, partially offset by state taxes of approximately 5%.
Our Segment Results for the First Quarter of Fiscal 2008 Compared to the First Quarter of Fiscal
2007
The following should be read in conjunction with the first quarter financial results of fiscal
2008 for each reporting segment. See Notes to Condensed Consolidated Financial Statements, Note 7
Segment Information.
QCT Segment. QCT revenues for the first quarter of fiscal 2008 were $1.57 billion, compared to
$1.23 billion for the first quarter of fiscal 2007. Equipment and services revenues, mostly
consisting of MSM and accompanying RF and PM integrated circuits, were $1.54 billion for the first
quarter of fiscal 2008, compared to $1.20 billion for the first quarter of fiscal 2007. The
increase in equipment and services revenue resulted primarily from an increase of $296 million
related to higher unit shipments and an increase of $60 million related to the net effects of
changes in product mix and the average sales prices of such products. Approximately 79 million MSM
integrated circuits were sold during the first quarter of fiscal 2008, compared to approximately 59
million for the first quarter of fiscal 2007.
QCTs earnings before taxes for the first quarter of fiscal 2008 were $470 million, compared
to $316 million for the first quarter of fiscal 2007. QCTs operating income as a percentage of its
revenues (operating margin percentage) was 30% in the first quarter of fiscal 2008, compared to 26%
in the first quarter of fiscal 2007. The increase in operating margin percentage was primarily due
to the increase in revenues and an increase in gross margin percentage, resulting from the net
effects of changes in product mix and the average unit costs of such products.
24
QCT inventories increased by 14% since September 30, 2007 to $442 million at December 30, 2007
due to the shift in our manufacturing business model from turnkey to IFM and related increased
purchases of completed die directly from foundry suppliers for use in QCTs integrated circuit
products.
QTL Segment. QTL revenues for the first quarter of fiscal 2008 were $650 million, compared to
$600 million for the first quarter of fiscal 2007. QTLs earnings before taxes for the first
quarter of fiscal 2008 were $541 million, compared to $498 million for the first quarter of fiscal
2007. QTLs operating margin percentage was 83% in the first quarter of fiscal 2008, compared to
82% in the first quarter of fiscal 2007. The increase in revenues primarily resulted from a $54
million increase in royalties, which were $640 million in the first quarter of fiscal 2008,
compared to $586 million in the first quarter of fiscal 2007. The increase in royalties resulted
from an increase in sales of CDMA-based products by licensees, partially offset by the effect of
Nokias failure to report royalties on sales after April 9, 2007. Revenues from amortized license
fees were $10 million in the first quarter of fiscal 2008, compared to $14 million in the first
quarter of fiscal 2007. The increase in QTLs earnings before taxes for the first quarter of fiscal
2008 as compared to the first quarter of fiscal 2007 was primarily attributable to the increase in
revenues.
QWI Segment. QWI revenues for the first quarter of fiscal 2008 were $210 million, compared to
$188 million for the first quarter of fiscal 2007. Revenues increased primarily due to an increase
in QIS revenue of $15 million and an increase in QES revenue of $4 million. The increase in QIS
revenue was primarily attributable to increases in fees related to our expanded BREW customer base
and products and increases in QChat revenue resulting from increased development efforts under the
licensing agreement with Sprint. The increase in QES revenue primarily resulted from higher
messaging revenues. QES shipped approximately 36,100 terrestrial-based and satellite-based systems
during the first quarter of fiscal 2008, compared to approximately 33,600 terrestrial-based and
satellite-based systems in the first quarter of fiscal 2007.
QWIs earnings before taxes for the first quarter of fiscal 2008 were $24 million, compared to
$20 million for the first quarter of fiscal 2007. QWIs operating margin percentage was 11% in the
first quarter of both fiscal 2008 and 2007.
QSI Segment. QSIs loss before taxes for the first quarter of fiscal 2008 was $55 million,
compared to $43 million for the first quarter of fiscal 2007. QSIs loss before taxes included a
$21 million increase in our MediaFLO USA subsidiarys loss before taxes comprised primarily of $22
million in cost of equipment and services revenues related to the commencement of our MediaFLO
services in March 2007.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and marketable
securities, cash generated from operations and proceeds from the issuance of common stock under our
stock option and employee stock purchase plans. Cash, cash equivalents and marketable securities
were $11.3 billion at December 30, 2007, a decrease of $482 million from September 30, 2007. Our
cash, cash equivalents and marketable securities at December 30,
2007 consisted of $5.9 billion
held by foreign subsidiaries with the remaining balance of $5.4 billion held domestically. Due to
tax considerations, we derive liquidity for operations primarily from domestic cash flow and
investments held domestically. Cash provided by operating activities was $880 million during the
first quarter of fiscal 2008, compared to $789 million during the first quarter of fiscal 2007.
Net proceeds from the issuance of common stock under our stock option and
employee stock purchase plans was $77 million during the first
quarter of fiscal 2008,
compared to $97 million during the first quarter of fiscal 2007.
On May 22, 2007, we announced we had been authorized to repurchase up to $3.0 billion of our
common stock. The stock repurchase program has no expiration date. During the first quarter of
fiscal 2008, we repurchased and retired 22,389,000 shares of our common stock for $894 million. In
connection with the stock repurchase program, we have a put option outstanding, with an expiration
date of March 2008, that may require us to repurchase an aggregate of 2,500,000 shares of our
common stock upon exercise for $94 million (net of the option premium received). Any shares
repurchased upon exercise of put options are retired. At December 30, 2007, $670 million remained
authorized for repurchases under our stock repurchase program, net of the put option outstanding.
Since December 30, 2007, we have repurchased and retired 17,727,000 shares of our own common stock
for approximately $668 million.
25
We
announced dividends totaling $228 million, or $0.14 per share,
during the first quarter of fiscal 2008, which were paid on January 4, 2008. On January 16, 2008, we announced a
cash dividend of $0.14 per share on our common stock, payable on March 28, 2008 to stockholders of
record as of February 29, 2008. We intend to continue to pay quarterly dividends subject to capital
availability and periodic determinations that cash dividends are in the best interest of our
stockholders.
Accounts
receivable decreased by 2% during the first quarter of fiscal 2008. Days sales outstanding,
on a consolidated basis, were 24 days at December 30, 2007 compared to 27 days at September 30,
2007.
We intend to continue our strategic investment activities to promote the worldwide adoption of
CDMA-based products and the growth of CDMA-based wireless data and wireless internet products. As
part of these investment activities, we may provide financing to facilitate the marketing and sale
of CDMA equipment by authorized suppliers. In the event additional needs or uses for cash arise, we
may raise additional funds from a combination of sources including potential debt and equity
issuance.
We believe our current cash and cash equivalents, marketable securities and cash generated
from operations will satisfy our expected working and other capital requirements for the
foreseeable future based on current business plans, including acquisitions, investments in other
companies and other assets to support the growth of our business, financing and other commitments,
the payment of dividends and possible additional stock repurchases.
Contractual Obligations/Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our condensed
consolidated balance sheets or fully disclosed in the notes to our condensed consolidated financial
statements. We have no material off-balance sheet arrangements as defined in S-K 303(a)(4)(ii).
As a result of the adoption of FIN 48 during the first quarter of fiscal 2008, we have
recorded a $194 million liability for uncertain tax positions, of which $113 million may result in
cash payment. We are not updating the disclosures in our long-term contractual obligations table
presented in our 2007 Form 10-K because of the difficulty in making reasonably reliable estimates
of the timing of cash settlements with the respective taxing authorities.
Additional information regarding our financial commitments at December 30, 2007 is provided in
the notes to our condensed consolidated financial statements. See Notes to Condensed Consolidated
Financial Statements, Note 4 Income Taxes and Note 6 Commitments and Contingencies.
Future Accounting Requirements
In September 2006, the FASB issued FASB Statement No. 157 (FAS 157), Fair Value
Measurements, which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about assets and liabilities measured at fair value in the financial
statements. FAS 157 does not require any new fair value measurements, but applies to other
accounting pronouncements that require or permit fair value measurements. In February 2007, the
FASB issued FASB Statement No. 159 (FAS 159), The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115, which provides companies
the irrevocable option to measure many financial assets and liabilities at fair value with the
changes in fair value recognized in earnings resulting in an opportunity to mitigate volatility in
earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provision. The accounting provisions of FAS 157 and FAS 159 will be
effective for our fiscal 2009 beginning September 29, 2008. We are in the process of determining
the effects, if any, the adoption of FAS 157 and FAS 159 will have on our consolidated financial
statements.
Risk Factors
You should consider each of the following factors as well as the other information in this
Quarterly Report in evaluating our business and our prospects. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently consider immaterial may also impair our business operations. If
any of the following risks actually occur, our business and financial results could be harmed. In
that case, the trading price of our common stock could decline. You should also refer to the other
information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2007, including our financial statements and the related notes.
26
If deployment of our technologies does not expand as expected, our revenues may not grow as
anticipated.
We focus our business primarily on developing, patenting and commercializing CDMA technology
for wireless telecommunications applications. Other digital wireless communications technologies,
particularly GSM technology, have been more widely deployed than CDMA technology. If adoption and
use of CDMA-based wireless communications standards do not continue in the countries where our
products and those of our customers and licensees are sold, our business and financial results
could suffer. If GSM wireless operators do not select CDMA for their networks or update their
current networks to any CDMA-based third generation (3G) technology, our business and financial
results could suffer since we generally have not generated revenues from GSM product sales. In
addition to CDMA technology, we continue invest in developing, patenting and commercializing OFDMA
technology, which has not yet been widely adopted and deployed commercially. If OFDMA is not widely
adopted and deployed commercially, our investments in OFDMA technology may not provide us an
adequate return.
Our business and the deployment of our technologies, products and services are dependent on
the success of our customers, licensees and CDMA-based wireless operators, as well as the timing of
their deployment of new services. Our licensees and CDMA-based wireless operators may incur lower
operating margins on products or services based on our technologies than on products using
alternative technologies as a result of greater competition or other factors. If CDMA-based
wireless operators, wireless device and/or infrastructure manufacturers cease providing CDMA-based
products and/or services, the deployment of CDMA technology could be negatively affected, and our
business could suffer.
We are dependent on the commercial deployment of 3G wireless communications equipment, products and
services to increase our revenues, and our business may be harmed if wireless networks deploy other
technologies.
To increase our revenues in future periods, we are dependent upon the commercial deployment of
3G wireless communications equipment, products and services based on our CDMA technology. Although
wireless network operators have commercially deployed CDMA2000 and WCDMA, we cannot predict the
timing or success of further commercial deployments or expansions of CDMA2000, WCDMA or other CDMA
systems. If existing deployments are not commercially successful or do not continue to grow their
subscriber base, or if new commercial deployments of CDMA2000, WCDMA or other CDMA-based systems
are delayed or unsuccessful, our business and financial results may be harmed. In addition, our
business could be harmed if wireless network operators deploy other technologies or switch existing
networks from CDMA to GSM without upgrading to WCDMA or if wireless network operators introduce new
technologies. A limited number of operators have started testing OFDMA technology, but OFDMA might
not be adopted or deployed commercially and we might not be successful in developing and marketing
OFDMA products.
Our patent portfolio may not be as successful in generating licensing income with respect to other
technologies as it has been for CDMA-based technologies.
Although we own a very strong portfolio of issued and pending patents related to GPRS, EDGE,
OFDM, OFDMA and MIMO technologies, our patent portfolio licensing program in these areas is less
established and might not be as successful in generating licensing income as our CDMA portfolio
licensing program. Sprint Nextel has indicated that it is planning to deploy WiMax (an OFDMA-based
technology) in its 2.5 GHz spectrum, also known as the Broadband Radio Services band. Other
operators are investigating deployment of WiMax. Other operators are considering LTE, being
standardized by 3GPP, or UMB, being standardized by 3GPP2, as next generation technologies for
deployment in existing or future spectrum bands. Verizon has announced its intention to begin
developing its chosen fourth generation (4G) technology, LTE, during 2008 and to prepare for the
time when its customers start demanding such 4G capabilities, while continuing the expansion and
operation of its existing CDMA-based technologies for many years to come. Although we believe that
our patented technology is essential and useful to implementation of the WiMax, LTE or UMB
standards, we might not achieve the same royalty revenue on such WiMax, LTE or UMB deployments as
on CDMA/WCDMA, and we might not achieve the same chipset market shares within a WiMax, LTE or UMB
network.
27
Our three largest customers accounted for 39% and 40% of consolidated revenues in the first quarter
of fiscal 2008 and 2007, respectively, and 41% and 39% of total consolidated revenues in fiscal
2007 and 2006, respectively. The loss of any one of our major customers or any reduction in the
demand for devices utilizing our CDMA technology could reduce our revenues and harm our ability to
achieve or sustain desired levels of operating results.
The loss of any one of our QCT segments significant customers or the delay, even if only
temporary, or cancellation of significant orders from any of these customers would reduce our
revenues in the period of the cancellation or deferral and harm our ability to achieve or sustain
expected levels of operating results. We derive a significant portion of our QCT segment revenues
from three major customers. Accordingly, unless and until our QCT segment diversifies and expands
its customer base, our future success will significantly depend upon the timing and size of any
future purchase orders from these customers. Factors that may impact the size and timing of orders
from customers of our QCT segment include, among others, the following:
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the product requirements of our customers and the network operators; |
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the financial and operational success of our customers; |
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the success of our customers products that incorporate our products; |
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changes in wireless penetration growth rates; |
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value added features which drive replacement rates; |
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shortages of key products and components; |
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fluctuations in channel inventory levels; |
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the success of products sold to our customers by competitors; |
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the rate of deployment of new technology by the wireless network operators and the
rate of adoption of new technology by the end consumers; |
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the extent to which certain customers successfully develop and produce CDMA-based
integrated circuits and system software to meet their own needs or source such products
from other suppliers; |
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general economic conditions; |
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changes in governmental regulations in countries where we or our customers currently
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widespread illness. |
We derive a significant portion of our royalty revenues in our QTL segment from a limited number of
licensees and our future success depends on the ability of our licensees to obtain market
acceptance for their products.
Our QTL segment derives royalty revenues primarily from sales of CDMA products by our
licensees. Although we have more than 145 licensees, we derive a significant portion of our royalty
revenue from a limited number of licensees. Our future success depends upon the ability of our
licensees to develop, introduce and deliver high-volume products that achieve and sustain market
acceptance. We have little or no control over the sales efforts of our licensees, and our licensees
might not be successful. Reductions in the average selling price of wireless communications devices
utilizing our CDMA technology, without a comparable increase in the volumes of such devices sold,
could have a material adverse effect on our business.
We may not be able to modify some of our license agreements to license later patents without
modifying some of the other material terms and conditions of such license agreements, and such
modifications may impact our revenues.
The licenses granted to and from us under a number of our license agreements include only
patents that are either filed or issued prior to a certain date, and, in a small number of
agreements, royalties are payable on those patents for a specified time period. As a result, there
are agreements with some licensees where later patents are not licensed by or to us under our
license agreements. In order to license any such later patents, we will need to extend or modify
our license agreements or enter into new license agreements with such licensees. We might not be
able to modify such license agreements in the future to license any such later patents or extend
such date(s) to incorporate later patents without affecting the material terms and conditions of
our license agreements with such licensees. In
28
particular, we are party to an ongoing arbitration with Nokia Corp. relating to Nokias
continued sales after April 9, 2007 of products that incorporate certain Qualcomm patents. One of
our contentions in that proceeding (which Nokia disputes) is that such use of our patents resulted
in an extension of the license agreement, which also extends our rights to sell integrated circuits
under Nokias patents. We might not prevail in such arbitration. If we do not prevail, Nokias
right to sell certain subscriber products (such as cellular phones, wireless personal digital
assistant and other devices) under most of our patents (including many that we have declared as
potentially essential to the CDMA, WCDMA and other standards), and therefore Nokias obligation to
pay royalties to us under the terms of the current agreement, may both cease, and our rights under
certain of Nokias patents to sell integrated circuits under the terms of the current agreement may
likewise cease. If we do not prevail, and the arbitration panel does not find Nokia to have
extended the license agreement, the above rights could be extended if Nokia expressly elects to
extend the agreement beyond April 9, 2007, a right that is exercisable through December 31, 2008
unless earlier terminated.
Efforts by some telecommunications equipment manufacturers and component suppliers to avoid paying
fair and reasonable royalties for the use of our intellectual property may create uncertainty about
our future business prospects, may require the investment of substantial management time and
financial resources, and may result in legal decisions and/or political actions by foreign
governments that harm our business.
A small number of companies have initiated various strategies in an attempt to renegotiate,
mitigate and/or eliminate their need to pay royalties to us for the use of our intellectual
property in order to negatively affect our business model and that of our other licensees. These
strategies have included (i) litigation, often alleging infringement of patents held by such
companies or unfair competition of some variety, (ii) taking questionable positions on the
interpretation of contracts with us, with royalty reduction as the likely true motive, (iii)
appeals to governmental authorities, such as the complaints filed with the European Commission (EC)
during the fourth calendar quarter of 2005 and with the Korea Fair Trade Commission (KFTC) and the
Japan Fair Trade Commission (JFTC) during 2006, and (iv) lobbying with governmental regulators and
elected officials for the purpose of seeking the imposition of some form of compulsory licensing
and/or to weaken a patent holders ability to enforce its rights or obtain a fair return for such
rights. A number of these strategies are purportedly based on interpretations of the policies of
certain standards development organizations concerning the licensing of patents that are or may be
essential to industry standards and our alleged failure to abide by these policies.
Six companies (Nokia, Ericsson, Panasonic, Texas Instruments, Broadcom and NEC) submitted
separate formal complaints to the Competition Directorate of the EC accusing our business
practices, with respect to licensing of patents and sales of chipsets, to be in violation of
Article 82 of the EC treaty. We received the complaints, have submitted a response and have
cooperated with the EC in its investigation. On October 1, 2007, the EC announced that it has
initiated a proceeding though it has not decided to issue a Statement of Objections, and it has not
made any conclusions as to the merits of the complaints. While this action does not indicate that
the EC has found any evidence of a violation by us and we believe that none of our business
practices violate the legal requirements of Article 82 of the EC treaty, if the EC determines
liability as to any of the alleged violations, it could impose fines and/or require us to modify
our practices. Further, the continuation of this investigation could be expensive and time
consuming to address, divert management attention from our business and harm our reputation.
Although such potential adverse findings may be appealed within the EC legal system, an adverse
final determination could have a significant negative impact on our revenues and/or earnings. We
also understand that 1) two U.S. companies (Texas Instruments and Broadcom) and two South Korean
companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the KFTC alleging
that our business practices are, in some way, a violation of South Korean competition laws and 2)
unnamed parties filed a complaint with the JFTC allegedly claiming that our business practices are,
in some way a violation of the Japanese competition laws. While we have not seen any of these
complaints in South Korea or Japan, we believe that none of our business practices violate the
legal requirements of South Korean competition law or Japanese competition law. However, we have
cooperated with the investigations of these complaints in South Korea and Japan, and any
continuation or expansion of these investigations could be expensive and time consuming to address,
divert management attention from our business and harm our reputation. An adverse final
determination on these charges could have a significant negative impact on our business, including
our revenues and/or earnings.
Although we believe that these challenges are without merit, and we will continue to
vigorously defend our intellectual property rights and our right to continue to receive a fair
return for our innovations, the distractions caused by challenges to our business model and
licensing program are undesirable and the legal and other costs
29
associated with defending our position have been and continue to be significant. We assume, as should investors, that
such challenges will continue into the foreseeable future and may require the investment of
substantial management time and financial resources to explain and defend our position.
The enforcement and protection of our intellectual property rights may be expensive and could
divert our valuable resources.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as
nondisclosure and confidentiality agreements and other methods, to protect our proprietary
information, technologies and processes, including our patent portfolio. Policing unauthorized use
of our products and technologies is difficult and time consuming. We cannot be certain that the
steps we have taken will prevent the misappropriation or unauthorized use of our proprietary
information and technologies, particularly in foreign countries where the laws may not protect our
proprietary rights as fully or as readily as United States laws. We cannot be certain that the laws
and policies of any country, including the United States, or the practices of any of the standards
bodies, foreign or domestic, with respect to intellectual property enforcement or licensing,
issuance of wireless licenses or the adoption of standards, will not be changed in a way
detrimental to our licensing program or to the sale or use of our products or technology. Recent
decisions from the United States courts relating to patents may affect the ability to enforce
patent rights. In addition, a recent case argued before the United
States Supreme Court has sought to extend the concept of patent
exhaustion in a manner which could have an adverse impact on
our licensing business. Within the United States Senate and House of Representatives, committee work has
progressed to draft a patent reform law, with the House and Senate committees each having
reported a different draft bill to the full House and Senate, respectively. The full House has
adopted its committees draft bill. The end product of such work could be new patent legislation
detrimental to our licensing program or to the sale or use of our products or technology. Any
efforts we make to inform and educate policymakers about the effects of such potential changes may
absorb significant management time and attention, which, in turn, could negatively impact our
operating results.
The vast majority of our patents and patent applications relate to our wireless communications
technology and much of the remainder of our patents and patent applications relate to our other
technologies and products. We may need to litigate to enforce our intellectual property rights,
protect our trade secrets or determine the validity and scope of proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights to one or more patents or incur
substantial unexpected operating costs. Any action we take to enforce our intellectual property
rights could be costly and could absorb significant management time and attention, which, in turn,
could negatively impact our operating results. In addition, failure to protect our trademark rights
could impair our brand identity.
Claims by other companies that we infringe their intellectual property, that patents on which we
rely are invalid, or that our business practices are in some way unlawful could adversely affect
our business.
From time to time, companies have asserted, and may again assert, patent, copyright and other
intellectual proprietary rights against our products or products using our technologies or other
technologies used in our industry. These claims have resulted and may again result in our
involvement in litigation. We may not prevail in such litigation given the complex technical issues
and inherent uncertainties in intellectual property litigation. If any of our products were found
to infringe on another companys intellectual property rights, we could be required to redesign our
products, which could be costly, or license such rights and/or pay damages or other compensation to
such other company. If we were unable to redesign our products or license such intellectual
property rights used in our products, we could be prohibited from making and selling such products.
We expect that we will continue to be involved in litigation and may have to appear in front
of administrative bodies (such as the U.S. International Trade Commission) to defend against patent
assertions against our products by companies, some of whom are attempting to gain competitive
advantage or negotiating leverage in licensing negotiations. We may not be successful and, if we
are not, the range of possible outcomes includes everything from a royalty payment to an injunction
on the sale of certain of our chipsets (and on the sale of our customers devices using our
chipsets) and the imposition of royalty payments that might make sales of our chipsets uneconomic.
Any such litigation could severely disrupt the business of our chipset customers and their wireless
customers, which in turn could hurt our relationships with our chipset customers and wireless
operators and could result in a decline in our chipset market share and/or a reduction in our
licensees sales to wireless operators, causing a corresponding decline in our chipset and/or
licensing revenues.
While we have had many settlement discussions with Broadcom, they have not been fruitful to
date, and the prospects for a reasonable settlement appear to be remote. To date, Broadcom has
insisted that any comprehensive
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settlement include the right to pass through to its customers intellectual property rights licensed by us to Broadcom. Any such arrangement could have a material
impact on our licensing and royalty business model.
In addition, intellectual property rights claims in our industry are common, and, as the
number of competitors in our market increases and the functionality of our products expands to
include additional technologies and features, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. Any claims, regardless of their
merit, could be time consuming to address, result in costly litigation, divert the efforts of our
technical and management personnel or cause product release or shipment delays, any of which could
have a material adverse effect upon our operating results. In any potential dispute involving other
companies patents or other intellectual property, our chipset customers could also become the
targets of litigation. Any such litigation could severely disrupt the business of our chipset
customers and their wireless operator customers, which in turn could hurt our relationships with
our chipset customers and wireless operators and could result in a decline in our chipset market
share and/or a reduction in our licensees sales to wireless operators, causing a corresponding
decline in our chipset and/or licensing revenues.
A number of other companies have claimed to own patents essential to various CDMA standards,
GSM standards and implementations of OFDM and OFDMA systems. If we or other product manufacturers
are required to obtain additional licenses and/or pay royalties to one or more patent holders, this
could have a material adverse effect on the commercial implementation of our CDMA or multimode
products and technologies, demand for our licensees products, and our profitability.
Other companies or entities also have and may again commence actions seeking to establish the
invalidity of our patents. In the event that one or more of our patents are challenged, a court may
invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm our
competitive position. If our key patents are invalidated, or if the scope of the claims in any of
these patents is limited by court decision, we could be prevented from licensing the invalidated or
limited portion of such patents. Such adverse decisions could negatively impact our revenues. Even
if such a patent challenge is not successful, it could be expensive and time consuming to address,
divert management attention from our business and harm our reputation.
Our industry is subject to competition that could result in decreased demand for our products and
the products of our customers and licensees and/or declining average selling prices for our
licensees products and our products, negatively affecting our revenues and operating results.
We currently face significant competition in our markets and expect that competition will
continue. Competition in the telecommunications market is affected by various factors, including:
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comprehensiveness of products and technologies; |
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value added features which drive replacement rates; |
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manufacturing capability; |
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scalability and the ability of the system technology to meet customers immediate and
future network requirements; |
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product performance and quality; |
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design and engineering capabilities; |
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compliance with industry standards; |
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time-to-market; |
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system cost; and |
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customer support. |
This competition may result in increased development costs and reduced average selling prices
for our products and those of our customers and licensees. Reductions in the average selling price
of our licensees products, unless offset by an increase in volumes, generally result in reduced
royalties payable to us. While pricing pressures from competition may, to a large extent, be
mitigated by the introduction of new features and functionality in our licensees products, there
is no guarantee that such mitigation will occur. We anticipate that additional competitors
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will enter our markets as a result of growth opportunities in wireless telecommunications, the trend
toward global expansion by foreign and domestic competitors, technological and public policy
changes and relatively low barriers to entry in selected segments of the industry.
Companies that promote non-CDMA technologies (e.g. GSM) and companies that design competing
CDMA-based integrated circuits are generally included amongst our competitors or potential
competitors in the United States or abroad. Examples (some of whom are strategic partners of ours
in other areas) include Broadcom, EoNex Technologies, Ericsson, Freescale, Fujitsu, Intel, LSI
Corporation, NEC, Nokia, Renesas, Samsung, Texas Instruments and VIA Telecom. With respect to our
QES business, our competitors are aggressively pricing products and services and are offering new
value-added products and services which may impact margins, intensify competition in current and
new markets and harm our ability to compete in certain markets.
Many of these current and potential competitors have advantages over us, including:
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longer operating histories and presence in key markets; |
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greater name recognition; |
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motivation by our customers in certain circumstances to find alternate suppliers; |
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access to larger customer bases; |
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economies of scale and cost structure advantages; and |
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greater sales and marketing, manufacturing, distribution, technical and other
resources than we have. |
As a result of these and other factors, our competitors may be more successful than us. In
addition, we anticipate additional competitors will enter the market for products based on 3G
standards. These competitors may have more established relationships and distribution channels in
markets not currently deploying CDMA-based wireless communications technology. These competitors
also may have established or may establish financial or strategic relationships among themselves or
with our existing or potential customers, resellers or other third parties. These relationships may
affect our customers decisions to purchase products or license technology from us. Accordingly,
new competitors or alliances among competitors could emerge and rapidly acquire significant market
share to our detriment. In addition to the foregoing, we have seen, and believe we will continue to
see, an increase in customers requesting that we develop products, including chipsets, that will
operate in an open source environment. Developing open source compliant products, without
imperiling the intellectual property rights upon which our licensing business depends, may prove
difficult under certain circumstances, thereby placing us at a competitive disadvantage for new
product designs.
While we continue to believe our QMT Divisions IMOD displays will offer compelling advantages
to the display market, there can be no assurance that other technologies will not continue to
improve in ways that reduce the advantages we anticipate from our IMOD displays. The flat panel
display market is currently, and we believe will likely continue to be for some time, dominated by
displays based on liquid crystal display (LCD) technology. Numerous companies are making
substantial investments in, and conducting research to improve characteristics of LCDs.
Additionally, several other flat panel display technologies have been, or are being, developed,
including technologies for the production of organic light-emitting diode (OLED), field emission,
inorganic electroluminescence, gas plasma and vacuum fluorescent displays. In each case, advances
in LCD or other flat panel display technologies could result in technologies that are more cost
effective, have fewer display limitations, or can be brought to market faster than our IMOD
technology. These advances in competing technologies might cause display manufacturers to avoid
entering into commercial relationships with us, or not renew planned or existing relationships with
us. Our QMT Division had $216 million in assets (including $128 million in goodwill) at December
30, 2007. If we are not successful in bringing our IMOD display technology to market, our assets
may become impaired, which, in turn, could negatively impact our operating results.
Successful attempts by certain companies to amend or modify Standards Development Organizations
(SDOs) and other industry forums intellectual property policies could impact our licensing
business.
Some companies have proposed significant changes to existing intellectual property policies
for implementation by SDOs and other industry organizations, some of which would require a maximum
aggregate intellectual property royalty rate for the use of all essential patents owned by all of
the member companies to be applied to the
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selling price of any product implementing the relevant standard. They have further proposed that such maximum aggregate royalty rate be apportioned to
each member company with essential patents based upon the size of its essential patent portfolio.
Although the European Telecommunications Standards Institute (ETSI) ad hoc IPR group and the Next
Generation Mobile Network industry group have thus far determined that such proposals should not be
adopted as amendments to existing ETSI policies or new policies, such proposals as described above might
be revisited by ETSI and might be adopted by other SDOs or industry groups, resulting in a
disadvantage to our business model either by limiting our return on investment with respect to new
technologies or forcing us to work outside of the SDOs or such other industry groups for promoting
our new technologies.
We depend upon a limited number of third party suppliers to manufacture component parts,
subassemblies and finished goods for our products. If these third party suppliers do not allocate
adequate manufacturing capacity in their facilities to manufacture products on our behalf, or if
there are any disruptions in the operations of, or the loss of, any of these third parties, it
could harm our ability to meet our delivery obligations to our customers, reduce our revenue,
increase our cost of sales and harm our business.
Our ability to meet customer demand depends, in part, on available manufacturing capacity and
our ability to obtain timely and adequate delivery of parts and components from our suppliers. A
reduction or interruption in our product supply source, an inability of our suppliers to react to
shifts in product demand or an increase in component prices could have a material adverse effect on
our business or profitability. Component shortages could adversely affect our ability and that of
our customers to ship products on a timely basis and, as a result, our customers demand for our
products. Any such shipment delays or declines in demand could reduce our revenues and harm our
ability to achieve or sustain desired levels of profitability. Additionally, failure to meet
customer demand in a timely manner could damage our reputation and harm our customer relationships.
Our operations may also be harmed by lengthy or recurring disruptions at any of our suppliers
manufacturing facilities and by disruptions in the distribution channels from our suppliers and to
our customers. Any such disruptions could cause significant delays in shipments until we are able
to shift the products from an affected manufacturer to another manufacturer. If the affected
supplier was a sole source supplier, we may not be able to obtain the product without significant
cost and delay. The loss of a significant third party supplier or the inability of a third party
supplier to meet performance and quality specifications or delivery schedules could harm our
ability to meet our delivery obligations to our customers and negatively impact our revenues and
business operations.
QCT Segment. A suppliers ability to meet our product manufacturing demand is limited mainly
by their overall capacity and current capacity availability. Although we have entered into
long-term contracts with our suppliers, most of these contracts do not provide for long-term
capacity commitments. To the extent that we do not have firm commitments from our suppliers over a
specific time period, or in any specific quantity, our suppliers may allocate, and in the past have
allocated, capacity to the production of products for their other customers while reducing capacity
to manufacture our products. Accordingly, capacity for our products may not be available when we
need it or available at reasonable prices. We have experienced capacity limitations from our
suppliers, which resulted in supply constraints and our inability to meet certain customer demand.
There can be no assurance that we will not experience these or other supply constraints in the
future, which could result in our failure to meet customer demand.
While our goal is to establish alternate suppliers for technologies that we consider critical,
some of our integrated circuits products are only available from single sources, with which we do
not have long-term contracts. Our reliance on sole or limited-source suppliers involves significant
risks including possible shortages of manufacturing capacity, poor product performance and reduced
control over delivery schedules, manufacturing capability and yields, quality assurance, quantity
and costs. In addition, the timely readiness of our foundry suppliers to support transitions to
smaller geometry process technologies could impact our ability to meet customer demand, revenue,
and cost expectations. The timing of acceptance of the smaller technology designs by our customers
may subject us to the risk of excess inventories of earlier designs.
In the event of a loss of, or a decision to change a key third party supplier, qualifying a
new foundry supplier and commencing volume production or testing could involve delay and expense,
resulting in lost revenues, reduced operating margins and possible loss of customers. We work
closely with our customers to expedite their processes for evaluating new integrated circuits from
our foundry suppliers; however, in some instances, transition of integrated circuit production to a
new foundry supplier may cause a temporary decline in shipments of specific integrated circuits to
individual customers.
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QMT Division. QMT needs to form and maintain reliable business relationships with flat panel
display manufacturers or other targeted partners to support the manufacture of IMOD displays in
commercial volumes. All of our current relationships have been for the development and limited
production of certain IMOD display panels and/or modules. Some or all of these relationships may
not succeed or, even if they are successful, may not result in the display manufacturers entering
into material supply relationships with us.
We have expanded our QCT segments manufacturing model to include the purchase of completed die
from semiconductor manufacturing foundries and to contract directly with third party manufacturers
for assembly and test services. This new production model may increase costs and lower our control
over the manufacturing process.
To further enable flexibility of supply and access to potential new foundry suppliers, and in
response to the complexity of our product roadmap, starting in fiscal 2005, we expanded our
manufacturing model to include purchasing completed die directly from semiconductor manufacturing
foundries. Under our Integrated Fabless Manufacturing (IFM) model, we contract directly with third
party manufacturers for back-end assembly and test services, and we ship the completed integrated
circuits to our customers. We expect to increase the volume of our purchases of completed die
directly from our foundry suppliers under our IFM model as we source new products and convert
existing turnkey production to our IFM model. We are unable to directly control the services
provided by our semiconductor assembly and test (SAT) suppliers, including the timely procurement
of packaging materials for our products, availability of assembly and test capacity, quality
assurance and product delivery schedules. We have a limited history of working with the SAT
suppliers under this expanded manufacturing model, and cannot guarantee that this change and our
lack of control will not cause disruptions in our operations that could harm our ability to meet
our delivery obligations to our customers, reduce our revenue, or increase our cost of sales.
Our suppliers may also be our competitors putting us at a disadvantage for pricing and capacity
allocation.
One or more of our suppliers may obtain licenses from us to manufacture CDMA-based integrated
circuits that compete with our products. In this event, the supplier could elect to allocate raw
materials and manufacturing capacity to their own products and reduce deliveries to us to our
detriment. In addition, we may not receive reasonable pricing, manufacturing or delivery terms. We
cannot guarantee that the actions of our suppliers will not cause disruptions in our operations
that could harm our ability to meet our delivery obligations to our customers or increase our cost
of sales.
We, and our licensees, are subject to the risks of conducting business outside the United States.
A significant part of our strategy involves our continued pursuit of growth opportunities in a
number of international markets. We market, sell and service our products internationally. We have
established sales offices around the world. We expect to continue to expand our international sales
operations and enter new international markets. This expansion will require significant management
attention and financial resources to successfully develop direct and indirect international sales
and support channels, and we cannot assure you that we will be successful or that our expenditures
in this effort will not exceed the amount of any resulting revenues. If we are not able to maintain
or increase international market demand for our products and technologies, we may not be able to
maintain a desired rate of growth in our business.
Our international customers sell their products to markets throughout the world, including
China, India, Japan, South Korea, North America, South America and Europe. We distinguish revenues
from external customers by geographic areas based on the location to which our products, software
or services are delivered and, for QTLs licensing and royalty revenue, the invoiced address of our
licensees. Consolidated revenues from international customers as a percentage of total revenues
were 89% and 87% in the first quarter of fiscal 2008 and 2007, respectively, and 87% in fiscal 2007
and 2006. Because most of our foreign sales are denominated in U.S. dollars, our products and those
of our customers and licensees that are sold in U.S. dollars become less price-competitive in
international markets if the value of the U.S. dollar increases relative to foreign currencies, and
our revenues may not grow as quickly as they otherwise might in response to worldwide growth in
wireless products and services.
In many international markets, barriers to entry are created by long-standing relationships
between our potential customers and their local service providers and protective regulations,
including local content and service requirements. In addition, our pursuit of international growth
opportunities may require significant investments for an extended period before we realize returns,
if any, on our investments. Our business could be adversely affected by a variety of uncontrollable
and changing factors, including:
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difficulty in protecting or enforcing our intellectual property rights and/or
contracts in a particular foreign jurisdiction, including challenges to our licensing
practices under such jurisdictions competition laws; |
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our inability to succeed in significant foreign markets, such as China, India or
Europe; |
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cultural differences in the conduct of business; |
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difficulty in attracting qualified personnel and managing foreign activities; |
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longer payment cycles for and greater difficulties collecting accounts receivable; |
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export controls, tariffs and other trade protection measures; |
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nationalization, expropriation and limitations on repatriation of cash; |
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social, economic and political instability; |
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natural disasters, acts of terrorism, widespread illness and war; |
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taxation; |
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variability in the value of the dollar against foreign currency; and |
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changes in laws and policies affecting trade, foreign investments, licensing
practices, loans and employment. |
We cannot be certain that the laws and policies of any country with respect to intellectual
property enforcement or licensing, issuance of wireless licenses or the adoption of standards will
not be changed or enforced in a way detrimental to our licensing program or to the sale or use of
our products or technology.
The wireless markets in China and India, among others, represent growth opportunities for us.
If wireless operators in China or India, or the governments of China or India, make technology
deployment or other decisions that result in actions that are adverse to the expansion of CDMA
technologies, our business could be harmed.
We are subject to risks in certain global markets in which wireless operators provide
subsidies on wireless device sales to their customers. Increases in device prices that negatively
impact device sales can result from changes in regulatory policies related to device subsidies.
Limitations or changes in policy on device subsidies in South Korea, Japan, China and other
countries may have additional negative impacts on our revenues.
Global economic conditions that impact the wireless communications industry could negatively affect
our revenues and operating results.
Global economic conditions can have wide-ranging effects on markets that we serve,
particularly wireless communications equipment manufacturers and wireless network operators. We
cannot predict negative events, such as war, that may have adverse effects on the economy or on
wireless device inventories at CDMA-based equipment manufacturers and operators. The continued
threat of terrorism and heightened security and military action in response to this threat, or any
future acts of terrorism, may cause disruptions to the global economy and to the wireless
communications industry and create uncertainties. Recent reports suggest that inflation could have
adverse effects on the global economy and capital markets. Inflation and/or deflation and economic
recessions could adversely affect our customers, including their ability to obtain financing,
upgrade wireless networks and purchase our products and services, and our end consumers, by
lowering their standards of living and diminishing their ability to purchase wireless devices based
on our technology. Inflation could also increase our costs of raw materials and operating expenses
and harm our business in other ways. During the first quarter of fiscal 2008, 75% of our revenues
were from customers and licensees based in South Korea, Japan and China, as compared to 69% during
the first quarter of fiscal 2007, respectively. During fiscal 2007, 69% of our revenues were from
customers and licensees based in South Korea, Japan and China, as compared to 70% during fiscal
2006. These customers sell their products to markets worldwide, including Japan, South Korea,
China, India, North America, South America and Europe. A significant downturn in the economies of
Asian countries where many of our customers and licensees are located, particularly the economies
of South Korea, Japan and China, or the economies of the major markets they
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serve would materially harm our business. Should such negative events occur, subsequent economic recovery might not
benefit us in the near term. If it does not, our ability to increase or maintain our revenues and
operating results may be impaired. In addition, because we intend to continue to make significant
investments in research and development and to maintain extensive ongoing customer service and
support capability, any decline in the rate of growth of our revenues will have a significant
adverse impact on our operating results.
Currency fluctuations could negatively affect future product sales or royalty revenue, harm our
ability to collect receivables, or increase the U.S. dollar cost of the activities of our foreign
subsidiaries and international strategic investments.
We are exposed to risk from fluctuations in currencies, which may change over time as our
business practices evolve, that could impact our operating results, liquidity and financial
condition. We operate and invest globally. Adverse movements in currency exchange rates may
negatively affect our business due to a number of situations, including the following:
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If the effective price of products sold by our customers were to increase as a result
of fluctuations in the exchange rate of the relevant currencies, demand for the products
could fall, which in turn would reduce our royalty and chipset revenues. |
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Declines in currency values in selected regions may adversely affect our operating
results because our products and those of our customers and licensees may become more
expensive to purchase in the countries of the affected currencies. |
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Assets or liabilities of our consolidated subsidiaries and our foreign investees that
are not denominated in the functional currency of those entities are subject to the
effects of currency fluctuations, which may affect our reported earnings. Our exposure
to foreign currencies may increase as we expand into new markets. |
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Investments in our consolidated foreign subsidiaries and in other foreign entities
that use the local currency as the functional currency may decline in value as a result
of declines in local currency values. |
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Certain of our revenues, such as royalty revenues, are derived from licensee or
customer sales that are denominated in foreign currencies. If these revenues are not
subject to foreign exchange hedging transactions, weakening of currency values in
selected regions could adversely affect our anticipated revenues and cash flows. |
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We may engage in foreign exchange hedging transactions that could affect our cash
flows and earnings because they may require the payment of structuring fees, and they
may limit the U.S. dollar value of royalties from licensees sales that are denominated
in foreign currencies. |
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Our trade receivables are generally U.S. dollar denominated. Any significant increase
in the value of the dollar against our customers or licensees functional currencies
could result in an increase in our customers or licensees cash flow requirements and
could consequently affect our ability to sell products and collect receivables. |
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Strengthening of currency values in selected regions may adversely affect our
operating results because the activities of our foreign subsidiaries may become more
expensive in U.S. dollars. |
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Strengthening of currency values in selected regions may adversely affect our cash
flows and investment results because strategic investment obligations denominated in
foreign currencies may become more expensive, and the U.S. dollar cost of equity in
losses of foreign investees may increase. |
We may engage in acquisitions or strategic transactions or make investments that could result in
significant changes or management disruption and fail to enhance stockholder value.
From time to time, we engage in acquisitions or strategic transactions or make investments
with the goal of maximizing stockholder value. We acquire businesses, enter into joint ventures or
other strategic transactions and purchase equity and debt securities, including minority interests
in publicly-traded and private companies, non-investment grade debt securities, equity and debt
mutual funds, corporate bonds/notes and mortgage/asset-backed securities. Many of our strategic
investments are in CDMA wireless operators, early-stage companies, or venture funds to support our
business, including the global adoption of CDMA-based technologies and related services.
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Most of our strategic investments entail a high degree of risk and will not become liquid until
more than one year from the date of investment, if at all. Our acquisitions or strategic
investments (either those we have completed or may undertake in the future) may not generate
financial returns or result in increased adoption or continued use of our technologies. In
addition, our other investments may not generate financial returns or may result in losses due to
market volatility, the general level of interest rates and inflation expectations.
Achieving the anticipated benefits of acquisitions depends in part upon our ability to
integrate the acquired businesses in an efficient and effective manner. The integration of
companies that have previously operated independently may result in significant challenges, and we
may be unable to accomplish the integration smoothly or successfully. The difficulties of
integrating companies include, among others:
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retaining key employees; |
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maintenance of important relationships of Qualcomm and the acquired business; |
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minimizing the diversion of managements attention from ongoing business matters; |
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coordinating geographically separate organizations; |
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consolidating research and development operations; and |
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consolidating corporate and administrative infrastructures. |
We cannot assure you that the integration of acquired businesses with our business will result
in the realization of the full benefits anticipated by us to result from the acquisition. We may
not derive any commercial value from the acquired technology, products and intellectual property or
from future technologies and products based on the acquired technology and/or intellectual
property, and we may be subject to liabilities that are not covered by indemnification protection
we may obtain.
Defects or errors in our products and services or in products made by our suppliers could harm our
relations with our customers and expose us to liability. Similar problems related to the products
of our customers or licensees could harm our business. If we experience product liability claims or
recalls, we may incur significant expenses and experience decreased demand for our products.
Our products are inherently complex and may contain defects and errors that are detected only
when the products are in use. For example, as our chipset product complexities increase, we are
required to migrate to integrated circuit technologies with smaller geometric feature sizes. The
design process interface issues are more complex as we enter into these new domains of technology,
which adds risk to yields and reliability. Because our products and services are responsible for
critical functions in our customers products and/or networks, such defects or errors could have a
serious impact on our customers, which could damage our reputation, harm our customer relationships
and expose us to liability. Defects or impurities in our components, materials or software or those
used by our customers or licensees, equipment failures or other difficulties could adversely affect
our ability and that of our customers and licensees to ship products on a timely basis as well as
customer or licensee demand for our products. Any such shipment delays or declines in demand could
reduce our revenues and harm our ability to achieve or sustain desired levels of profitability. We
and our customers or licensees may also experience component or software failures or defects that
could require significant product recalls, reworks and/or repairs that are not covered by warranty
reserves and which could consume a substantial portion of the capacity of our third party
manufacturers or those of our customers or licensees. Resolving any defect or failure related
issues could consume financial and/or engineering resources that could affect future product
release schedules. Additionally, a defect or failure in our products or the products of our
customers or licensees could harm our reputation and/or adversely affect the growth of 3G wireless
markets.
Testing, manufacturing, marketing and use of our products and those of our licensees and
customers entail the risk of product liability. The use of wireless devices containing our products
to access untrusted content creates a risk of exposing the system software in those devices to
viral or malicious attacks. We continue to expand our focus on this issue and take measures to
safeguard the software from this threat. However, this issue carries the risk of general product
liability claims along with the associated impacts on reputation and demand. Although we carry
product liability insurance to protect against product liability claims, we cannot assure you that
our insurance coverage will be sufficient to protect us against losses due to product liability
claims, or that we will be able to
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continue to maintain such insurance at a reasonable cost.
Furthermore, not all losses associated with alleged
product failure are insurable. Our inability to maintain insurance at an acceptable cost or to
protect ourselves in other ways against potential product liability claims could prevent or inhibit
the commercialization of our products and those of our licensees and customers and harm our future
operating results. In addition, a product liability claim or recall, whether against our licensees,
customers, or us could harm our reputation and result in decreased demand for our products.
MediaFLO does not fully control promotional activities necessary to stimulate demand for our
services.
Our MediaFLO business is a wholesale provider of mobile entertainment and information services
to our operator partners. As such, we do not set the retail price of our service to the consumer,
nor do we directly control the marketing and promotion of the service to the operators subscriber
base. Therefore, we are dependent upon our operator partners to price, market and otherwise promote
our services to the end users. If our operator partners do not effectively price, market and
otherwise promote the service to their subscriber base, our ability to achieve the subscriber and
revenue targets contemplated in our business plan will be negatively impacted.
Consumer acceptance and adoption of our MediaFLO technology will have a considerable impact on the
success of our MediaFLO businesses.
Customer acceptance of the services our MediaFLO businesses offer is, and will continue to be,
affected by technology-based differences and by the operational performance, quality, reliability
and coverage of our wireless network. Consumer demand could be impacted by differences in
technology, coverage and service areas, network quality, consumer perceptions, media content
offerings and rate plans. Our operator partners may have difficulty retaining subscribers if we are
unable to meet subscriber expectations for network quality and coverage, customer care or content.
Obtaining content that is appealing to subscribers on economically rational terms may be limited by
our content provider partners inability to obtain the mobile rights to such programming. An
inability to address these issues could limit our ability to expand our subscriber base and place
us at a competitive disadvantage. Additionally, adoption and deployment of our MediaFLO technology
could be adversely impacted by government regulatory practices that support a single standard other
than our technology, operator selection of competing technologies or consumer preferences.
Our business and operating results will be harmed if we are unable to manage growth in our
business.
Certain of our businesses have experienced periods of rapid growth and/or increased their
international activities, placing significant demands on our managerial, operational and financial
resources. In order to manage growth and geographic expansion, we must continue to improve and
develop our management, operational and financial systems and controls, including quality control
and delivery and service capabilities. We also need to continue to expand, train and manage our
employee base. We must carefully manage research and development capabilities and production and
inventory levels to meet product demand, new product introductions and product and technology
transitions. We cannot assure you that we will be able to timely and effectively meet that demand
and maintain the quality standards required by our existing and potential customers and licensees.
In addition, inaccuracies in our demand forecasts, or failure of the systems used to develop
the forecasts, could quickly result in either insufficient or excessive inventories and
disproportionate overhead expenses. If we ineffectively manage our growth or are unsuccessful in
recruiting and retaining personnel, our business and operating results will be harmed.
Our operating results are subject to substantial quarterly and annual fluctuations and to market
downturns.
Our revenues, earnings and other operating results have fluctuated significantly in the past
and may fluctuate significantly in the future. General economic or other conditions causing a
downturn in the market for our products or technology, and in turn affecting the timing of customer
orders or causing cancellations or rescheduling of orders, could also adversely affect our
operating results. Moreover, our customers may change delivery schedules, cancel or reduce orders
without incurring significant penalties and generally are not subject to minimum purchase
requirements.
Our future operating results will be affected by many factors, including, but not limited to:
our ability to retain existing or secure anticipated customers or licensees, both domestically and
internationally; our ability to develop, introduce and market new technology, products and services
on a timely basis; management of inventory by us and our customers and their customers in response
to shifts in market demand; changes in the mix of technology and
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products developed, licensed, produced and sold; seasonal customer demand; and other factors
described elsewhere in this Quarterly Report and in these risk factors. Our cash investments represent
a significant asset that may be
subject to fluctuating or even negative returns depending upon interest rate movements and
financial market conditions in fixed income and equity securities.
These factors affecting our future operating results are difficult to forecast and could harm
our quarterly and/or annual operating results. If our operating results fail to meet the financial
guidance we provide to investors, or the expectations of investment analysts or investors in any
period, securities class action litigation could be brought against us and/or the market price of
our common stock could decline.
Our stock price may be volatile.
The stock market in general, and the stock prices of technology-based and wireless
communications companies in particular, have experienced volatility that often has been unrelated
to the operating performance of any specific public company. The market price of our common stock
has fluctuated in the past and is likely to fluctuate in the future as well. Factors that may have
a significant impact on the market price of our stock include:
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announcements concerning us or our competitors, including the selection of wireless
communications technology by wireless operators and the timing of the roll-out of those
systems; |
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court or regulatory body decisions or settlements regarding intellectual property
licensing and patent litigation and arbitration; |
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receipt of substantial orders or order cancellations for integrated circuits and
system software products; |
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quality deficiencies in services or products; |
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announcements regarding financial developments or technological innovations; |
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international developments, such as technology mandates, political developments or
changes in economic policies; |
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lack of capital to invest in 3G networks; |
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new commercial products; |
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changes in recommendations of securities analysts; |
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general stock market volatility; |
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government regulations, including share-based compensation accounting and tax
regulations; |
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energy blackouts; |
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acts of terrorism and war; |
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inflation and deflation; |
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widespread illness; |
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proprietary rights or product or patent litigation against us or against our
customers or licensees; |
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strategic transactions, such as spin-offs, acquisitions and divestitures; or |
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rumors or allegations regarding our financial disclosures or practices. |
Our future earnings and stock price may be subject to volatility, particularly on a quarterly
basis. Shortfalls in our revenues or earnings in any given period relative to the levels expected
by securities analysts could immediately, significantly and adversely affect the trading price of
our common stock.
In the past, securities class action litigation often has been brought against a company
following periods of volatility in the market price of its securities. Due to changes in the
volatility of our stock price, we may be the target of securities litigation in the future.
Securities and patent litigation could result in substantial uninsured costs and divert
managements attention and resources. In addition, stock price volatility may be precipitated by
failure to meet earnings expectations or other factors, such as the potential uncertainty in future
reported earnings created by
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the assumptions used for share-based compensation and the related valuation models used to
determine such expense.
Our industry is subject to rapid technological change, and we must make substantial investments in
new products and technologies to compete successfully.
New technological innovations generally require a substantial investment before they are
commercially viable. We intend to continue to make substantial investments in developing new
products and technologies, and it is possible that our development efforts will not be successful
and that our new technologies will not result in meaningful revenues. In particular, we intend to
continue to invest significant resources in developing integrated circuit products to support
high-speed wireless internet access and multimode, multiband, multinetwork operation and multimedia
applications, which encompass development of graphical display, camera and video capabilities, as
well as higher computational capability and lower power on-chip computers and signal processors. We
also continue to invest in the development of our BREW applications development platform, our
MediaFLO MDS and FLO technology and our IMOD display technology. All of these new products and
technologies face significant competition, and we cannot assure you that the revenues generated
from these products or the timing of the deployment of these products or technologies, which may be
dependent on the actions of others, will meet our expectations. We cannot be certain that we will
make the additional advances in development that may be essential to commercialize our IMOD
technology successfully.
The market for our products and technology is characterized by many factors, including:
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rapid technological advances and evolving industry standards; |
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changes in customer requirements and consumer expectations; |
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frequent introductions of new products and enhancements; |
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evolving methods for transmission of wireless voice and data communications; and |
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intense competition from companies with greater resources, customer relationships and
distribution capabilities. |
Our future success will depend on our ability to continue to develop and introduce new
products, technology and enhancements on a timely basis. Our future success will also depend on our
ability to keep pace with technological developments, protect our intellectual property, satisfy
customer requirements, price our products competitively and achieve market acceptance. The
introduction of products embodying new technologies and the emergence of new industry standards
could render our existing products and technology, and products and technology currently under
development, obsolete and unmarketable. If we fail to anticipate or respond adequately to
technological developments or customer requirements, or experience any significant delays in
development, introduction or shipment of our products and technology in commercial quantities,
demand for our products and our customers and licensees products that use our technology could
decrease, and our competitive position could be damaged.
Changes in assumptions used to estimate the values of share-based compensation have a significant
effect on our reported results.
We are required to estimate and record compensation expense in the statement of operations for
share-based payments, such as employee stock options, using the fair value method. This method has
a significant effect on our reported earnings, although it will not affect our cash flows, and
could adversely impact our ability to provide accurate guidance on our future reported financial
results due to the variability of the factors used to estimate the values of share-based payments.
If factors change and/or we employ different assumptions or different valuation methods in future
periods, the compensation expense that we record may differ significantly from amounts recorded
previously, which could negatively affect our stock price and our stock price volatility.
The accounting guidance for share-based compensation is relatively new, and best practices are
not well established. The application of these principles may be subject to further interpretation
and refinement over time. There are significant differences among valuation models, and there is a
possibility that we will adopt different valuation models in the future. This may result in a lack
of consistency in future periods and materially affect the fair value estimate of share-based
payments. It may also result in a lack of comparability with other companies that use different
models, methods and assumptions.
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Theoretical valuation models and market-based methods are evolving and may result in lower or
higher fair value estimates for share-based compensation. The timing, readiness, adoption, general
acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical
models may require voluminous historical information, modeling expertise, financial analyses,
correlation analyses, integrated software and databases, consulting fees, customization and testing
for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may
dilute our earnings per share and involve significant transaction fees and ongoing administrative
expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the
benefits to our investors.
Potential tax liabilities could adversely affect our results.
We are subject to income taxes in both the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our provision for income taxes. Although we believe
our tax estimates are reasonable, the final determination of tax audits and any related litigation
could be materially different than that which is reflected in historical income tax provisions and
accruals. In such case, a material effect on our income tax provision and net income in the period
or periods in which that determination is made could result. In addition, tax rules may change that
may adversely affect our future reported financial results or the way we conduct our business. For
example, we consider the operating earnings of certain non-United States subsidiaries to be
invested indefinitely outside the United States based on estimates that future domestic cash
generation will be sufficient to meet future domestic cash needs. No provision has been made for
United States federal and state or foreign taxes that may result from future remittances of
undistributed earnings of foreign subsidiaries. Our future reported financial results may be
adversely affected if tax or accounting rules regarding unrepatriated earnings change or if
domestic cash needs require us to repatriate foreign earnings.
The high amount of capital required to obtain radio frequency licenses, deploy and expand wireless
networks and obtain new subscribers could slow the growth of the wireless communications industry
and adversely affect our business.
Our growth is dependent upon the increased use of wireless communications services that
utilize our technology. In order to provide wireless communications services, wireless operators
must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in
the United States and other countries throughout the world, and limited spectrum space is allocated
to wireless communications services. Industry growth may be affected by the amount of capital
required to: obtain licenses to use new frequencies; deploy wireless networks to offer voice and
data services; expand wireless networks to grow voice and data services; and obtain new
subscribers. The significant cost of licenses, wireless networks and subscriber additions may slow
the growth of the industry if wireless operators are unable to obtain or service the additional
capital necessary to implement or expand 3G wireless networks. Our growth could be adversely
affected if this occurs.
If wireless devices pose safety risks, we may be subject to new regulations, and demand for our
products and those of our licensees and customers may decrease.
Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect
of discouraging the use of wireless devices, which would decrease demand for our products and those
of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have
updated the guidelines and methods they use for evaluating radio frequency emissions from radio
equipment, including wireless phones and other wireless devices. In addition, interest groups have
requested that the FCC investigate claims that wireless communications technologies pose health
concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also
been expressed over the possibility of safety risks due to a lack of attention associated with the
use of wireless devices while driving. Any legislation that may be adopted in response to these
expressions of concern could reduce demand for our products and those of our licensees and
customers in the United States as well as foreign countries.
Our QES and MediaFLO businesses depend on the availability of satellite and other networks.
Our OmniTRACS and OmniVision systems operate on leased Ku-band satellite transponders in the
United States, Mexico and Europe. Our primary data satellite transponder and position reporting
satellite transponder lease for the system in the United States runs through October 2012 and
includes transponder and satellite protection (back-up capacity in the event of a transponder or
satellite failure). The transponder lease for the system in Mexico runs through April 2010 and does
not currently have back-up capability. Our agreement with a third party to
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provide network and satellite services (including procuring satellite space) in Europe expires
in September 2012. We believe our agreements will provide sufficient transponder capacity for our
OmniTRACS and OmniVision operations through the expiration dates. A failure to maintain adequate
satellite capacity could harm our business, operating results, liquidity and financial position.
QES terrestrial-based products rely on wireless terrestrial communication networks operated by
third parties. The unavailability or nonperformance of these network systems could harm our
business. The products and services that we sell for use on Globalstar Inc.s (Globalstar)
low-Earth-orbit satellite network are dependent on the availability and performance of the
Globalstar satellite system. On February 6, 2007, Globalstar announced that many Globalstar
satellites are experiencing an anomaly resulting in degraded performance of the amplifiers for the
S-band satellite communications antenna. Globalstar stated that unless remedied, by some time in
2008, this degradation or degraded performance will have a significant adverse impact on
Globalstars ability to provide uninterrupted two-way voice and data services on a continuous basis
in any given location. On May 30, 2007, Globalstar announced that four Globalstar satellites were
successfully launched, and four additional satellites are planned for launch shortly. Globalstar
stated that it believes the additional satellites will augment the current operating constellation
and improve two-way voice and data services until the launch of the second-generation satellite
constellation, which is scheduled to begin in the summer of 2009. If the recent launch of the
satellites does not remedy the problem or if Globalstar is unable to launch a second-generation
satellite constellation, this degraded performance will have an adverse impact on sales of our
products and services that rely on the Globalstar network.
Our MediaFLO network and systems currently operate in the United States market on a leased
Ku-band satellite transponder. Our primary program content and data distribution satellite
transponder lease runs through December 31, 2012 and includes transponder and satellite protection
(back-up capacity in the event of a transponder or satellite failure), which we believe will
provide sufficient transponder capacity for our domestic United States MediaFLO services through
fiscal 2012. Additionally, our MediaFLO Transmitter Sites are monitored and controlled by a variety
of terrestrial-based data circuits relying on various terrestrial and satellite communication
networks operated by third parties. A failure to maintain adequate satellite capacity or the
unavailability or nonperformance of the terrestrial-based network systems could have an adverse
effect on our business and operating results.
Our business and operations would suffer in the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a
Disaster Recovery Plan for our internal information technology networking systems, our systems are
vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural
disasters, terrorism, war and telecommunication failures. Any system failure, accident or security
breach that causes interruptions in our operations or to our customers or licensees operations
could result in a material disruption to our business. To the extent that any disruption or
security breach results in a loss or damage to our customers data or applications, or
inappropriate disclosure of confidential information, we may incur liability as a result. In
addition, we may incur additional costs to remedy the damages caused by these disruptions or
security breaches.
Message transmissions for QES operations are formatted and processed at the Network Management
Center in San Diego, California, with a fully redundant backup Network Management Center located in
Las Vegas, Nevada. Content from third parties for MediaFLO operations is received, processed and
retransmitted at the Broadcast Operations Center in San Diego, California. The centers, operated by
us, are subject to system failures, which could interrupt the services and have an adverse effect
on our operating results.
From time to time, we install new or upgraded business management systems. To the extent such
systems fail or are not properly implemented, we may experience material disruptions to our
business, delays in our external financial reporting or failures in our system of internal
controls, that could have a material adverse effect on our results of operations.
Noncompliance with environmental or safety regulations could cause us to incur significant expenses
and harm our business.
As part of the development of our IMOD display technology, we are operating a research and
development fabrication facility. The development of IMOD display prototypes is a complex and
precise process involving hazardous materials subject to environmental and safety regulations.
Failure or inability to comply with existing or future environmental and safety regulations could
result in significant remediation liabilities, the imposition of fines and/or the suspension or
termination of development activities.
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Our stock repurchase program may not result in a positive return of capital to stockholders.
At December 30, 2007, we had remaining authority to repurchase up to $670 million of our
common stock, net of a put option outstanding. Since December 30, 2007, we have repurchased and
retired 17,727,000 shares of our common stock for $668 million. Our stock repurchases may not
return value to stockholders because the market price of the stock may decline significantly below
the levels at which we repurchased shares of stock. Our stock purchase program is intended to
deliver stockholder value over the long-term, but stock price fluctuations can reduce the programs
effectiveness.
As part of our stock repurchase program, we sold put options to reduce the cost of
repurchasing stock. As of December 30, 2007, we have one put option outstanding that may require us
to repurchase 2.5 million shares for approximately $94 million. In the event of a significant and
unexpected drop in stock price, this arrangement may require us to repurchase stock at price levels
that are significantly above the then-prevailing market price of our stock. Such an overpayment may
have an adverse effect on the effectiveness of our overall stock repurchase program and may reduce
value for our stockholders.
We cannot provide assurance that we will continue to declare dividends at all or in any particular
amounts.
We intend to continue to pay quarterly dividends subject to capital availability and periodic
determinations that cash dividends are in the best interest of our stockholders. Future dividends
may be affected by, among other items, our views on potential future capital requirements,
including those related to research and development, creation and expansion of sales distribution
channels and investments and acquisitions, legal risks, stock repurchase programs, changes in
federal income tax law and changes to our business model. Our dividend payments may change from
time to time, and we cannot provide assurance that we will continue to declare dividends at all or
in any particular amounts. A reduction in our dividend payments could have a negative effect on our
stock price.
Government regulation and policies of industry standards bodies may adversely affect our business.
Our products and services and those of our customers and licensees are subject to various
regulations, including FCC regulations in the United States and other international regulations, as
well as the specifications of national, regional and international standards bodies. Changes in the
regulation of our activities, including changes in the allocation of available spectrum by the
United States government and other governments or exclusion or limitation of our technology or
products by a government or standards body, could have a material adverse effect on our business,
operating results, liquidity and financial position.
We hold licenses in the United States from the FCC for the spectrum referred to as Block D in
the Lower 700 MHz Band (also known as TV Channel 55), covering the entire nation for use in our
MediaFLO business. As a result, we are regulated by the FCC pursuant to Part 27 of the FCCs rules,
which are subject to a variety of ongoing FCC proceedings. It is impossible to predict with
certainty the outcome of pending FCC or other federal or state regulatory proceedings relating to
our MediaFLO service or our use of the spectrum for which we hold licenses. Unless we are able to
obtain relief, existing laws and regulations may inhibit our ability to expand our business and to
introduce new products and services. In addition, the adoption of new laws or regulations or
changes to the existing regulatory framework could adversely affect our business plans.
We may not be able to attract and retain qualified employees.
Our future success depends largely upon the continued service of our board members, executive
officers and other key management and technical personnel. Our success also depends on our ability
to continue to attract, retain and motivate qualified personnel. In addition, implementing our
product and business strategy requires specialized engineering and other talent, and our revenues
are highly dependent on technological and product innovations. The market for such specialized
engineering and other talented employees in our industry is extremely competitive. In addition,
existing immigration laws make it more difficult for us to recruit and retain highly skilled
foreign national graduates of U.S. universities, making the pool of available talent even smaller.
Key employees represent a significant asset, and the competition for these employees is intense in
the wireless communications industry. In the event of a labor shortage, or in the event of an
unfavorable change in prevailing labor and/or immigration laws, we could experience difficulty
attracting and retaining qualified employees. We continue to anticipate increases in human
resources, particularly in engineering, through fiscal 2008. If we are unable to attract and retain
the qualified employees that we need, our business may be harmed.
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We may have particular difficulty attracting and retaining key personnel in periods of poor
operating performance given the significant use of incentive compensation by our competitors. We do
not have employment agreements with our key management personnel and do not maintain key person
life insurance on any of our personnel. To the extent that new regulations make it less attractive
to grant options to employees or if stockholders do not authorize shares for the continuation of
equity compensation programs in the future, we may incur increased compensation costs, change our
equity compensation strategy or find it difficult to attract, retain and motivate employees, each
of which could materially and adversely affect our business.
Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
Changing laws, regulations and standards relating to corporate governance and public
disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations
and standards are subject to varying interpretations in many cases. As a result, their application
in practice may evolve over time. We are committed to maintaining high standards of corporate
governance and public disclosure. Complying with evolving interpretations of new or changed legal
requirements may cause us to incur higher costs as we revise current practices, policies and
procedures, and may divert management time and attention from revenue generating to compliance
activities. If our efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due to ambiguities related to
practice, our reputation might also be harmed. In addition, it has become more difficult and more
expensive for us to obtain director and officer liability insurance, and we have purchased reduced
coverage at substantially higher cost than in the past. Further, our board members, chief executive
officer and chief financial officer could face an increased risk of personal liability in
connection with the performance of their duties. As a result, we may have difficulty attracting and
retaining qualified board members and executive officers, which could harm our business.
Our charter documents and Delaware law could limit transactions in which stockholders might obtain
a premium over current market prices.
Our certificate of incorporation includes a provision that requires the approval of holders of
at least 66 2/3% of our voting stock as a condition to certain mergers or other business
transactions with, or proposed by, a holder of 15% or more of our voting stock. Under our charter
documents, stockholders are not permitted to call special meetings of our stockholders or to act by
written consent. These charter provisions may discourage certain types of transactions involving an
actual or potential change in our control, including those offering stockholders a premium over
current market prices. These provisions may also limit our stockholders ability to approve
transactions that they may deem to be in their best interests.
Further, our Board of Directors has the authority under Delaware law to fix the rights and
preferences of and issue shares of preferred stock, and our preferred share purchase rights
agreement will cause substantial dilution to the ownership of a person or group that attempts to
acquire us on terms not approved by our Board of Directors. While our Board of Directors approved
our preferred share purchase rights agreement to provide the board with greater ability to maximize
shareholder value, these rights could deter takeover attempts that the board finds inadequate and
make it more difficult to bring about a change in our ownership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial market risks related to interest rates, foreign currency exchange rates and equity
prices are described in our 2007 Annual Report on Form 10-K. At December 30, 2007, there have been
no other material changes to the market risks described at September 30, 2007 except as described
below. Additionally, we do not anticipate any other near-term changes in the nature of our market
risk exposures or in managements objectives and strategies with respect to managing such
exposures.
Interest Rate Risk. We invest our cash in a number of diversified investment and
non-investment grade fixed and floating rate securities, consisting of cash equivalents, marketable
debt securities and debt mutual funds. The following table provides information about our financial
instruments that are sensitive to changes in interest rates.
44
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
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No Single |
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2008 |
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2009 |
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2010 |
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2011 |
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2012 |
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Thereafter |
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Maturity |
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Total |
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Fixed interest-bearing securities: |
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|
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|
Cash and cash equivalents |
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$ |
897 |
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$ |
897 |
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Interest rate |
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|
4.9 |
% |
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Available-for-sale securities: |
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Investment grade |
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$ |
1,228 |
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$ |
237 |
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$ |
252 |
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$ |
92 |
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$ |
31 |
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$ |
23 |
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$ |
212 |
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$ |
2,075 |
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Interest rate |
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|
5.1 |
% |
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|
5.4 |
% |
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4.0 |
% |
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5.2 |
% |
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4.8 |
% |
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7.5 |
% |
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5.3 |
% |
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Non-investment grade |
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$ |
12 |
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$ |
19 |
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$ |
15 |
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$ |
40 |
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$ |
41 |
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$ |
411 |
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$ |
538 |
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Interest rate |
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|
5.5 |
% |
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|
8.4 |
% |
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9.0 |
% |
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9.0 |
% |
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8.0 |
% |
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9.0 |
% |
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Floating interest-bearing
securities: |
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Cash and cash equivalents |
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$ |
1,947 |
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$ |
1,947 |
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Interest rate |
|
|
4.1 |
% |
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Available-for-sale securities: |
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Investment grade |
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$ |
168 |
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$ |
349 |
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$ |
293 |
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$ |
50 |
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$ |
76 |
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$ |
89 |
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$ |
806 |
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$ |
1,831 |
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Interest rate |
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|
4.9 |
% |
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|
5.1 |
% |
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5.1 |
% |
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5.2 |
% |
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5.3 |
% |
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5.5 |
% |
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5.7 |
% |
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|
Non-investment grade |
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$ |
7 |
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$ |
8 |
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$ |
28 |
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$ |
63 |
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|
$ |
111 |
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|
$ |
390 |
|
|
$ |
714 |
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|
$ |
1,321 |
|
Interest rate |
|
|
7.0 |
% |
|
|
7.5 |
% |
|
|
7.2 |
% |
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6.7 |
% |
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7.0 |
% |
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|
6.9 |
% |
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|
7.1 |
% |
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|
Cash and cash equivalents and available-for-sale securities are recorded at fair value.
Equity Price Risk. We have a diversified marketable securities portfolio, including mutual
fund and exchange traded fund shares that is subject to equity price risk. The recorded values of
marketable equity securities decreased to $1.22 billion at December 30, 2007 from $1.52 billion at
September 30, 2007. The recorded values of equity mutual fund and exchange traded fund shares
decreased to $1.38 billion at December 30, 2007 from $1.87 billion at September 30, 2007. We made
equity investments in companies of varying size, style, industry and geography, and changes in
investment allocations may affect the price volatility of our investments. A 10% decrease in the
market price of our marketable equity securities and equity mutual fund and exchange traded fund
shares at December 30, 2007 would cause a corresponding 10% decrease in the carrying amounts of
these securities, or $260 million.
In connection with our stock repurchase program, we sell put options that may require us to
repurchase shares of our common stock at fixed prices. These written put options subject us to
equity price risk. At December 30, 2007, we had one outstanding put option, enabling the holder to
sell 2,500,000 shares of our common stock upon exercise for approximately $94 million (net of the
option premium received). The put option liability, with a fair value of $7 million at December 30,
2007, was included in other current liabilities. If the fair value of our common stock at December
30, 2007 decreased by 15%, the amount required to physically settle the put option would exceed the
fair value of the shares by $9 million, net of the $8 million in premium received.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based on this evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this Quarterly Report.
Changes in Internal Control over Financial Reporting. There have been no changes in our
internal control over financial reporting during the first quarter of fiscal 2008 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
45
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A review of our current litigation is disclosed in the notes to our condensed consolidated
financial statements. See Notes to Condensed Consolidated Financial Statements, Note 6
Commitments and Contingencies. We are also engaged in other legal actions arising in the ordinary
course of our business and believe that the ultimate outcome of these actions will not have a
material adverse effect on our results of operations, liquidity or financial position.
ITEM 1A. RISK FACTORS
We have provided updated Risk Factors in the section labeled Risk Factors in Part I, Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations. The Risk
Factors section provides updated information in certain areas, but we do not believe those updates
have materially changed the type or magnitude of the risks we face in comparison to the disclosure
provided in our most recent Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer purchases of equity securities during the first quarter of fiscal 2008 were (in
millions, except share and per share data):
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Total Number of |
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Approximate Dollar |
|
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|
Shares Purchased |
|
Value of Shares that |
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as Part of Publicly |
|
May Yet Be Purchased |
|
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Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
Under the Plans or |
|
|
Shares Purchased |
|
Per Share (1) |
|
Programs (2) |
|
Programs (2) |
October 1, 2007 to
October 28, 2007 |
|
|
10.5 |
|
|
$ |
41.41 |
|
|
|
10.5 |
|
|
$ |
1,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2007 to
November 25, 2007 |
|
|
8.6 |
|
|
$ |
38.74 |
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|
|
8.6 |
|
|
$ |
891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 26, 2007 to
December 30, 2007 |
|
|
3.3 |
|
|
$ |
40.08 |
|
|
|
3.3 |
|
|
$ |
764 |
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22.4 |
|
|
$ |
40.18 |
|
|
|
22.4 |
|
|
$ |
764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average Price Paid Per Share excludes cash paid for commissions. We repurchased 2.5 million shares in the first
quarter of 2008 upon the exercise of an outstanding put option. A premium of $6 million was excluded from the
average price paid per share. If the premium had been included, the average price paid per share for the
purchases of shares made during the first quarter would have been $39.91. |
|
(2) |
|
On May 22, 2007, we announced that we had been authorized to repurchase up to $3.0 billion of our common stock
with no expiration date. The approximate dollar value of shares that may yet be purchased has not been reduced by
the net cost of $94 million (net of the premiums received) of 2.5 million shares that may be repurchased related
to put options outstanding at December 30, 2007. Since December 30, 2007, we have repurchased and retired
17,272,000 shares of our common stock for $668 million. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
46
ITEM 6. EXHIBITS
Exhibits
|
|
|
3.1
|
|
Restated Certificate of Incorporation. (1) |
|
|
|
3.2
|
|
Certificate of Amendment of Certificate of Designation. (2) |
|
|
|
3.4
|
|
Amended and Restated Bylaws. (3) |
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Paul E. Jacobs. |
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William E. Keitel. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for Paul E. Jacobs. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for William E. Keitel. |
|
|
|
(1) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on March 13,
2006. |
|
(2) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on September
30, 2005. |
|
(3) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on September
22, 2006. |
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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|
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|
|
QUALCOMM Incorporated
|
|
|
/s/ William E. Keitel
|
|
|
William E. Keitel |
|
|
Executive Vice President and
Chief Financial Officer |
|
|
Dated: January 23, 2008
48