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QUALCOMM INC/DE - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
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 Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended September 30, 2012 contained in our
2012 Annual Report on Form 10-K.
This Quarterly Report (including, but not limited to, the following section
regarding Management's Discussion and Analysis of Financial Condition and
Results of Operations) contains forward-looking statements, including, but not
limited to, statements regarding our business, financial condition, results of
operations and prospects. Additionally, statements concerning future matters,
such as the development of new products, enhancements or technologies, industry
or regional trends, consumer demand, sales or price levels, challenges to our
business model and other statements regarding matters that are not historical,
are forward-looking statements. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Quarterly Report.
Although forward-looking statements in this Quarterly Report reflect our good
faith judgment, such statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are inherently subject to
risks and uncertainties and actual results and outcomes may differ materially
from the results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to such differences in
results and outcomes include without limitation those discussed under the
heading "Risk Factors" below, as well as those discussed elsewhere in this
Quarterly Report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Quarterly
Report. We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Quarterly Report. Readers are urged to carefully review and
consider the various disclosures made in this Quarterly Report, which attempt to
advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
Overview
Recent Developments
Revenues for the first quarter of fiscal 2013 were $6.0 billion, with net income
of $1.9 billion, which were impacted by the following key items:
• We shipped approximately 182 million Mobile Station Modem (MSM) integrated
circuits for CDMA- and OFDMA-based wireless devices, an increase of 17%,
compared to 156 million MSM integrated circuits in the year ago quarter.
(1)
• Total reported device sales were approximately $53.3 billion, an increase
of approximately 29% compared to approximately $41.4 billion in the year
ago quarter. (2)
Against this backdrop, the following recent developments occurred during the
first quarter of fiscal 2013 with respect to key elements of our business or our
industry:
• Worldwide wireless connections grew by approximately 1% to reach
approximately 6.5 billion. (3)
• Worldwide 3G connections (all CDMA-based) grew by approximately 4% to approximately 1.9 billion, which was approximately 29% of total wireless
subscriptions, including approximately 523 million CDMA2000 1X/1xEV-DO
subscriptions and approximately 1.4 billion WCDMA/HSPA/TD-SCDMA
subscriptions. (3)
(1) Some customers built devices that incorporated two MSM integrated circuits.
In such cases, which represent approximately 1% of our gross volume, we count
only one MSM integrated circuit in reporting the MSM integrated circuit
shipments.
(2) Total reported device sales is the sum of all reported sales in U.S. dollars
(as reported to us by our licensees) of all licensed CDMA-based, OFDMA-based
and multimode CDMA/OFDMA subscriber devices (including handsets, modules,
modem cards and other subscriber devices) by our licensees during a
particular period (collectively, 3G/4G devices). Not all licensees report
sales the same way (e.g., some licensees report sales net of permitted
deductions, such as transportation, insurance and packing costs, while other
licensees report sales and then identify the amount of permitted deductions
in their reports), and the way in which licensees report such information may
change from time to time. Total reported device sales for a particular period
may include prior period activity that was not reported by the licensee until
such particular period.
21--------------------------------------------------------------------------------(3) According to Wireless Intelligence estimates as of January 28, 2013, for the
quarter ended December 30, 2012. Wireless Intelligence estimates for CDMA2000
1X/1xEV-DO subscribers do not include Wireless Local Loop.
Our Business and Operating Segments
We design, manufacture, have manufactured on our behalf and market digital
communications products and services based on CDMA, OFDMA and other
technologies. We derive revenues principally from sales of integrated circuit
products, fixed license fees (payable in one or more installments) and ongoing
royalties for use of our intellectual property, and fees for messaging and other
services and related hardware sales, software development and licensing, and
related services and software hosting services. Operating expenses primarily
consist of cost of equipment and services revenues and research and development
and selling, general and administrative expenses.
We conduct business primarily through four reportable segments: QCT, QTL, QWI
and QSI. Our reportable segments are operated by QUALCOMM Incorporated and its
direct and indirect subsidiaries. At the beginning of fiscal 2013, we completed
a corporate reorganization in which certain assets of QUALCOMM Incorporated, as
well as the stock of certain of its direct and indirect subsidiaries, were
contributed to its wholly-owned subsidiary Qualcomm Technologies, Inc. (QTI).
QTL continues to be operated by QUALCOMM Incorporated, which continues to own
the vast majority of our patent portfolio. Substantially all of our products and
services businesses, including QCT, and substantially all of our engineering,
research and development functions, are operated by QTI and its subsidiaries.
Neither QTI nor any of its subsidiaries has any right, power or authority to
grant any licenses or other rights under or to any patents owned by QUALCOMM
Incorporated.
QCT is a leading developer and supplier of integrated circuits and system
software based on CDMA, OFDMA and other technologies for use in voice and data
communications, networking, application processing, multimedia and global
positioning system products. QCT's integrated circuit products and system
software are sold to or licensed to manufacturers that use our products in
wireless devices, particularly mobile phones, tablets, laptops, data modules,
handheld wireless computers and gaming devices, access points and routers, data
cards and infrastructure equipment, and in wired devices, particularly broadband
gateway equipment, desktop computers, televisions and Blu-ray players. The MSM
integrated circuits, which include the Mobile Data Modem, Qualcomm Single Chip
and Qualcomm Snapdragon processor-based devices, perform the core baseband modem
functionality in wireless devices providing voice and data communications, as
well as multimedia applications and global positioning functions. In addition,
our Snapdragon processors provide advanced application and graphics processing
capabilities. QCT's system software enables the other device components to
interface with the integrated circuit products and is the foundation software
enabling manufacturers to develop devices utilizing the functionality within the
integrated circuits. QCT revenues comprised 68% and 66% of total consolidated
revenues in the first quarter of fiscal 2013 and 2012, 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. Integrated circuits are die cut from silicon
wafers that have been assembled into packages or modules and have completed the
final test manufacturing processes. We rely on independent third-party suppliers
to perform the manufacturing and assembly, and most of the testing, of our
integrated circuits based primarily on our proprietary designs and test
programs. 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 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
model, we purchase wafers and die from semiconductor manufacturing foundries and
contract with separate third-party manufacturers for probe, assembly and final
test services.
QTL grants licenses or otherwise provides rights to use portions of our
intellectual property portfolio, which, among other rights, includes certain
patent rights essential to and/or useful in the manufacture and sale of certain
wireless products, including, without limitation, products implementing
CDMA2000, WCDMA, CDMA TDD (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA
standards and their derivatives. QTL licensing revenues are comprised of license
fees as well as royalties based on sales by licensees of products incorporating
or using our intellectual property. License fees are fixed amounts paid in one
or more installments. Royalties are generally based upon a percentage of the
wholesale (i.e., licensee's) selling price of licensed products, net of certain
permissible deductions (e.g., certain shipping costs, packing costs, VAT, etc.).
QTL revenues comprised 29% and 31% of total consolidated revenues in the first
quarter of fiscal 2013 and 2012, respectively. The vast majority of such
revenues were generated through our licensees' sales of CDMA2000 and WCDMA
subscriber equipment products.
QWI, which includes our QES, QIS, QGOV and Firethorn divisions, generates
revenues primarily through sales of products, services (including software
development) and software aimed at the support and delivery of wireless
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applications. QES sells integrated wireless systems and services to
transportation and logistics companies to manage their assets and workforce. QIS
provides content enablement services for the wireless industry, including its
Brew, Plaza and other products and services. QIS also provides QChat
push-to-talk and other software products and services for wireless operators.
QGOV provides development and other services and related products involving
wireless communications technologies to government agencies and their
contractors. Firethorn builds and manages software applications that enable
mobile commerce services. QWI revenues comprised 2% and 3% of total consolidated
revenues in the first quarter of fiscal 2013 and 2012, respectively.
QSI makes strategic investments that we believe will open new opportunities for
our technologies, support the design and introduction of new products and
services for voice and data communications or possess unique capabilities or
technology. Many of these strategic investments are in early-stage companies.
QSI also holds wireless spectrum, including the broadband wireless access (BWA)
spectrum held by our subsidiaries (BWA subsidiaries) that were established to
operate a wireless network in India. As part of our strategic investment
activities, we intend to pursue various exit strategies from each of our QSI
investments at some point in the future. The assets and liabilities of the BWA
subsidiaries are presented as held for sale at December 30, 2012 as a result of
our agreement with Bharti Airtel Limited (Bharti), which provides that Bharti's
ownership interest in the BWA subsidiaries will increase over time to 100% if
certain conditions are met.
Nonreportable segments are comprised of display and other product and services
initiatives, including our QMT division. QMT continues to develop an
interferometric modulator (IMOD) display technology based on
micro-electro-mechanical-system (MEMS) structure combined with thin film optics.
Looking Forward
The deployment of 3G networks enables increased voice capacity and higher data
rates than prior generation networks, thereby supporting more minutes of use and
a wide range of mobile broadband data applications for handsets, 3G connected
computing devices and other consumer electronics. According to the Global mobile
Suppliers Association (GSA), as of January 2013, to complement their existing 3G
networks, more than 140 wireless operators have deployed and more than 325
wireless operators are planning to deploy OFDMA-based technology, often called
4G, in new wireless spectrum to gain additional capacity for data services. As a
result, we expect continued growth in the coming years in consumer demand for 3G
and 3G/4G multimode products and services around the world. In addition, we
expect an increasing number of devices, such as computers, consumer electronics
and networking equipment, to require multiple communications technologies to
support a variety of connected applications.
As we look forward to the next several months, the following items are likely to
have an impact on our business:
• The worldwide transition from 2G to 3G and 3G/4G networks is expected to
continue, including the further expansion of 3G in China, India and other
emerging regions. We expect that the emergence of lower-end smartphone
products will contribute to such expansion.
• We expect consumer demand for advanced 3G and 3G/4G multimode devices,
including smartphones and data-centric devices, such as tablets and
e-readers, to continue at a strong pace.
• We expect that CDMA-based device prices will continue to vary broadly due
to the increased penetration of smartphones combined with active
competition throughout the world at all price tiers. Additionally, varying
rates of economic growth by region and stronger growth of CDMA-based
device shipments in emerging regions, as compared to developed regions,
are expected to continue to impact the average and range of selling prices
of CDMA-based devices.
• We continue to invest significant resources toward the development of technologies and products for voice and data communications, primarily in
the wireless industry, including advancements to 3G and 4G LTE (an
OFDMA-based standard) networks, wireless baseband chips, our converged
computing/communications (Snapdragon) chips, multimedia products, software
and services, as well as our IMOD and other display technologies.• We expect industry demand for 28 nanometer integrated circuits to continue
to be strong. We have worked closely with our suppliers to increase our
supply of 28 nanometer integrated circuits and do not anticipate any
significant supply shortages, relative to expected customer demand.
In addition to the foregoing business and market-based matters, we continue to
devote resources to working with and educating participants in the wireless
value chain as to the benefits of our business model in promoting a highly
competitive and innovative wireless industry. However, we expect that certain
companies may continue to be dissatisfied
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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.
Further discussion of risks related to our business is presented in the Risk
Factors included in this Quarterly Report.
Our Operating Results for the First Quarter of Fiscal 2013 Compared to the First
Quarter of Fiscal 2012
Revenues (in millions) Three Months Ended
December 30, 2012 December 25, 2011 Change
Equipment and services $ 4,199 $ 3,167 $ 1,032
Licensing 1,819 1,514 305
$ 6,018 $ 4,681 $ 1,337
The increase in equipment and services revenues was primarily due to an increase
in QCT revenues of $1.04 billion. The increase in licensing revenues was
primarily due to an increase in QTL revenues of $317 million.
Operating Expenses (in millions) Three Months Ended
December 30, 2012 December 25, 2011 Change
Cost of equipment and services (E&S) revenues $ 2,237 $ 1,754 $ 483
Cost as % of E&S revenues 53 % 55 %
The increase in margin percentage in the first quarter of fiscal 2013 compared
to the first quarter of fiscal 2012 was primarily attributable to an increase in
QCT gross margin percentage. Our margin percentage may fluctuate in future
periods depending on the mix of products sold and services provided, competitive
pricing, new product introduction costs and other factors.
Three Months Ended
December 30, 2012 December 25, 2011 Change
Research and development $ 1,106 $ 873 $ 233
% of revenues 18 % 19 %
Selling, general, and administrative 587 503 84
% of revenues 10 % 11 %
The dollar increase in research and development expenses was primarily
attributable to an increase of $195 million in costs related to the development
of CDMA-based 3G, OFDMA-based 4G LTE and other technologies for integrated
circuit and related software products and to expand our intellectual property
portfolio and a $31 million increase in share-based compensation. Remaining
dollar increases were related to development of our display technologies, other
new product initiatives and our services businesses.
The dollar increase in selling, general and administrative expenses was
primarily attributable to a $29 million increase in employee-related expenses
and a $24 million increase in costs related to litigation and other legal
matters.
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Net Investment Income (in millions) Three Months Ended
December 30, December 25,
2012 2011 Change
Interest and dividend income:
Corporate and other segments $ 164 126 $ 38
QSI 1 4 (3 )
Interest expense (8 ) (27 ) 19
Net realized gains on investments:
Corporate and other segments 91 37 54
QSI 5 7 (2 )
Net impairment losses on investments:
Corporate and other segments (4 ) (14 ) 10
QSI (6 ) (6 ) -
(Losses) gains on derivative instruments (1 ) 45 (46 )
Equity in losses of investees (3 ) (2 ) (1 )
$ 239 $ 170 $ 69
The increase in interest and dividend income on cash and marketable securities
held by corporate and other segments was a result of higher average cash and
marketable securities balances and adjustments in cash and marketable securities
allocations. The decrease in interest expense was the result of capitalizing a
portion of interest starting in the third quarter of fiscal 2012 related to the
BWA network in India. The increase in net realized gains on investments was
primarily due to adjustments in marketable securities allocations in fiscal
2013. Gains on derivative instruments in the first quarter of fiscal 2012
primarily resulted from changes in the fair value of put options sold in
connection with our stock repurchase program which expired in fiscal 2012.
Income Tax Expense (in millions) Three Months Ended
December 30, 2012 December 25, 2011 Change
Income tax expense $ 424 $ 321 $ 103
Effective tax rate 18 % 19 % (1 )%
The following table summarizes the primary factors that caused our effective tax
rates for the first quarter of fiscal 2013 and 2012 to be less than the United
States federal statutory rate:
Three Months Ended
December 30, 2012 December 25, 2011
Expected income tax provision at federal statutory tax rate 35 % 35 %
Benefits from foreign income taxed at other than U.S. rates (17 %)
(15 %)
Benefits related to the research and development tax credit - % (1 %)
Effective tax rate 18 % 19 %
The effective tax rate for the first quarter of fiscal 2013 is lower than the
effective tax rate for the first quarter of fiscal 2012 as a result of increased
tax benefits from higher foreign earnings taxed at rates that are less than the
United States federal tax rate, partially offset by a lower federal research and
development tax credit. The annual effective tax rate for fiscal 2012 reflected
the United States federal research and development credit generated through
December 31, 2011, the date on which the credit expired.
The American Taxpayer Relief Act of 2012, which reinstated the United States
federal research and development tax credit retroactively from January 1, 2012
through December 31, 2013, was not enacted into law until the second quarter of
fiscal 2013. Therefore, the expected tax benefit resulting from such
reinstatement for fiscal 2013 will not be reflected in our estimated annual
effective tax rate for fiscal 2013 until the second fiscal quarter.
Additionally, the tax benefit resulting from such reinstatement for fiscal 2012
is expected to be recorded as a discrete tax benefit in the second quarter
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of fiscal 2013. After consideration of both of these items, we estimate our
annual effective income tax rate for fiscal 2013 will be approximately 16%.
Our Segment Results for the First Quarter of Fiscal 2013 Compared to the First
Quarter of Fiscal 2012
The following should be read in conjunction with the first quarter financial
results of fiscal 2013 for each reporting segment. See "Notes to Condensed
Consolidated Financial Statements, Note 7 - Segment Information."
Reconciling
QCT QTL QWI QSI Items Total
Three Months Ended December
30, 2012
Revenues $ 4,120 $ 1,757 $ 146 $ - $ (5 ) $ 6,018
EBT (1) 1,068 1,532 (3 ) (17 ) (253 ) 2,327
EBT as a % of revenues 26 % 87 % (2 %)
Three Months Ended December
25, 2011
Revenues $ 3,085 $ 1,440 $ 152 $ - $ 4 $ 4,681
EBT (1) 739 1,267 1 (34 ) (252 ) 1,721
EBT as a % of revenues 24 % 88 % 1 %
(1) Earnings (loss) before taxes.
QCT Segment. The $1.04 billion increase in QCT revenues was primarily due to an
increase in equipment and services revenues. Equipment and services revenues,
mostly related to sales of MSM and accompanying RF and PM integrated circuits,
were $4.07 billion and $3.03 billion in the first quarter of fiscal 2013 and
2012, respectively. The increase in equipment and services revenues resulted
primarily from an increase of $637 million related to the net effects of changes
in product mix and lower selling prices of such products and an increase of $396
million related to higher unit shipments. Approximately 182 million and 156
million MSM integrated circuits were sold during the first quarter of fiscal
2013 and 2012, respectively.
The increase in QCT EBT as a percentage of revenues was due to both an increase
in gross margin percentage and the 34% increase in QCT revenues relative to a
combined 28% increase in research and development expenses and selling, general
and administrative expenses. QCT gross margin percentage increased as a result
of the net effects of a decrease in average unit costs and favorable product
mix, partially offset by normal price declines and higher product support costs.
QCT inventories increased by 26% to $1.23 billion in the first quarter of fiscal
2013 from $973 million at September 30, 2012 primarily due to increases in
work-in-process and finished goods related to the timing of inventory receipts
and builds and the abatement of 28 nanometer supply constraints at the end of
the first quarter of fiscal 2013.
QTL Segment. The $317 million increase in QTL revenues was primarily due to an
increase in sales of CDMA-based devices by licensees. The decrease in QTL EBT as
a percentage of revenues was attributable to the 22% increase in revenues
relative to a 31% increase in operating expenses primarily due to an increased
allocation of patent expenses in connection with the corporate reorganization
and increased research and development expense from new projects.
QWI Segment. The $6 million decrease in QWI revenues was primarily due to a
decrease in QES revenues.
QSI Segment. The $17 million decrease in QSI loss before taxes was primarily due
to a $20 million decrease in interest expense as a result of capitalizing
interest starting in the third quarter of fiscal 2012 related to the BWA network
in India.
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 $28.4 billion at
December 30, 2012, an increase of $1.5 billion from September 30, 2012. This
increase included $340 million in proceeds from the issuance of common stock
under our equity compensation plans. Our cash, cash equivalents and marketable
securities at December 30, 2012 consisted of $10.1 billion held domestically and
$18.3 billion held by foreign subsidiaries. Of the amount of cash, cash
equivalents and marketable securities held by our foreign subsidiaries at
December 30, 2012, $17.8 billion is held in jurisdictions where our
undistributed earnings are indefinitely reinvested and would be subject to
material tax effects if
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repatriated. Total cash provided by operating activities increased to $2.0
billion during the first quarter of fiscal 2013, compared to $1.8 billion during
the first quarter of fiscal 2012.
During the first quarter of fiscal 2013, we repurchased and retired 4,295,000
shares of our common stock for $250 million, before commissions. At December 30,
2012, approximately $2.5 billion remained available for repurchase under our
stock repurchase program. The stock repurchase program has no expiration date.
We continue to evaluate repurchases as a means of returning capital to
stockholders, subject to our periodic determinations that repurchases are in the
best interest of our stockholders.
We paid cash dividends totaling $428 million, or $0.25 per share, on December
21, 2012. On January 15, 2013, we announced a cash dividend per share of $0.25
per share on our common stock, payable on March 27, 2013 to stockholders of
record as of March 8, 2013. We intend to continue to use cash dividends as a
means of returning capital to stockholders, subject to capital availability and
our view that cash dividends are in the best interests of our stockholders.
Accounts receivable increased 13% during the first quarter of fiscal 2013. Days
sales outstanding, on a consolidated basis, were 25 days at December 30, 2012,
compared to 29 days at September 30, 2012. The increase in accounts receivable
and the decrease in the days sales outstanding was primarily due to the effects
of timing of shipments and customer payments for receivables related to
integrated circuits.
We believe our current cash and cash equivalents, marketable securities and our
expected cash flow generated from operations will provide us with flexibility
and satisfy our working and other capital requirements over the next fiscal year
and beyond based on our current business plans.
• Our research and development expenditures were $1.1 billion during the
first quarter of fiscal 2013 and $3.9 billion in fiscal 2012, and we
expect to continue to invest heavily in research and development for new technologies, applications and services for voice and data communications,
primarily in the wireless industry.
• Cash outflows for capital expenditures were $205 million during the first
quarter of fiscal 2013 and $1.3 billion in fiscal 2012, respectively,
including approximately $480 million in fiscal 2012 related to the
construction of a new manufacturing facility in Taiwan for our QMT
division. We expect to continue to incur capital expenditures in the
future to support our business, including research and development activities. Future capital expenditures may be impacted by transactions
that are currently not forecasted.
• Our purchase obligations for the remainder of fiscal 2013 and for fiscal
2014, some of which relate to research and development activities and
capital expenditures, totaled $3.7 billion and $445 million, respectively,
at December 30, 2012.
• We expect to continue making strategic investments and acquisitions, the
amounts of which could vary significantly, to open new opportunities for
our technologies, obtain development resources, grow our patent portfolio
or pursue new business.
• At December 30, 2012, we have loan and debenture liabilities in the aggregate of $1.0 billion, which were classified as held for sale, related
to the BWA spectrum won in India that are denominated in Indian rupees. At
December 30, 2012, loans in the aggregate of $451 million are due and
payable in full on May 31, 2014, one loan in the amount of $75 million is
due and payable on December 1, 2014, and $513 million in debentures,
including accrued interest, are due and payable in full on June 25, 2017.
Each holder has the right to demand redemption of its portion of the
debentures outstanding on June 25, 2013 subject to sufficient prior written notice. The loans bear interest at rates that are reset quarterly
(ranging from 10.00% to 10.25% at December 30, 2012); interest payments
are due monthly. The debentures bear interest at an agreed-upon annual
rate, which is compounded annually and reset semi-annually beginning on
June 25, 2013 (10.25% at December 30, 2012) with interest due upon
redemption.
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. Our consolidated balance sheet at
December 30, 2012 included an aggregate of $451 million and $75 million in loans
and $513 million in debentures that are payable in full in Indian rupees on
May 31, 2014, December 1, 2014 and June 25, 2017, respectively. The debentures
can be redeemed by us without penalty on certain dates. Additionally, each
holder has the right to demand redemption of its portion of the debentures
outstanding on June 25, 2013 subject to sufficient prior written notice. We have
no material off-balance sheet arrangements as defined in Regulation S-K
303(a)(4)(ii).
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Additional information regarding our financial commitments at December 30, 2012
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."
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,
2012, including our financial statements and the related notes.
Risks Related to Our Businesses
Our revenues are dependent on the commercial deployment of CDMA, OFDMA and other
communications technologies and our customers' and licensees' sales of
communications equipment, products and services based on these technologies.
We develop, patent and commercialize technology and products based on CDMA,
OFDMA and other communications technologies. Our revenues are dependent upon the
commercial deployment of these technologies and our customers' and licensees'
sales of wireless communications equipment, products and services based on these
technologies. Our business may be harmed, and our substantial investments in
these technologies may not provide us an adequate return, if:
• wireless operators delay 3G and/or 3G/4G multimode deployments, expansions
or upgrades and/or delay moving 2G customers to 3G or 3G/4G multimode
devices;
• LTE, an OFDMA-based 4G wireless standard, is not more widely deployed or
commercial deployment is delayed;
• government regulators delay the reallocation of 2G spectrum to allow wireless operators to upgrade to 3G, thereby restricting the expansion of
3G wireless connectivity, primarily outside of major population areas;
• wireless operators are unable to drive improvements in 3G network
performance and/or capacity; or
• wireless operators and other industries using these technologies deploy
other technologies.
Our business is dependent on our ability to increase our share of components
sold and to continue to drive the adoption of our products and services into 3G,
3G/4G multimode and 4G wireless devices and networks. We are also dependent on
the success of our customers, licensees, operators of CDMA- and OFDMA-based
wireless networks and other industries using our technologies, as well as the
timing of their deployment of new products and services, and they may incur
lower gross margins on products or services based on these technologies than on
products using alternative technologies. If commercial deployment or upgrades of
these technologies or upgrades of 2G subscribers to 3G, 3G/4G multimode or 4G
wireless communications equipment, products or services based on these
technologies do not continue or are delayed, our revenues could be negatively
impacted, and our business could suffer.
Our industry is subject to competition in an environment of rapid technological
change that could result in decreased demand and/or declining average selling
prices for our products and those of our licensees and/or result in new
specifications or requirements placed upon our products, each of which could
negatively affect our revenues and operating results.
Our industry is subject to rapid technological change, and we must make
substantial investments in new products, services and technologies to compete
successfully. 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. Our products, services and
technologies face significant competition, and the revenues generated or the
timing of their deployment, which may be dependent on the actions of others, may
not meet our expectations. Competition in the communications industry is
affected by various factors that include, among others: evolving industry
standards and business models; evolving methods of transmission for voice and
data communications; networking; value-added features that drive replacement
rates and selling prices; turnkey, integrated product offerings
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scalability and the ability of the system technology to meet customers'
immediate and future network requirements.
Our future success will depend on, among other factors, our ability to:
• increase and/or accelerate demand for our integrated circuit products and
drive their adoption into the most popular device models and across a
broad spectrum of devices, such as smartphones, tablets and other mobile
computing devices, and into a new generation of products for consumer
electronics and connectivity, including gaming, wireless charging, eHealth
and the connected home;
• strengthen our integrated circuit product roadmap for, and develop channel
relationships in, emerging geographic regions requiring turnkey product
offerings for low-end smartphones;
• be a preferred partner (and sustain preferred relationships) providing
products that support Android, Windows Phone/RT and other operating system
platforms to the partners that effectively commercialize new devices using
these platforms;
• continue to be a leader in 4G technology evolution, including expansion of
our OFDMA-based single mode licensing program, and continue our timely
introduction of 4G turnkey, integrated products and services;
• be a leader serving original equipment manufacturers, high level operating
systems (HLOS) providers, operators and other industry participants as new
market entrants and other factors affect the industry landscape;
• become a leading supplier of small cell technology (which allows
inexpensive cell sites deployed by users to connect to traditional
cellular networks through wired internet connections) to enable
significant network capacity expansion to meet anticipated growth in
mobile data traffic;
• develop brand recognition as we compete against better known companies in
mobile computing and other consumer driven arenas;
• focus our service businesses on key opportunities, such as wireless
charging, eHealth and machine-to-machine technologies (allowing both
wireless and wired systems to communicate with other devices) that create
standalone value and/or contribute to the success of our other businesses;
and
• succeed in significant foreign regions, such as China, India and Europe.
Companies that promote standards that are neither CDMA- nor OFDMA-based (e.g.,
GSM) and companies that design integrated circuits based on CDMA, OFDMA or their
derivatives are generally competitors or potential competitors. Examples (some
of which are strategic partners of ours in other areas) include Broadcom, CSR
plc, Freescale, HiSilicon Technologies, Intel, Lantiq, Marvell Technology,
Matsushita, MediaTek, Motorola Mobility, nVidia, Renesas Electronics, Samsung,
Spreadtrum Communications, ST-Ericsson (a joint venture between Ericsson Mobile
Platforms and ST-NXP Wireless), Texas Instruments and VIA Telecom. Many of these
current and potential competitors have advantages over us that include, among
others: motivation by our customers in certain circumstances to find alternate
suppliers; foreign government support of other technologies; more extensive
relationships with local distribution companies and original equipment
manufacturers in emerging geographic regions (e.g., China); and/or a more
established presence in certain device markets.
Certain of our software and our suppliers' software may contain or may be
derived from "open source" software, and we have seen, and believe we will
continue to see, an increase in customers requesting that we develop products,
including software associated with our integrated circuit products, that
incorporate open source software elements and operate in an open source
environment, which, under certain open source licenses, may offer accessibility
to a portion of a product's source code and may expose related intellectual
property to adverse licensing conditions. Licensing of such software may impose
certain obligations on us if we were to distribute derivative works of the open
source software. For example, these obligations may require us to make source
code for the derivative works available to our customers in a manner that allows
them to make such source code available to their customers, or license such
derivative works under a particular type of license that is different than what
we customarily use to license our software. Developing open source products,
while adequately protecting the intellectual property rights upon which our
licensing business depends, may prove burdensome and time-consuming under
certain circumstances, thereby placing us at a competitive disadvantage for new
product designs. Also, our use and our customers' use of open source software
may subject our products and our customers' products to governmental scrutiny
and delays in product certification, which could cause customers to view our
products as less desirable than our competitors' products. While we believe we
have taken appropriate steps and employed adequate controls to protect our
intellectual property rights, our use of open source software presents risks
that could have an adverse effect on these rights and on our business.
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Competition may reduce average selling prices for our chipset products and the
products of our customers and licensees. Total royalties payable to us will
generally decrease as a result of reductions in the average selling prices of
our licensees' products, unless offset by an increase in volumes. We anticipate
that additional competitors will introduce products as a result of growth
opportunities in wireless communications, 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.
We derive a significant portion of our consolidated revenues from a small number
of customers and licensees. If revenues derived from these customers or
licensees decrease or the timing of such revenues fluctuate, our operating
results could be negatively affected.
Our QCT segment derives a significant portion of revenues from a small number of
customers, and we may be unable to further diversify our customer base. In
addition, our industry is experiencing and may continue to experience an
increasing concentration of device share among a few companies, and this trend
may result in an increasing portion of our revenues being derived from a small
number of customers. Further, there has been and continues to be litigation
among certain of our customers and other industry participants, and the
potential outcomes of such litigation, including but not limited to injunctions
against devices that incorporate our products, could impact our business. The
loss of any one of our significant customers, a reduction in the purchases of
our products by such customers, or the delay, even if only temporary, or
cancellation of significant purchases from any of these customers would reduce
our revenues in the period of the delay or cancellation and harm our ability to
achieve or sustain expected operating results. Further, concentration of device
share among a few companies, and the corresponding purchasing power of these
companies, may result in lower prices for our products which, if not accompanied
by a sufficient increase in volume, could have an adverse effect on our
revenues. In addition, the timing and size of purchases by our significant
customers may be impacted by the timing of such customers' new or next
generation product introductions, over which we have little or no control, and
the timing of such introductions may cause our operating results to fluctuate.
Accordingly, unless and until our QCT segment diversifies and expands its
customer base, our future success will largely depend upon and be impacted by
future purchases and the timing and size of any such future purchases by these
customers.
Further, companies that provide HLOS for devices, including large companies,
such as Microsoft and Google, have entered the device market. If we fail to
effectively partner with these companies, or their partners or their customers,
they may decide not to purchase (either directly or through their contract
manufacturers), or to reduce or discontinue their purchases of, our integrated
circuit products.
Although we have more than 225 licensees, our QTL segment derives a significant
portion of licensing revenues 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 customer 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 devices sold by our major licensees, without a sufficient increase in
the volumes of such devices sold, could have an adverse effect on our revenues.
Our licensing revenues can be impacted by the deployment of other technologies
in place of technologies based on CDMA, OFDMA and their derivatives, by the need
to extend certain existing license agreements that are expiring and/or to cover
additional later patents or by the success of our licensing programs for 4G
single mode products and in emerging, machine-to-machine (M2M) services markets.
Although we own a very strong portfolio of issued and pending patents related to
GSM, GPRS, EDGE, OFDM, OFDMA, WLAN, Multiple Input, Multiple Output (MIMO) and
other 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 licensing program. Many wireless operators are investigating or have
selected LTE (or to a lesser extent WiMAX) as their next-generation 4G
technologies for deployment in existing or future wireless spectrum bands as
complementary to their existing CDMA-based networks. While multimode 3G/4G
products are generally covered by existing 3G licensing agreements, products
that implement 4G and do not implement 3G are generally not covered by existing
3G licensing agreements. Although we believe that our patented technology is
essential and useful to implementation of the LTE and WiMAX industry standards
and have granted royalty-bearing licenses to more than 40 companies (including
LG, Nokia, Samsung and ZTE) to make and sell products implementing 4G standards
but not implementing 3G standards, the royalty rates for single mode 4G products
are generally lower than our royalty rates for 3G and 3G/4G multimode products,
and therefore, we might not achieve the same licensing revenues on such LTE or
WiMAX products as on 3G-based or multimode 3G/4G-based products. In addition,
new connectivity services are emerging that rely on devices that may or may not
be used on traditional cellular networks, such as devices used in gaming and the
connected home. Standards, even de facto standards, that develop as these
technologies mature may impact our ability to obtain royalties
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that are equivalent to those that we receive for 3G products used in cellular
communications. Although we believe that our patented technology is essential
and useful to the commercialization of such services, the royalties we receive
may be lower than those we receive from our current licensing program.
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 and/or royalties are not owed
to us under such license agreements after the specified time period. In order to
license or to obtain a license to such later patents, or to receive royalties
after the specified time period, we will need to extend or modify such license
agreements or enter into new license agreements with such licensees. We might
not be able to modify those license agreements, or enter into new license
agreements, in the future without affecting the material terms and conditions of
our license agreements with such licensees, and such modifications or new
agreements may impact our revenues. If we are unable to reach agreement on such
modifications or new agreements, it could result in patent infringement
litigation with such companies.
Efforts by some communications equipment manufacturers or their customers to
avoid paying fair and reasonable royalties for the use of our intellectual
property may require the investment of substantial management time and financial
resources and may result in legal decisions and/or actions by governments,
courts, Standards Development Organizations (SDOs) or other industry
organizations that harm our business.
A small number of companies have initiated various strategies to 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,
patent misuse, patent exhaustion, and/or patent and/or license unenforceability,
or some form of unfair competition, (ii) taking positions contrary to our
understanding of their contracts with us, (iii) appeals to governmental
authorities, (iv) collective action, including working with wireless operators,
standards bodies, other like-minded companies and other organizations, on both
formal and informal bases, to adopt intellectual property policies and practices
that could have the effect of limiting returns on intellectual property
innovations, and (v) lobbying governmental regulators and elected officials for
the purpose of seeking the imposition of some form of compulsory licensing
and/or to weaken a patent holder's ability to enforce its rights or obtain a
fair return for such rights.
Some companies or entities 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 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 number of essential patents held by such company. Others have proposed
that injunctions not be an available remedy for infringement of essential
patents and/or have made proposals that could severely limit damage awards and
other remedies by courts for patent infringement (e.g., by severely limiting the
base upon which the royalty percentage may be applied). A number of these
strategies are purportedly based on interpretations of the policies of certain
SDOs concerning the licensing of patents that are or may be essential to
industry standards and our and/or other companies' alleged failure to abide by
these policies. There is a risk that relevant courts or governmental agencies
will interpret some or all of those proposals in a manner adverse to our
interests or that some SDOs may adopt such proposals as so-called clarifications
or amendments to their intellectual property policies. If such proposals and
strategies continue and are successful in the future, our business model would
be harmed, either by artificially limiting our return on investment with respect
to new technologies, limiting our ability to seek injunctions against infringers
of our standards' essential patents, or forcing us to work outside of the SDOs
or such other industry groups to promote our new technologies, and our results
of operations could be negatively impacted. As well, the legal and other costs
associated with defending our position have been and continue to be significant.
We assume that such challenges, regardless of their merits, will continue into
the foreseeable future and may require the investment of substantial management
time and financial resources to explain and defend our position.
Other companies or entities have commenced, and may again commence, actions
seeking to establish the invalidity of one or more 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, depending upon their extent, 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.
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The enforcement and protection of our intellectual property rights may be
expensive, could fail to prevent misappropriation or unauthorized use of our
proprietary intellectual property rights, could result in the loss of our
ability to enforce one or more patents or could be adversely affected by changes
in patent laws, by laws in certain foreign jurisdictions that may not
effectively protect our intellectual property rights or by ineffective
enforcement of laws in such jurisdictions.
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, technologies and
proprietary information is difficult and time consuming. We cannot be certain
that the steps we have taken, or may take in the future, 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 intellectual property rights as fully or as readily as United
States laws or where the enforcement of such laws may be lacking or ineffective.
Some industry participants who have a vested interest in devaluing patents
generally, or standards essential patents in particular, have mounted attacks on
certain patent systems, increasing the likelihood of changes to established
patent laws. In the United States, patents laws governing, among other things,
the granting of patents and the enforcement of patents will change in March 2013
as a result of the Leahy-Smith America Invents Act. Many observers anticipate
that the European Union will adopt a unitary patent system that may broadly
impact that region's patent regime in the near future. We cannot predict with
certainty the long-term effects of these changes or proposed changes. In
addition, we cannot be certain that the laws and policies of any country or the
practices of any standards bodies, foreign or domestic, with respect to
intellectual property enforcement or licensing or the adoption of standards,
will not be changed in the future in a way detrimental to our licensing program
or to the sale or use of our products or technology. We may have difficulty in
protecting or enforcing our intellectual property rights and/or contracts in a
particular foreign jurisdiction due to, among others: challenges to our
licensing practices under such jurisdictions' competition laws; adoption of
mandatory licensing provisions by foreign jurisdictions (either with
controlled/regulated royalties or royalty free); failure of foreign courts to
recognize and enforce judgments of contract breach and damages issued by courts
in the United States; and challenges pending before foreign competition agencies
to the pricing and integration of additional features and functionality into our
chipset products.
We may need to litigate in the United States or elsewhere in the world 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 ability to enforce 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.
Claims by other companies that we infringe their intellectual property could
adversely affect our business.
From time to time, companies have asserted, and may again assert, patent,
copyright and other intellectual property 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 company's intellectual property
rights, we could be subject to an injunction or required to redesign our
products, which could be costly, or to license such rights and/or pay damages or
other compensation to such other company. If we were unable to redesign our
products, license such intellectual property rights used in our products or
otherwise distribute our products through a licensed supplier, we could be
prohibited from making and selling such products. In any potential dispute
involving other companies' patents or other intellectual property, our chipset
foundries, semiconductor assembly and test providers and customers could also
become the targets of litigation. We are contingently liable under certain
product sales, services, license and other agreements to indemnify certain
customers against certain types of liability and/or damages arising from
qualifying claims of patent infringement by products or services sold or
provided by us. Reimbursements under indemnification arrangements could have an
adverse effect on our results of operations. Furthermore, any such litigation
could severely disrupt the supply of our products and the businesses of our
chipset customers and their customers, which in turn could hurt our
relationships with them and could result in a decline in our chipset sales
and/or reductions in our licensees' sales, causing a corresponding decline in
our chipset and/or licensing revenues. 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 an adverse effect upon our operating
results.
We expect that we may 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 leverage
in licensing negotiations. We may
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not be successful in such proceedings, and if we are not, the range of possible
outcomes includes everything from royalty payment to an injunction on the sale
of certain of our integrated circuit products (and on the sale of our customers'
devices using such products). Any imposition of royalty payments might make
purchases of our products less economical for our customers. A negative outcome
in any such proceeding could severely disrupt the business of our chipset
customers and their wireless operator customers, which in turn could harm our
relationships with them and could result in a decline in our share of worldwide
chipset sales and/or a reduction in our licensees' sales to wireless operators,
causing corresponding declines 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 OFDMA standards or implementations of systems
based on such standards. If we or other product manufacturers are required to
obtain additional licenses and/or pay royalties to one or more of such other
patent holders, this could have an adverse effect on the commercial
implementation of our products and technologies, average sales prices of and
demand for our licensees' products and our results of operations.
We depend on a limited number of third-party suppliers for our procurement,
manufacture and testing of product inventories. If we fail to execute supply
strategies that provide competitive advantage in terms of supply assurance,
technology leadership and cost, our operating results and our business may be
harmed.
Our QCT segment purchases raw materials, component parts, subassemblies and
specialized manufacturing equipment from third-party suppliers and contracts
with separate suppliers for probe, assembly, test and other services in the
manufacture of product inventories. A reduction, interruption, delay or
limitation in our product supply source, a failure by our suppliers to provide
or allocate adequate manufacturing or test capacity for our products or their
inability to react to shifts in product demand or an increase in raw material or
component prices could have an adverse effect on our ability to meet customer
demands, our business and/or our profitability. The loss of a supplier or the
inability of a 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, business operations and
ability to compete for future business. In the event of a loss of or a decision
to change a supplier, qualifying a new foundry supplier and commencing volume
production or testing could cause us to incur additional expense and production
delays, resulting in possible loss of customers.
While we have established alternate suppliers for certain technologies that we
consider critical, we rely on sole- or limited-source suppliers for some
products, subjecting us to significant risks, including: possible shortages of
raw materials or manufacturing capacity; poor product performance; and reduced
control over delivery schedules, manufacturing capability and yields, quality
assurance, quantity and costs. To the extent we have established alternate
suppliers, these suppliers may require significant levels of support to bring
complex technologies to production. As a result, we may invest a significant
amount of effort and resources in supporting, and incur higher costs to
maintain, such alternate suppliers. Our arrangements with our suppliers may
oblige us to incur costs to manufacture and test our products that do not
decrease at the same rate as decreases in pricing to our customers. The ability
of our suppliers to develop or maintain leading process technologies, including
transitions to smaller geometry process technologies, and to effectively compete
with the manufacturing performance of our competition, could also impact our
ability to meet customer demand, increase our operating expenses and subject us
to the risk of excess inventories. Our inability to meet customer demand due to
sole- or limited-sourcing and/or the additional operating expenses that we incur
because of these or other supply constraints or because of the need to support
alternate suppliers could negatively impact our business, our revenues and our
results of operations.
Although we have long-term contracts with our suppliers, many 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 for any
specific quantity, our suppliers may allocate, and in the past have allocated,
capacity to the production and testing of products for their other customers
while reducing or limiting capacity to manufacture or test our products.
Accordingly, capacity for our products may not be available when we need it or
at reasonable prices. To the extent we do obtain long-term capacity commitments,
we may incur additional costs related to those commitments. As an example, we
experienced capacity limitations from our suppliers related to 28 nanometer
integrated circuits, resulting in supply constraints and our inability to meet
certain customer demand during fiscal 2012 and the first quarter of fiscal 2013.
One or more of our suppliers or potential alternate suppliers may manufacture
CDMA- or OFDMA-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 or limit 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.
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Global economic conditions that impact the communications industry could
negatively affect the demand for our products and our customers' products, which
may negatively affect our revenues.
A decline in global economic conditions, particularly in geographic regions with
high customer concentrations, could have adverse, wide-ranging effects on demand
for our products and for the products of our customers, particularly equipment
manufacturers or others in the wireless communications industry who buy their
products, such as wireless operators. Any prolonged economic crisis may result
in a downturn in demand for our products or technology; the insolvency of key
suppliers; delays in reporting and/or payments from our licensees and/or
customers; failures by counterparties; and negative effects on wireless device
inventories. In addition, our direct and indirect customers' ability to purchase
or pay for our products and services, obtain financing and upgrade wireless
networks could be adversely affected by economic conditions, leading to a
reduction, cancellation or delay of orders for our products.
Our stock price and earnings are subject to substantial quarterly and annual
fluctuations and to market downturns.
Both the market price of our common stock and our earnings have fluctuated in
the past and are likely to fluctuate in the future as well. Factors that may
have a significant impact on the market price of our stock and/or earnings
include, among others:
• volatility of the stock market in general and technology-based companies
in particular that is often unrelated to the operating performance of any
specific public company;
• 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;
• international developments, such as technology mandates, political
developments or changes in economic policies;
• changes in recommendations of securities analysts;
• earnings (or forecasts) that fail to meet financial guidance that we
provided to investors or the expectations of investment analysts or
investors;
• proprietary rights, product or patent litigation taken or threatened
against us or against our customers or licensees;
• strategic transactions, such as spin-offs, acquisitions and divestitures;
• unexpected and/or significant changes in the average selling price of our
licensees' products and our products;
• unresolved disputes with licensees that result in non-payment and/or
non-recognition of royalty revenues that may be owed to us;
• declines in the value or performance of our significant marketable securities portfolio, which is subject to financial market volatility and
liquidity, interest rate, credit and other risks; or
• inquiries, rumors or allegations regarding our financial disclosures,
practices or compliance programs.
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 our stock price, we may be the target of securities litigation
in the future. Securities litigation could result in substantial uninsured costs
and divert management's attention and resources.
We may engage in acquisitions or strategic transactions or make strategic
investments that could adversely affect our financial results or fail to enhance
stockholder value.
We engage in acquisitions or strategic transactions or make strategic
investments with the goal of maximizing stockholder value. We acquire businesses
and other assets, including wireless spectrum, patents and other intangible
assets, enter into joint ventures or other strategic transactions and purchase
minority equity interests in or make loans to companies that are generally
private and early-stage. Our strategic activities are focused on expanding the
wireless industry and promoting the global adoption of CDMA, OFDMA or other
technologies and related services to enhance our stockholder value. Many of our
acquisitions or strategic investments entail a high degree of risk, and
investments may not become liquid for several years after the date of the
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
some cases, we may be required to consolidate or record our share of the
earnings or losses of companies in which we have acquired ownership interests.
In addition, we may record impairment charges related to our strategic
investments or other strategic assets, such as wireless spectrum and
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other intangible assets. Any losses or impairment charges that we incur related
to strategic investments or other transactions will have a negative impact on
our financial results, and we may continue to incur new or additional losses
related to strategic assets or investments that we have not fully impaired or
exited.
Achieving the anticipated benefits of business 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, including, among others: retaining key
employees; successfully integrating new employees, business systems and
technology; retaining customers and suppliers of the acquired business;
minimizing the diversion of management's attention from ongoing business
matters; coordinating geographically separate organizations; consolidating
research and development operations; and consolidating corporate and
administrative infrastructures. We may not derive any commercial value from
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 or become subject to litigation.
Additionally, we may not be successful in expanding into geographic regions
and/or categories of products served by or adjacent to an acquired business and
in addressing potential new opportunities that may arise out of the combination.
Due to our inexperience with products of and/or geographic regions served by
acquired businesses, we may overestimate the benefits, including product and
other synergies and growth opportunities that we expect to realize, and we may
not achieve them. If we do not achieve the anticipated benefits of business
acquisitions, our results of operations may be adversely affected, and we may
not enhance stockholder value by engaging in these transactions.
Our QMT division's business does not currently generate operating income and may
not succeed or its operating results may not meet our expectations.
While we continue to believe our QMT division's next generation IMOD display
technology will offer compelling advantages to users of displays, other
technologies may continue to improve in ways that reduce the advantages we
anticipate. Sales of flat panel displays are currently dominated, and we believe
will likely continue to be dominated for some time, 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, numerous companies have started investing in another flat panel
display technology called organic light-emitting diode (OLED), which provides
comparable performance to high end LCDs. In each case, advances in LCD or other
flat panel display technologies, such as OLED, 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 device manufacturers to avoid entering into or continuing licensing
and/or commercial relationships with us.
During fiscal 2012, we updated the business plan and related internal forecasts
for our QMT division to reflect a focus on licensing our next generation IMOD
display technology while directly commercializing only certain IMOD products. We
may not evolve our QMT division into a successful licensing business or IMOD
product supplier if we are unable to develop our IMOD display technology to meet
market demands or to cost-effectively manufacture and commercialize our IMOD
products, among other factors. In addition, we have limited experience
commercializing IMOD products, and we may be unsuccessful in selling such
products. Our QMT division had $1.1 billion in assets (including $136 million in
goodwill) at December 30, 2012. If we do not expect to achieve or do not achieve
the cash flows anticipated in QMT's business plan, our assets may become
impaired, negatively impacting our operating results, and we may not meet future
earnings projections related to this business.
Currency fluctuations could negatively affect future product sales or royalty
revenues, harm our ability to collect receivables or increase the U.S. dollar
cost of the activities of our foreign subsidiaries and international strategic
investments.
Our international customers sell their products throughout the world in various
currencies. Consolidated revenues from international customers as a percentage
of total revenues were greater than 90% during the first quarter of fiscal 2013
and in each of the last three fiscal years. Adverse movements in currency
exchange rates may negatively affect our business and our operating results due
to a number of factors, including, among others:
• Our products and those of our customers and licensees that are sold
outside the United States may become less price-competitive;
• Certain of our revenues, such as royalties, that are derived from licensee
or customer sales that are denominated in foreign currencies could
decrease;
35--------------------------------------------------------------------------------• Foreign exchange hedging transactions that we engage in to reduce the
impact of currency fluctuations may require the payment of structuring
fees, limit the U.S. dollar value of royalties from licensees' sales that
are denominated in foreign currencies, cause earnings volatility if the hedges do not qualify for hedge accounting and expose us to counterparty
risk if the counterparty fails to perform;
• We may need additional cash to settle our loan and debenture obligations
that are denominated in Indian rupees and the related interest;
• The U.S. dollar value of our marketable securities that are denominated
directly or indirectly in foreign currencies may decline; and
• Labor and the cost of goods in currencies other than the U.S. dollar may
increase, resulting in higher than expected costs.
Failures in our products and services or in the products of our customers,
including those resulting from security vulnerabilities, defects or errors,
could harm our business.
The use of devices containing our products to access untrusted content creates a
risk of exposing the system software in those devices to viral or malicious
attacks. While we continue to expand our focus on this issue and are taking
measures to safeguard our products from cybersecurity threats, device
capabilities continue to evolve in a 3G/4G environment, enabling more data and
processes, such as mobile computing, and increasing the risk of security
failures. Further, our products are inherently complex and may contain defects
or 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 manufacturing yields and reliability.
Manufacturing, testing, marketing and use of our products and those of our
customers and licensees entail the risk of product liability. Because our
products and services are responsible for critical functions in our customers'
products and/or networks, security failures, defects or errors in our
components, materials or software or in our customers' products could have an
adverse impact on us, on our customers and on the end users of their products.
Such adverse impact could include product liability claims or recalls, a
decrease in demand for connected devices and wireless services, damage to our
reputation and to our customer relationships and other financial liability or
harm to our business.
Our business and operations could suffer in the event of security breaches.
Attempts by others to gain unauthorized access to our information technology
systems are becoming more sophisticated. These attempts, which might be related
to industrial or other espionage, include covertly introducing malware to our
computers and networks and impersonating authorized users, among others. We seek
to detect and investigate all security incidents and to prevent their
recurrence, but in some cases, we might be unaware of an incident or its
magnitude and effects. While we have identified several incidents of
unauthorized access, none have caused material damage to our business. The
theft, unauthorized use or publication of our intellectual property and/or
confidential business information could harm our competitive position, reduce
the value of our investment in research and development and other strategic
initiatives or otherwise adversely affect our business. To the extent that any
security breach results in inappropriate disclosure of our customers' or
licensees' confidential information, we may incur liability. We expect to devote
additional resources to the security of our information technology systems.
Potential tax liabilities could adversely affect our results of operations.
We are subject to income taxes in the United States and in numerous foreign
jurisdictions. Significant judgment is required in determining our provision for
income taxes. Although we believe that our tax estimates are reasonable, the
final determination of tax audits and any related litigation could materially
differ from amounts reflected in historical income tax provisions and accruals.
In such case, our income tax provision and results of operations in the period
or periods in which that determination is made could be negatively affected.
During the third quarter of fiscal 2012, we established our QCT segment's
non-United States headquarters in Singapore. We obtained tax incentives in
Singapore, including a tax exemption for the first five years provided that we
meet specified employment and incentive criteria in Singapore. Our Singapore tax
rate is expected to increase in fiscal 2017 and again in fiscal 2027 as a result
of expiration of these incentives. If we do not meet the criteria required to
benefit from such incentives, our results of operations may be adversely
affected.
Tax rules may change in a manner that adversely affects 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
indefinitely invested outside the United States based on current needs for those
earnings to be reinvested offshore as well as
36
--------------------------------------------------------------------------------
estimates that future domestic cash generation will be sufficient to meet future
domestic cash needs for the foreseeable future. No provision has been made for
United States federal and state or foreign taxes that may result from future
remittances of undistributed earnings of these foreign subsidiaries. Our future
financial results and liquidity may be adversely affected if tax rules regarding
unrepatriated earnings change, if domestic cash needs require us to repatriate
foreign earnings, or if the United States international tax rules change as part
of comprehensive tax reform or other tax legislation.
If wireless devices pose safety risks, we may be subject to new regulations, and
demand for our products and those of our customers and licensees may decrease.
Concerns over the effects of radio frequency emissions continue. Interest groups
have requested that the FCC investigate claims that wireless communications
technologies pose health concerns and cause interference with, among other
things, airbags, hearing aids and medical devices. Legislation that may be
adopted in response to these concerns or adverse news or findings about safety
risks could reduce demand for our products and those of our licensees and
customers in the United States as well as in foreign countries.
We are subject to government regulations. Our business may suffer as a result of
changes in laws or regulations, our failure or inability to comply with laws or
regulations or adverse rulings in enforcement or other proceedings.
Our products and services, and those of our customers and licensees, are subject
to various laws and regulations globally, as well as the specifications of
international, national and regional communications standards bodies. The
adoption of new laws or regulations or changes in the regulation of our
activities by a government or standards body, including, among others, those
affecting the use of our technology or products, trade, foreign investments,
licensing practices, spectrum availability and license issuance, adoption of
standards, the provision of device subsidies by wireless operators to their
customers, taxation, environmental protection, loans and employment, could have
an adverse effect on our business.
National, state and local environmental laws and regulations affect our
operations around the world. These laws may make it more expensive to
manufacture, have manufactured and sell products. Our costs could also increase
if our vendors (e.g., third-party manufacturers or utility companies) pass on
their costs to us. It may also be difficult to comply with laws and regulations
in a timely manner, and we may not have compliant products available in the
quantities requested by our customers, which may have an adverse impact on our
results of operations.
One of our subsidiaries in India holds broadband wireless access (BWA) spectrum
that will be used to operate a wireless network. Bharti Airtel Limited (Bharti),
an Indian wireless network operator, holds a 49% interest in this and other
subsidiaries formed to operate the wireless network (the BWA subsidiaries). Our
license to use the BWA spectrum is subject to minimum build-out requirements to
be met by May 2017. If we do not meet these requirements, the Government of
India's Department of Telecommunications could impose a fine or could rescind
the license in the area(s) in which the build-out requirements are not met.
There are also other contingencies, including unexpected regulatory delays or
conditions, which could adversely impact our ability to successfully and timely
exit the BWA subsidiaries as anticipated.
The SEC has recently adopted disclosure rules for companies that use conflict
minerals in their products, with substantial supply chain verification
requirements in the event that the materials come from, or could have come from,
the Democratic Republic of the Congo or adjoining countries. These new rules and
verification requirements, which will apply to our activities in calendar 2013,
will impose additional costs on us and on our suppliers, and may limit the
sources or increase the prices of materials used in our products. Further, if we
are unable to certify that our products are conflict free, we may face
challenges with our customers, which could place us at a competitive
disadvantage, and our reputation may be harmed.
Laws, regulations and standards relating to corporate governance, business
conduct, public disclosure and health care are complex and changing and may
create uncertainty regarding compliance. Laws, regulations and standards are
subject to varying interpretations in many cases, and their application in
practice may evolve over time. As a result, our efforts to comply may fail,
particularly if there is ambiguity as to how they should be applied in practice.
New laws, regulations and standards or evolving interpretations of legal
requirements may cause us to incur higher costs as we revise current practices,
policies and/or procedures and may divert management time and attention to
compliance activities.
We may not be able to attract and retain qualified employees.
Our future success depends largely upon the continued service of our executive
officers and other key management and technical personnel and on our ability to
continue to attract, retain and motivate qualified personnel. In addition,
37--------------------------------------------------------------------------------
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 employees in our industry is extremely
competitive. Further, existing immigration laws make it more difficult for us to
recruit and retain highly skilled foreign national graduates of universities in
the United States, making the pool of available talent even smaller. We continue
to anticipate increases in human resource needs, particularly in engineering. If
we are unable to attract and retain the qualified employees, our business may be
harmed.
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