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 Company’s condensed consolidated 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.
The following table shows the gross unrealized losses and fair values of the Company’s investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months, aggregated by investment category (in millions):
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 Company’s management reports because they are not considered in evaluating the segments’ operating performance. Unallocated income and charges include certain investment income (loss), certain share-based compensation and certain research and development expenses and marketing expenses that were not deemed to be not directly related to the businesses of the segments. The table below presents revenues and EBT for reportable segments (in millions):
Revenues from external customers and intersegment revenues were as follows (in millions):
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
included $398$437 million and $389$384 million at March 28,27, 2011 and September 26, 2010 and September 27, 2009,, respectively, of property, plant and equipment, goodwill and other assets related to the Qualcomm MEMS TechnologiesCompany’s QMT 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 certain cash, cash equivalents, marketable securities, property, plant and equipment, deferred tax assets, goodwill, and other intangible assets and assets of nonreportable segments. Segment assets and reconciling items were as follows (in millions):
| | | | | | | | |
| | March 28, | | | September 27, | |
| | 2010 | | | 2009 | |
QCT | | $ | 885 | | | $ | 892 | |
QTL | | | 28 | | | | 89 | |
QWI | | | 143 | | | | 142 | |
QSI | | | 1,656 | | | | 1,614 | |
Reconciling items | | | 25,785 | | | | 24,708 | |
| | | | | | |
Total consolidated assets | | $ | 28,497 | | | $ | 27,445 | |
| | | | | | |
|
| | | | | | | |
| March 27, 2011 | | September 26, 2010 |
QCT | $ | 1,130 | | | $ | 1,085 | |
QTL | 26 | | | 28 | |
QWI | 149 | | | 129 | |
QSI | 2,597 | | | 2,745 | |
Reconciling items | 29,922 | | | 26,585 | |
Total consolidated assets | $ | 33,824 | | | $ | 30,572 | |
Note 10 — Restructuring
On December 20, 2010, the Company agreed to sell substantially all of the Company’s 700 MHz spectrum for $1.9 billion, subject to the satisfaction of customary closing conditions, including approval by the U.S. Federal Communications Commission. The agreement follows the Company’s previously announced plan to restructure and evaluate strategic options related to the FLO TV business and network. Under the restructuring plan, the FLO TV business and network were shut down on March 27, 2011, and the Company is no longer pursuing the MediaFLO Technologies business. Restructuring activities
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
under this plan were initiated in the fourth quarter of fiscal 2010 and are expected to be substantially complete by the end of fiscal 2012 as the Company continues to negotiate the exit of certain contracts and removes certain of its equipment from the network sites. The spectrum was classified as held for sale at March 27, 2011. Although the Company will attempt to sell certain of the other FLO TV assets, these other assets were classified as held for use at March 27, 2011 because the held for sale criteria, under applicable accounting rules, were not met, and as a result, the FLO TV business was not considered a discontinued operation at March 27, 2011.
The Company estimates that it will incur future restructuring and restructuring-related charges associated with this plan of up to $65 million, which are primarily related to lease exit and other costs. Restructuring charges consist of lease exit costs, other contract termination costs and certain severance costs. Restructuring-related charges include all other charges associated with the execution of this plan and primarily consist of asset impairment and accelerated depreciation. The restructuring charges are recorded in the QSI segment, and the restructuring-related charges are recorded primarily in the QSI segment. The Company may also realize certain gains, primarily due to the potential release of liabilities associated with ongoing efforts to exit certain contracts, the amount of which cannot be reasonably estimated at this time. Future cash expenditures associated with this plan are expected to be in the range of $125 million to $175 million.
The Company recorded restructuring and restructuring-related costs as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 27, 2011 |
| Asset Impairment and Accelerated Depreciation | | Contract Termination | | Other | | Total |
Restructuring charges | | | | | | | |
Cost of equipment and services revenues | $ | — | | | $ | 8 | | | $ | (2 | ) | | $ | 6 | |
Selling, general and administrative | — | | | 38 | | | 2 | | | 40 | |
| — | | | 46 | | | — | | | 46 | |
Restructuring-related charges | | | | | | | |
Cost of equipment and services revenues | 254 | | | — | | | — | | | 254 | |
Selling, general and administrative | 7 | | | — | | | 5 | | | 12 | |
| 261 | | | — | | | 5 | | | 266 | |
| $ | 261 | | | $ | 46 | | | $ | 5 | | | $ | 312 | |
|
| | | | | | | | | | | | | | | |
| Six Months Ended March 27, 2011 |
| Asset Impairment and Accelerated Depreciation | | Contract Termination | | Other | | Total |
Restructuring charges | | | | | | | |
Revenues | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | |
Cost of equipment and services revenues | — | | | 9 | | | 8 | | | 17 | |
Research and development | — | | | 2 | | | — | | | 2 | |
Selling, general and administrative | — | | | 38 | | | 4 | | | 42 | |
| — | | | 51 | | | 12 | | | 63 | |
Restructuring-related charges | | | | | | | |
Cost of equipment and services revenues | 287 | | | — | | | — | | | 287 | |
Research and development | 6 | | | — | | | — | | | 6 | |
Selling, general and administrative | 12 | | | — | | | 13 | | | 25 | |
| 305 | | | — | | | 13 | | | 318 | |
| $ | 305 | | | $ | 51 | | | $ | 25 | | | $ | 381 | |
The following is a rollforward of the restructuring accrual since inception of the plan, which is reported as a component of
QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
accrued expenses (in millions):
|
| | | | | | | | | | | | | | | |
| Balance at September 26, 2010 | | Net Additions | | Cash Payments | | Balance at March 27, 2011 |
Contract termination costs | $ | — | | | $ | 51 | | | $ | (6 | ) | | $ | 45 | |
Other costs | — | | | 12 | | | (5 | ) | | 7 | |
| $ | — | | | $ | 63 | | | $ | (11 | ) | | $ | 52 | |
Note 11 — Goodwill Impairment
During the first quarter of fiscal 2011, the Firethorn division in the QWI segment introduced a new product application trademarked as SWAGG. The initial consumer adoption rate of SWAGG has fallen significantly short of the Company's expectations, and as a result, the Company revised its internal forecasts to reflect lower than expected demand and reduced the Firethorn cost structure. Based on these adverse changes, the Company performed a goodwill impairment test for the Firethorn division, which was determined to be a reporting unit for purposes of the goodwill impairment test. The goodwill impairment test is a two-step process. First, the Company estimated the fair value of the Firethorn reporting unit by considering both discounted future projected cash flows and prices of comparable businesses. The results of this analysis indicated that the carrying value of the reporting unit exceeded its fair value. Therefore, the Company measured the amount of impairment charge by determining the implied fair value of the goodwill as if the Firethorn reporting unit were being acquired in a business combination. The Company determined the fair value of the assets and the liabilities, primarily using a cost approach. Based on the results of the goodwill impairment test, the Company recorded a pre-tax goodwill impairment charge of $114 million in the second quarter of fiscal 2011. Subsequent to the impairment, $40 million of goodwill remains for the Firethorn reporting unit.
Note 12 — Acquisition
On January 5, 2011, the Company announced that it had entered into a definitive agreement under which it intends to acquire Atheros Communications, Inc. for $45 per share in cash, which represented an enterprise value of approximately $3.1 billion on that date. The transaction has received approval of Atheros’ stockholders and certain foreign regulators, and the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, has expired. The completion of the transaction remains subject to the satisfaction of certain closing conditions, including an additional foreign regulatory approval. The Company expects the transaction to close in the third quarter of fiscal 2011.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thisinformation 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended September 27, 200926, 2010 contained in our 20092010 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 second quarter of fiscal 20102011 were $2.7$3.9 billion, with net income of $774$999 million, which were impacted by the following key items:
| |
• | | We shipped approximately 93118 million Mobile Station Modem (MSM) integrated circuits for CDMA-basedCDMA- and OFDMA-based wireless devices, an increase of 35%,27% compared to approximately 6993 million MSM integrated circuits in the year ago quarter. The chipset volume in the second quarter of fiscal 2009 was affected by the slowdown in the worldwide economy.(1) |
| |
|
| • | | Total reported device sales were approximately $27.7$40.0 billion, an increase of approximately 7%,44% compared to approximately $25.8$27.7 billion in the year ago quarter. (1)(2) |
We resolved two licensee disputes, and as a result, recorded revenues of $401 million related to prior quarters.
We are executing on a restructuring plan under which the FLO TV business and network were shut down, and we are no longer pursuing our MediaFLO Technologies business. We recorded restructuring and restructuring-related charges of $312 million in the second quarter of fiscal 2011.
During the first quarter of fiscal 2011, the Firethorn division in the QWI segment introduced a new product application trademarked as SWAGG. The initial consumer adoption of SWAGG has fallen significantly short of our expectation, and as a result, in the second quarter of fiscal 2011, we recorded impairment charges of $120 million, including $114 million in goodwill impairment.
Against this backdrop, the following recent developments occurred during the second quarter of fiscal 20102011 with respect to key elements of our business or our industry:
| |
• | | Worldwide wireless subscriberssubscriptions grew by approximately 4%3% to reach approximately 4.85.6 billion.(2)(3) |
| |
|
| • | | CDMA subscribers, including both 2G (cdmaOne) andWorldwide 3G (CDMA2000 1X, 1xEV-DO, WCDMA, HSPA and TD-SCDMA), are approximately 21% of total worldwide wireless subscribers to date. (2) |
|
| • | | 3G subscriberssubscriptions (all CDMA-based) grew to approximately 1.021.3 billion, worldwide,approximately 24% of total wireless subscriptions, including approximately 490524 million CDMA2000 1X/1xEV-DO subscriberssubscriptions and approximately 525783 million WCDMA/HSPA/TD-SCDMA subscribers.subscriptions. (2)(3) |
| |
|
| • | | In the handset market, CDMA-based unit shipments grew an estimated 19% year-over-year,38% over the prior year quarter, compared to an estimated increase of 15% year-over-year16% across all wireless technologies. (3)(4) |
| | |
(1) | During the second quarter of fiscal 2011, some customers built devices that incorporated two MSMs. In such cases, which represent less than 1% of our gross volume, we count only one MSM in reporting the MSM 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 subscriber devices (including handsets, modules, modem cards and other subscriber devices) by our licensees during a particular period. Not all licensees report sales the same way (e.g., some licensees report selling pricessales net of permitted deductions, such as transportation, insurance and packing costs, while other licensees report selling pricessales 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. |
21
| | |
(2) | (3) | According to Wireless Intelligence estimates as of April 19, 2010,18, 2011, for the quarter ending March 31, 2010.2011. Wireless Intelligence estimates for CDMA2000 1X/1xEV-DO subscribers do not include Wireless Local Loop. |
| |
(3) | (4) | Based on current reports by Strategy Analytics, a global research and consulting firm, in their February 2011 Global Handset Market Share Updates.Update. |
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 revenues principally from sales of integrated circuit products, license fees and royalties for use of our intellectual property, messaging and other services and related hardware sales, software development and licensing and related services and software hosting services and services related to delivery of multimedia content.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-basedCDMA- and OFDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products. QCT’s integrated circuit products and system software are used in wireless devices, particularly mobile phones, tablets, laptops, data modules, handheld wireless computers, data cards and infrastructure equipment. The integrated circuits for wireless devices include the Mobile Station Modem (MSM), Mobile Data Modem (MDM), Qualcomm Single Chip (QSC), Qualcomm Snapdragon (QSD), Radio Frequency (RF), Power Management (PM) and Bluetooth devices. TheseThe baseband integrated circuits (MSM, MDM, QSC and QSD) for wireless devices and system software perform voice and data communication, multimedia and global positioning functions, and our RF, PM and Bluetooth devices perform radio conversion between RFradio frequency and baseband signals, power management and peripheral connectivity. QCT’s system software enables the other device components to interface with the integrated circuit products and is the foundation software enabling equipment 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 operator’s base station equipment. QCT revenues comprised 58%51% and 54%58% of total consolidated revenues in the second quarter of fiscal 20102011 and 2009,2010, respectively, and 59%56% and 53%59% of total consolidated revenues for the first six months of fiscal 20102011 and 2009,2010, 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 completed the assembly and 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. 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 die from semiconductor manufacturing foundries and contract with separate 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 or otherwise provides rights 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 (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA standards and their derivatives. QTL receives 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 (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 37%45% and 39%37% of total consolidated revenues in the second quarter of fiscal 20102011 and 2009,2010, respectively, and 35%39% and 39%35% of total consolidated revenues for the first six months of fiscal 20102011 and 2009,2010, respectively. The vast majority of such revenues have beenwere generated through our licensees’ sales of cdmaOne, CDMA2000 and WCDMA subscriber equipment products.
QWI, which includes Qualcomm Enterprise Services (QES), Qualcomm Internet Services (QIS), Qualcomm Government Technologies (QGOV) and Firethorn, generates revenues primarily through mobile information products and services and software and software development aimed at support and delivery of wireless
22
applications. QES sells equipment, software and services used by transportation and other companies to connect wirelessly with their assets and workforce. Through March 2010,2011, QES has shipped approximately 1,372,0001,466,000 terrestrial-based and satellite-based mobile information units. QIS provides content enablement services for the wireless industry, including BREW (Binary Runtime Environment for Wireless),Brew, the Plaza suite and other services. QIS also provides QChat push-to-talk, QPoint and other products for wireless network operators. QGOV 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 services. QWI revenues comprised 6%4% and 7%6% of total consolidated revenues in the second quarter of fiscal 20102011 and 2009,2010, and 6%5% and 7%6% of total consolidated revenues for the first six months of fiscal 20102011 and 2009,2010, respectively.
QSI managesconsists of the Company’s strategic investment activities, including FLO TV Incorporated (FLO TV), our wholly-owned wireless multimedia operator subsidiary. QSI also makes strategic investments in early-stage and other companies, including licensed device manufacturers, that we believe will open new markets for CDMA technology,CDMA- and OFDMA-based technologies, support the design and introduction of new CDMA-basedCDMA and OFDMA products and services for wireless voice and internet data communications or possess unique capabilities or technology. Our FLO TV subsidiary offers its service over our nationwide multicast network based on our MediaFLO Media Distribution System (MDS)Many of these strategic investments are in early-stage companies and MediaFLO technology, which leveragesin wireless spectrum, such as the Forward Link Only (FLO) air interface standard. This network is utilized as a shared resource for wireless operators and their customersBWA spectrum won in the United States. The commercial availabilityauction in India. On December 20, 2010, we announced that we have agreed to sell substantially all of the FLO TV network and service on wireless operator devices will continue, in part, to be determined by our wireless operator partners. FLO TV’s network uses the 700 MHz spectrum for which we hold licenses nationwide. Additionally,$1.9 billion, subject to the satisfaction of customary closing conditions, including approval by the U.S. Federal Communications Commission. The agreement follows our previously announced plan to restructure and evaluate strategic
options related to our FLO TV hasbusiness and will continue to procure, aggregate and distribute content in service packages, whichnetwork. Under the restructuring plan, we will continue to make available on a wholesale basis to our wireless operator customers (whether they operate on CDMA, WCDMA or GSM) in the United States. In November 2009, FLO TV began to offershut down the FLO TV service on a subscription basis directly to consumersbusiness and network in the United States. FLO TV currently provides the services for use in personal television devices and automotive devices and plans to make it available in other portable device accessories in the future. These devices are sold through various retail and distribution channels. 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 FLO TV to our stockholders in a spin-off transaction.March 2011.
Nonreportable segments include: the Qualcomm MEMS Technologies division, which is developingcontinues to develop an interferometric modulator (IMOD) display technology based on micro-electro-mechanical-system (MEMS) structure combined with thin film optics; the MediaFLO Technologies division, which is developing our MediaFLO MDS and MediaFLO technology and markets MediaFLO for deployment outside of the United States; and other product initiatives. The MediaFLO Technologies business is no longer being pursued.
Restructuring and Restructuring-Related Activities
We are executing on a restructuring plan under which the FLO TV business and network were shut down on March 27, 2011, and we are no longer pursuing our MediaFLO Technologies business. Restructuring activities were initiated in the fourth quarter of fiscal 2010 and are expected to be substantially complete by the end of fiscal 2012 as we continue to negotiate the exit of certain contracts and remove certain of our equipment from the network sites. The 700 MHz spectrum that we agreed to sell was classified as held for sale at March 27, 2011. Although we will attempt to sell certain of the other FLO TV assets, these other assets were classified as held for use at March 27, 2011 because the held for sale criteria, under applicable accounting rules, were not met, and as a result, the FLO TV business was not considered a discontinued operation at March 27, 2011.
We estimate that we will incur restructuring and restructuring-related charges associated with this plan of up to $65 million, which are primarily related to lease exit and other costs. Restructuring charges consist of lease exit costs, other contract termination costs and certain severance costs. Restructuring-related charges include all other charges associated with the execution of this plan and are expected to primarily consist of asset impairments and accelerated depreciation. The restructuring charges are recorded in the QSI segment, and the restructuring-related charges are recorded primarily in the QSI segment. We may also realize certain gains, primarily due to the potential release of liabilities associated with ongoing efforts to exit certain contracts, the amount of which cannot be reasonably estimated at this time. Future cash expenditures associated with this plan are expected to be in the range of $125 million to $175 million.
The Company recorded restructuring and restructuring-related costs as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 27, 2011 |
| Asset Impairment and Accelerated Depreciation | | Contract Termination | | Other | | Total |
Restructuring charges | | | | | | | |
Cost of equipment and services revenues | $ | — | | | $ | 8 | | | $ | (2 | ) | | $ | 6 | |
Selling, general and administrative | — | | | 38 | | | 2 | | | 40 | |
| — | | | 46 | | | — | | | 46 | |
Restructuring-related charges | | | | | | | |
Cost of equipment and services revenues | 254 | | | — | | | — | | | 254 | |
Selling, general and administrative | 7 | | | — | | | 5 | | | 12 | |
| 261 | | | — | | | 5 | | | 266 | |
| $ | 261 | | | $ | 46 | | | $ | 5 | | | $ | 312 | |
|
| | | | | | | | | | | | | | | |
| Six Months Ended March 27, 2011 |
| Asset Impairment and Accelerated Depreciation | | Contract Termination | | Other | | Total |
Restructuring charges | | | | | | | |
Revenues | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | |
Cost of equipment and services revenues | — | | | 9 | | | 8 | | | 17 | |
Research and development | — | | | 2 | | | — | | | 2 | |
Selling, general and administrative | — | | | 38 | | | 4 | | | 42 | |
| — | | | 51 | | | 12 | | | 63 | |
Restructuring-related charges | | | | | | | |
Cost of equipment and services revenues | 287 | | | — | | | — | | | 287 | |
Research and development | 6 | | | — | | | — | | | 6 | |
Selling, general and administrative | 12 | | | — | | | 13 | | | 25 | |
| 305 | | | — | | | 13 | | | 318 | |
| $ | 305 | | | $ | 51 | | | $ | 25 | | | $ | 381 | |
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. Data applications include broadband connectivity, streaming video, location-basedMany wireless operators are also planning to complement their existing 3G networks by deploying OFDMA-based technology, often called 4G, in new spectrum to gain additional capacity for data services, mobile social networking and multimedia messaging.such as in the recent launch of a LTE network by Verizon Wireless in the United States. 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. As we look forward to the next several months, the following items are likely to have an impact on our business:
| • | | The worldwide transition to 3G CDMA-based networks is expected to continue. This includes the network launchesThe worldwide transition to 3G CDMA-based networks is expected to continue, including the further expansion of 3G in China and further expansion of 3G in China, including CDMA2000 by China Telecom, WCDMA by China Unicom and TD-SCDMA by China Mobile, and the sale of 3G spectrum in India. |
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| • | | We expect that CDMA-based device prices will continue to segment into high and low end due to high volumes and vibrant competition in marketplaces around the world. A tempered economic recovery in developed regions combined with relative strength at the lower end of the overall market is expected to continue to impact the average selling price of CDMA-based devices for the remainder of fiscal 2010. |
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| • | | We expect consumer demand for advanced 3G-based devices, including smartphones, data devices and new device categories, such as eBook readers, to continue at a strong pace. We also expect growth in low-end 3G devices as 3G expands in emerging markets. |
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We expect consumer demand for advanced 3G-based and 3G/4G multimode devices, including smartphones, data-centric devices and new device categories, such as tablets and eBook readers, to continue at a strong pace. We also expect growth in lower-end 3G devices as 3G expands in emerging regions. We still face significant competition in lower-end devices from GSM-based products, particularly in emerging regions.
We expect that CDMA-based device prices will continue to vary broadly due to the increased penetration of smartphones and the popularity of smartphone applications combined with active competition throughout the world at all price tiers. This, along with varying rates of economic growth by region and stronger than average growth in emerging regions, is 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 technology to increase the data rates available with 3G and 4G networks, wireless baseband chips, converged computing/communication chips, multimedia products, software and services for the wireless industry.
We continue to invest in the evolution of CDMA and a broad range of other technologies, such as LTE, our IMOD display technology and our Snapdragon platform, as part of our vision to enable a wide range of products and technologies.
We are executing on a restructuring plan under which we shut down the FLO TV business and network, and we are no longer pursuing our MediaFLO Technologies business. We estimate that we will incur future restructuring and restructuring-related charges associated with this plan of up to $65 million, and that future cash expenditures associated with this plan will be in the range of $125 million to $175 million. We may also realize certain gains, primarily due to the potential release of liabilities associated with ongoing efforts to exit certain contracts, the amount of which cannot be reasonably estimated at this time. Restructuring activities were initiated in the fourth quarter of fiscal 2010 and are expected to be substantially complete by the end of fiscal 2012. We have agreed to sell substantially all of our 700 MHz spectrum for $1.9 billion, subject to the satisfaction of customary closing conditions, including approval from the U.S. Federal Communications Commission. If the closing conditions are met, we expect to recognize a gain of $1.2 billion.
| • | | We intend to continue to invest significant resources toward the development of technology to increase the data rates available with 3G and 4G networks, wireless baseband chips, converged computing/communication chips, multimedia products, software and services for the wireless industry. |
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| • | | We expect demand for cost-effective 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 a single chip or package, lowering component counts and enabling faster time-to-market for our customers. We still face significant competition in the lower-end market from GSM-based products, particularly in emerging markets. |
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| • | | We expect to continue to invest in the evolution of CDMA and a broad range of other technologies, such as LTE, our FLO TV mobile television service, our IMOD display technology and our Snapdragon platform, as part of our vision to enable a wide range of products and technologies. |
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Based on our most recent review of our extended supply chain, we do not foresee any significant impact in our ability to supply product to our customers as a result of the recent events in Japan. In addition, based on preliminary indications, we do not foresee any significant impact on the demand profile for wireless devices in that region. We will continue to monitor the situation and its impact on our business as the situation in Japan develops.
On January 5, 2011, we announced that we had entered into a definitive agreement under which we intend to acquire Atheros Communications, Inc. for $45 per share in cash, which represented an enterprise value of approximately $3.1 billion on that date. The transaction has received approval by Atheros’ stockholders and certain foreign regulators, and the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, has expired. The transaction is subject to certain closing conditions, including the receipt of an additional foreign regulatory approval, and is expected to close in the third quarter of fiscal 2011.
In addition to the foregoing business and market-based matters, we continue to devote resources to working with and educating participants in the following items are likelywireless value chain as to have an impact onthe benefits of our business model in promoting a highly competitive and resultsinnovative wireless market. However, we expect that certain companies may continue to be dissatisfied with the need to pay reasonable royalties for the use of operations overour technology and not welcome the next several months: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.
| • | | We expect to 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 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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| • | | 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 litigation in which we or our customers may become involved. |
Further discussion of risks related to our business is presented in the Risk Factors included in this Quarterly Report.
Second Quarter of Fiscal 20102011 Compared to Second Quarter of Fiscal 20092010
Revenues.Total revenues for the second quarter of fiscal 20102011 were $2.66$3.88 billion, compared to $2.46$2.66 billion for the second quarter of fiscal 2009.2010. Revenues from sales of equipment and services for the second quarter of fiscal 20102011 were $1.60$2.04 billion, compared to $1.41$1.60 billion for the second quarter of fiscal 2009.2010. The increase in revenues from sales of equipment and services was primarily due to a $207$431 million increase in QCT revenues, partially offset by a $16 million decrease in QWIequipment and services revenues. Revenues from licensing and royalty fees for the second quarter of fiscal 20102011 were $1.07$1.83 billion, compared to $1.04$1.07 billion for the second quarter of fiscal 2009.2010. The increase in revenues from licensing and royalty fees was primarily due to a $20$772 million increase in QTL revenues.
Cost of Equipment and Services.Cost of equipment and services revenues for the second quarter of fiscal 2011 was $1.36 billion, compared to $809 million for the second quarter of fiscal 2010. Cost of equipment and services revenues for the second quarter of fiscal 2010 was $8092011 included $304 million related to our FLO TV subsidiary, an increase of $249 million as compared to $738 million for the second quarter of fiscal 2009.2010 as a result of our shut down of the FLO TV business and network. Cost of equipment and services revenues as a percentage of equipment and services revenues for our other businesses was 51%52% for the second quarter of fiscal 2010,2011, compared to 52%47% for the second quarter of fiscal 2009. The increase2010. This decrease in margin percentage in the second quarter of fiscal 20102011 compared to the second quarter of fiscal 20092010 was primarily attributable to an increasea decrease in QCT gross margin percentage, partially offset by an increase in costs related to our Qualcomm MEMS Technologies division.percentage. Cost of equipment and services revenuesin the second quarter of fiscal 2011 included $10$17 million in share-based compensation, compared to $10 million in the second quarter of both fiscal 2010 and 2009.. 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 second quarter of fiscal 2010,2011, research and development expenses were $740 million or 19% of revenues, compared to $648 million or 24% of revenues compared to $604 million or 25% of revenues for the second quarter of fiscal 2009.2010. The dollar increase iswas primarily attributable to a $56$76 million increase in costs related to the development of 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
24
convergence of multiband, multimode, multinetwork products and technologies, third-party operating systems and services platforms. This increase was partially offset by a $21 million decrease in costs related to our FLO TV subsidiary. The percentage decrease was primarily attributable to the 46% increase in revenues, largely related to our QTL licensing and royalty revenues, relative to the 14% increase in costs. Research and development expenses for the second quarter of fiscal 20102011 included share-based compensation of $75$98 million, compared to $68$75 million in the second quarter of fiscal 2009.2010.
Selling, General and Administrative Expenses.For the second quarter of fiscal 2010,2011, selling, general and administrative expenses were $585 million or 15% of revenues, compared to $430 million or 16% of revenues compared to $375 million or 15% of revenues for the second quarter of fiscal 2009.2010. The dollar increase was primarily attributable to a $23$53 million increase in patent-related costs andcharitable donations, primarily resulting from the establishment of the Qualcomm Charitable Foundation in the second quarter of fiscal 2011, a $19$36 million increase in sellingemployee-related expenses and marketing expenses, primarily related to FLO TV.a $14 million increase in professional fees. Selling, general and administrative expenses for the second quarter of fiscal 20102011 included share-based compensation of $69$87 million, compared to $62$69 million in the second quarter of fiscal 2010.
Goodwill Impairment. Operating expenses for the second quarter of fiscal 2009.2011 included a $114 million goodwill impairment charge related to our Firethorn division due to the initial consumer adoption of a new product application falling significantly short of expectations.
Litigation Settlement, Patent License and Other Related Items.The
Net Investment Income. Net investment income was $185 million for the second quarter of fiscal 2009 operating expenses included a $748 million litigation settlement charge related2011, compared to the Settlement and Patent License and Non-Assert Agreement with Broadcom, which resulted in the dismissal with prejudice of all litigation between the companies.
Net Investment Income (Loss).Net investment income was $189 million for the second quarter of fiscal 2010, compared2010. The net decrease was comprised as follows (in millions):
|
| | | | | | | | | | | |
| Three Months Ended | | |
| March 27, 2011 | | March 28, 2010 | | Change |
Interest and dividend income: | | | | | |
Corporate and other segments | $ | 122 | | | $ | 129 | | | $ | (7 | ) |
QSI | 4 | | | — | | | 4 | |
Interest expense | (34 | ) | | (7 | ) | | (27 | ) |
Net realized gains on investments | 102 | | | 80 | | | 22 | |
Net impairment losses on investments: | | | | | |
Corporate and other segments | (4 | ) | | (15 | ) | | 11 | |
QSI | (1 | ) | | (1 | ) | | — | |
Gains on derivative instruments | — | | | 3 | | | (3 | ) |
Equity in losses of investees | (4 | ) | | — | | | (4 | ) |
| $ | 185 | | | $ | 189 | | | $ | (4 | ) |
The increase in interest expense is primarily attributable to a net investment lossthe loans related to the BWA spectrum won in the India auction in the third quarter of $91fiscal 2010.
Income Tax Expense. Income tax expense was $263 million for the second quarter of fiscal 2009. The net increase was comprised as follows (in millions):
| | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | March 28, | | | March 29, | | | | |
| | 2010 | | | 2009 | | | Change | |
Interest and dividend income: | | | | | | | | | | | | |
Corporate and other segments | | $ | 129 | | | $ | 121 | | | $ | 8 | |
Interest expense | | | (7 | ) | | | (4 | ) | | | (3 | ) |
Net realized gains on investments: | | | | | | | | | | | | |
Corporate and other segments | | | 80 | | | | — | | | | 80 | |
Net impairment losses on investments: | | | | | | | | | | | | |
Corporate and other segments | | | (15 | ) | | | (199 | ) | | | 184 | |
QSI | | | (1 | ) | | | (10 | ) | | | 9 | |
Gains on derivative instruments | | | 3 | | | | 13 | | | | (10 | ) |
Equity in losses of investees | | | — | | | | (12 | ) | | | 12 | |
| | | | | | | | | |
| | $ | 189 | | | $ | (91 | ) | | $ | 280 | |
| | | | | | | | | |
During the second quarter of fiscal 2010, we recorded lower impairment losses on marketable securities and higher net realized gains2011, compared to the second quarter of fiscal 2009. This was largely due to depressed securities values caused by a major disruption in United States and foreign financial markets in late calendar 2008 and early calendar 2009.
Income Tax Expense.Income tax expense was $191 million for the second quarter of fiscal 2010, compared to $188 million for the second quarter of fiscal 2009.2010. The effective tax rate for the second quarter of fiscal 20102011 was 20%21%, as compared to negative 186%20% for the second quarter of fiscal 2009. The second quarter of fiscal 2009 reflects a $748 million pre-tax litigation settlement charge with a discrete tax benefit computed at a rate less than the United States federal rate and the revaluation of net deferred tax assets related to changes in California tax legislation enacted in 2009.2010.
First Six Months of Fiscal 20102011 Compared to First Six Months of Fiscal 20092010
Revenues.Total revenues for the first six months of fiscal 20102011 were $5.33$7.22 billion, compared to $4.97$5.33 billion for the first six months of fiscal 2009. Revenues from two customers of our QCT and QTL segments (each of whom accounted for more than 10% of our consolidated revenues for the period) comprised approximately 27% and 30% in aggregate of total consolidated revenues in the first six months of fiscal 2010 and 2009, respectively.2010. Revenues from sales of equipment and services for the first six months of fiscal 20102011 were $3.26$4.26 billion, compared to $2.84$3.26 billion for the first six months of fiscal 2009.2010. The increase in revenues from sales of equipment and services was primarily due to a $478$944 million increase in QCT revenues, partially offset by a $44 million decrease in QWIequipment and services revenues. Revenues from licensing and royalty fees for the first six months of fiscal 20102011 were $2.08$2.97 billion,
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compared to $2.14$2.08 billion for the first six months of fiscal 2009.2010. The decreaseincrease in revenues from licensing and royalty fees was primarily due to a $69$912 million decreaseincrease in QTL revenues.
Cost of Equipment and Services.Cost of equipment and services revenues for the first six months of fiscal 20102011 was $1.62$2.49 billion, compared to $1.49$1.62 billion for the first six months of fiscal 2009.2010. Cost of equipment and services revenues for the first six months of fiscal 2011 included $391 million related to our FLO TV subsidiary, an increase of $289 million as compared to the first six months of fiscal 2010 as a result of our shut down of the FLO TV business and network. Cost of equipment and services revenues as a percentage of equipment and services revenues for our other businesses was 50%49% for the first six months of fiscal 2010,2011, compared to 53%47% for the first six months of fiscal 2009. The increase2010. This decrease in margin percentage in the first six months of fiscal 20102011 compared to the first six months of fiscal 20092010 was primarily attributable to an increasea decrease in QCT gross margin percentage, partially offset by an increase in costs related to our Qualcomm MEMS Technologies division.percentage. Cost of equipment and services revenues in the first six months of fiscal 20102011 included $21$30 million in share-based compensation, compared to $20$21 million in the first six months of fiscal 2009.2010.
Research and Development Expenses.For the first six months of fiscal 2010,2011, research and development expenses were $1.24$1.41 billion or 23%20% of revenues, compared to $1.21$1.24 billion or 24%23% of revenues for the first six months of fiscal 2009.2010. The dollar increase was primarily attributable to a $61$132 million increase in costs related to the development of 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. TheThis increase in research and development expenses was partially offset by a $31$20 million decrease in costs related to our FLO TV subsidiary. The percentage decrease was primarily attributable to the development of our asset-tracking products and services, MediaFLO technology, MediaFLO MDS, IMOD display products using MEMS technology, BREW products and mobile commerce applications.35% increase in revenues relative to the 13% increase in costs. Research and development expenses in the first six months of fiscal 20102011 included share-based compensation of $184 million, compared to $147 million in the first six months of fiscal 2010.
Selling, General and Administrative Expenses. For the first six months of fiscal 2011, selling, general and administrative expenses were $1.02 billion or 14% of revenues, compared to $810 million or 15% of revenues for the first six months of fiscal 2010. The dollar increase was primarily attributable to a $72 million increase in employee-related expenses, a $54 million increase in charitable contributions, primarily resulting from the establishment of the Qualcomm Charitable Foundation in the second quarter of fiscal 2011, and a $48 million increase in patent-related costs and other professional fees. Selling, general and administrative expenses in the first six months of fiscal 2011 included share-based compensation of $159 million, compared to $137 million in the first six months of fiscal 2009.2010.
Selling, General and Administrative Expenses.For the first six months of fiscal 2010, selling, general and administrative
Goodwill Impairment. Operating expenses were $810 million or 15% of revenues, compared to $789 million or 16% of revenues for the first six months of fiscal 2009. The dollar increase was primarily attributable to2011 included a $28$114 million increase in selling and marketing expenses, primarilygoodwill impairment charge related to FLO TV, andour Firethorn division due to the operating performance of a $26new product application falling significantly short of expectations.
Net Investment Income. Net investment income was $404 million increase in patent-related costs, partially offset by a $36 million decrease in costs related to litigation and other legal matters. Selling, general and administrative expenses infor the first six months of fiscal 2010 included share-based compensation of $137 million,2011, compared to $128 million in the first six months of fiscal 2009.
Litigation Settlement, Patent License and Other Related Items.The first six months of fiscal 2009 operating expenses included a $748 million litigation settlement charge related to the Settlement and Patent License and Non-Assert Agreement with Broadcom, which resulted in the dismissal with prejudice of all litigation between the companies.
Net Investment Income (Loss).Net investment income was $361 million for the first six months of fiscal 2010, compared to a net investment loss of $385 million for the first six months of fiscal 2009.2010. The net increase was comprised as follows (in millions):
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| | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | March 28, | | | March 29, | | | | |
| | 2010 | | | 2009 | | | Change | |
Interest and dividend income: | | | | | | | | | | | | |
Corporate and other segments | | $ | 274 | | | $ | 255 | | | $ | 19 | |
QSI | | | — | | | | 1 | | | | (1 | ) |
Interest expense | | | (16 | ) | | | (7 | ) | | | (9 | ) |
Net realized gains (losses) on investments: | | | | | | | | | | | | |
Corporate and other segments | | | 171 | | | | (38 | ) | | | 209 | |
QSI | | | 11 | | | | 5 | | | | 6 | |
Net impairment losses on investments: | | | | | | | | | | | | |
Corporate and other segments | | | (66 | ) | | | (586 | ) | | | 520 | |
QSI | | | (7 | ) | | | (15 | ) | | | 8 | |
(Losses) gains on derivative instruments | | | (1 | ) | | | 13 | | | | (14 | ) |
Equity in losses of investees | | | (5 | ) | | | (13 | ) | | | 8 | |
| | | | | | | | | |
| | $ | 361 | | | $ | (385 | ) | | $ | 746 | |
| | | | | | | | | |
|
| | | | | | | | | | | |
| Six Months Ended | | |
| March 27, 2011 | | March 28, 2010 | | Change |
Interest and dividend income: | | | | | |
Corporate and other segments | $ | 251 | | | $ | 274 | | | $ | (23 | ) |
QSI | 5 | | | — | | | 5 | |
Interest expense | (62 | ) | | (16 | ) | | (46 | ) |
Net realized gains on investments: | | | | | |
Corporate and other segments | 230 | | | 171 | | | 59 | |
QSI | 1 | | | 11 | | | (10 | ) |
Net impairment losses on investments: | | | | | |
Corporate and other segments | (11 | ) | | (66 | ) | | 55 | |
QSI | (5 | ) | | (7 | ) | | 2 | |
Losses on derivative instruments | — | | | (1 | ) | | 1 | |
Equity in losses of investees | (5 | ) | | (5 | ) | | — | |
| $ | 404 | | | $ | 361 | | | $ | 43 | |
During the first six months of fiscal 2010,2011, we recorded lower impairment losses on marketable securities and higher net realized gains on corporate investmentsmarketable securities as compared to net realized losses during the first six months of fiscal 2009. Depressed securities values caused by a major disruption in United States and foreign financial markets impacted our results in the first six months of fiscal 2009 and continued to cause impairment losses in the first six months of fiscal 2010 butdue to a lesser extent.improvements in financial market conditions. The increase in interest expense is primarily attributable to the loans related to the BWA spectrum won in the India auction in the third quarter of fiscal 2010.
Income Tax Expense.Income tax expense was $422 million for the first six months of fiscal 2011, compared to $401 million for the first six months of fiscal 2010, compared to $298 million2010. The effective tax rate for the first six months of fiscal 2009. The effective tax rate2011 was 16%, compared to 20% for the first six months of fiscal 2010. During the first quarter of fiscal 2011, the United States government extended the federal research and development tax credit to include qualified research expenditures paid or incurred after December 31, 2009 and before January 1, 2012. We recorded a tax benefit of $32 million related to fiscal 2010 compared to 85%in the first quarter of fiscal 2011 from the retroactive extension of this credit. The annual effective tax rate for fiscal 2010 included tax expense of approximately $137 million that arose because certain deferred revenue was taxable in fiscal 2010, but the resulting deferred tax asset will reverse in future years when the Company's state tax rate will be lower as a result of California tax legislation enacted in 2009. The effective tax rate for the first six months of fiscal 2009. The annual effective tax rate is estimated to be 21% for fiscal 2010, compared to2011 of 16% was lower than the expected annual effective rate of 35% for fiscal 2009. The second17% primarily as a result of the benefit associated with the retroactive extension of the tax credit in the first quarter of fiscal 2009 reflects a $748 million pre-tax litigation settlement charge with a discrete tax benefit computed at a rate less than the United States federal rate and the revaluation of net deferred tax assets related to changes in California tax legislation enacted in 2009. The annual effective rate for fiscal 2010 only reflects United States federal research and development credits generated through December 31, 2009, the date on which they expired.2011.
The estimated annual effective tax rate for fiscal 20102011 of 21%17% is less than the United States federal statutory rate primarily due to benefits of approximately 22%21% related to foreign earnings taxed at less than the United States federal rate and benefits of
approximately 2% related to the research and development tax credit, 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, partially offset by state taxes of approximately 5% and tax expense of approximately 4% associated with deferred revenue related to the Company’s 2008 license and settlement agreements with Nokia is taxable in fiscal 2010, but for which the resultingvaluation of deferred tax asset will reverseassets to reflect changes in future years when the Company’s state tax rate will be lower.California law.
Deferred tax assets, net of valuation allowance, increased from September 27, 2009 to March 28, 2010 primarily due to the establishment of the deferred tax asset related to revenue derived from the Company’s 2008 license and settlement agreements with Nokia.
Our Segment Results for the Second Quarter of Fiscal 20102011 Compared to the Second Quarter of Fiscal 20092010
The following should be read in conjunction with the second quarter financial results of fiscal 20102011 for each reporting segment. See “Notes to Condensed Consolidated Financial Statements, Note 9 —- Segment Information.”
QCT Segment.QCT revenues for the second quarter of fiscal 20102011 were $1.54$1.96 billion, compared to $1.32$1.54 billion for the second quarter of fiscal 2009.2010. Equipment and services revenues, mostly related to sales of MSM and accompanying RF and PM integrated circuits, were $1.91 billion for the second quarter of fiscal 2011, compared to $1.47 billion for the second quarter of fiscal 2010, compared to $1.27 billion for the second quarter of fiscal 2009.2010. The increase in equipment and services revenues resulted primarily from a $339$380 million increase related to higher unit shipments partially offset byand a decrease of $140$59 million increase related to the net effects of changes in product mix and the average selling prices of such products. Approximately 93118 million MSM integrated circuits were sold during the second quarter of fiscal 2010,2011, compared to approximately 6993 million for the second quarter of fiscal 2009. The chipset volume in the second quarter of fiscal
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2009 was impacted by the slowdown in the worldwide economy that caused contraction in the CDMA-based channel inventory and resulted in lower demand for CDMA-based MSM integrated chips.2010. (1)
QCT’s
QCT earnings before taxes for the second quarter of fiscal 20102011 were $344$417 million, compared to $217$344 million for the second quarter of fiscal 2009. QCT’s2010. QCT operating income as a percentage of its revenues (operating margin percentage) was 21% in the second quarter of fiscal 2011, compared to 22% in the second quarter of fiscal 2010, compared to 17% in the second quarter of fiscal 2009.2010. The increase in QCT earnings before taxes was primarily attributable to the increase in QCT revenues, partially offset by a $42$60 million increase in research and development expenses and a $33 million increase in selling, general and administrative expenses. The increasedecrease in operating margin percentage was primarily due to an increasea decrease in gross margin percentage, andpartially offset by a decreasehigher increase in QCT revenues relative to the increases in research and development expenses as a percentage of QCT revenues, driven primarily by the increase in QCT revenues.and selling, general and administrative expenses. QCT gross margin percentage increaseddecreased as a result of the net effects of lower average selling prices, higher product support costs and a decrease in average unit costs, favorable product mix, lower product support costs and lower average selling prices.costs.
QTL Segment.QTL revenues for the second quarter of fiscal 20102011 were $974 million,$1.75 billion, compared to $954$974 million for the second quarter of fiscal 2009.2010. During the second quarter of fiscal 2011, we entered into agreements with two licensees to settle ongoing disputes, including the arbitration proceeding with Panasonic. As a result, QTL revenues during the second quarter of fiscal 2011 included $401 million in revenues related to prior quarters. The $20remaining $371 million increase in revenues was primarily due to an increase in sales of CDMA-based devices by licensees partially offset by lowerand higher average royalties per unit of such CDMA-based devices includingas well as current period revenues from the effecttwo licensees following the settlement of underreported royalties by a licensee, and the deferral of revenue due to an on-going arbitration with Panasonic. QTL’stwo disputes.
QTL earnings before taxes for the second quarter of fiscal 20102011 were $821 million,$1.57 billion, compared to $839$821 million for the second quarter of fiscal 2009. QTL’s2010. QTL operating margin percentage was 90% in the second quarter of fiscal 2011, compared to 84% in the second quarter of fiscal 2010, compared to 86% in the second quarter of fiscal 2009.2010. The decreaseincreases in QTL earnings before taxes wasand operating margin percentage were primarily attributable to an increase in selling, general and administrative expenses and a decrease in gain related to foreign currency option contracts that have been rendered ineffective, partially offset by the increase in QTL revenues. The decrease in operating margin percentage was primarily attributable to an increase in selling, general and administrative expenses.
QWI Segment.QWI revenues for the second quarter of fiscal 20102011 were $152$157 million, compared to $176$152 million for the second quarter of fiscal 2009. Revenues decreased primarily due to a $31 million decrease in QIS equipment and services and licensing revenues resulting primarily from the cessation of development efforts under the QChat licensing agreement with Sprint.
QWI’s2010. QWI loss before taxes for the second quarter of fiscal 20102011 was $1$135 million, compared to earnings before taxes of $25$1 million for the second quarter of fiscal 2009. QWI’s2010. QWI operating margin percentage was negative 4% in the second quarter of both fiscal 2011 and 2010, comparedprincipally due to 15% in the second quarteroperating losses of fiscal 2009.our Firethorn division. The decreaseincrease in QWI earningsloss before taxes was primarily attributable to the decrease$120 million in QIS revenues. The declineimpairment charges related to certain assets of our Firethorn division, including $114 million in operating margin percentage was attributable to both the decline in QIS revenues and the ongoing operating losses of Firethorn.goodwill impairment.
QSI Segment.QSI revenues for the second quarter of fiscal 20102011 were $2$5 million, compared to $8$2 million for the second quarter of fiscal 2009.2010. QSI revenues are attributable to our FLO TV subsidiary. The decrease in FLO TV revenues was primarily due to an increase in customer-related incentives that were recorded as reductions to revenues. QSI’s loss before taxes for the second quarter of fiscal 20102011 was $136$404 million, compared to $102$136 million for the second quarter of fiscal 2009.2010. QSI loss before taxes increased by $34$268 million primarily due to a $50$233 million increase in our FLO TV subsidiary’s loss before taxes partially offsetand a $27 million increase in interest expense attributable to the loans related to the BWA spectrum won in the India auction in the third quarter of fiscal 2010.
We are executing on a restructuring plan under which we shut down the FLO TV business and network in March 2011. QSI loss before taxes for the second quarter of fiscal 2011 included $310 million related to this plan. In addition to our ongoing operating costs, we expect to incur future restructuring and restructuring-related charges associated with this plan of up to $65 million, which are primarily related to lease exit and other costs. Restructuring activities were initiated in the fourth quarter of fiscal 2010 and are expected to be substantially complete by a $16 million decrease in net investment losses (unrelated to FLO TV).the end of fiscal 2012.
Our Segment Results for the First Six Months of Fiscal 20102011 Compared to the First Six Months of Fiscal 20092010
The following should be read in conjunction with the first six months financial results of fiscal 20102011 for each reporting segment. See “Notes to Condensed Consolidated Financial Statements, Note 9 —- Segment Information.”
QCT Segment.QCT revenues for the first six months of fiscal 20102011 were $3.14$4.08 billion, compared to $2.65$3.14 billion for the first six months of fiscal 2009.2010. Equipment and services revenues, mostly related to sales of MSM and accompanying RF and PM integrated circuits, were $3.97 billion for the first six months of fiscal 2011, compared to $3.03 billion for the first six months of fiscal 2010, compared to $2.55 billion for the first six months of fiscal 2009.2010. The increase in equipment and services revenues resulted primarily from a $794an $839 million increase related to higher unit shipments partially offset byand a decrease of $327$118 million increase related to the net effects of changes in product mix and the average selling prices of such products. Approximately 185236 million MSM integrated circuits were sold during the first six months of fiscal 2010,2011, compared to approximately 132185 million for the first six months of fiscal 2009. The chipset volume in the first six months of
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fiscal 2009 was impacted by the slowdown in the worldwide economy that caused contraction in the CDMA-based channel inventory and resulted in lower demand for CDMA-based MSM integrated chips.2010.
QCT’s
QCT earnings before taxes for the first six months of fiscal 20102011 were $769 million,$1.06 billion, compared to $385$769 million for the first six months of fiscal 2009. QCT’s2010. QCT operating income as a percentage of its revenues (operating margin percentage) was 26% in the first six months of fiscal 2011, compared to 25% in the first six months of fiscal 2010, compared to 15% in the first six months of fiscal 2009.2010. The increaseincreases in QCT earnings before taxes wasand operating margin percentage were primarily attributable to thea higher increase in QCT revenues partially offset by an increase in research and development expenses. The increase in operating margin percentage was primarily duerelative to an increase in gross margin percentage and decreasesthe increases in research and development and selling, general and administrative expenses, aspartially offset by a percentage of QCT revenues driven primarily by the increasedecrease in QCT revenues.gross margin percentage. QCT gross margin percentage increaseddecreased as a result of the net effects of lower average selling prices, higher product support costs and a decrease in average unit costs, lower product support costs, favorable product mix and lower average selling prices.costs. (1)
QCT inventories decreasedincreased by 13%14% to $354$549 million in the second quarterfirst six months of fiscal 20102011 from $408$481 million at September 27, 200926, 2010 primarily due to a decreasean increase in unitsfinished goods on hand related to the timing of inventory receiptsbuilds and the stage of completion between work-in-process and finished goods.changes in product mix.
QTL Segment.QTL revenues for the first six months of fiscal 20102011 were $1.89$2.80 billion, compared to $1.96$1.89 billion for the first six months of fiscal 2009.2010. During the second quarter of fiscal 2011, we entered into agreements with two licensees to settle ongoing disputes, including the arbitration proceeding with Panasonic and recorded $401 million in revenues related to prior quarters. The remaining $511 million increase in revenues during the first six months of fiscal 2011 was primarily due to an increase in sales of CDMA-based devices by licensees and higher average royalties per unit of CDMA-based devices, partially offset by the effect of $71 million that was included in QTL revenues in the first six months of fiscal 2010 included $71 millionbut was attributable to fiscal 2009 that2009. The $71 million had previously not been previously recognized in fiscal 2009 due to discussions regarding a license agreement that was signed in the first quarter of fiscal 2010. The $141 million decrease in revenues (before the $71 million offset) was primarily due to lower royalties per unit of such CDMA-based devices, including the effect of underreported royalties by a licensee, and the deferral of revenue due to an on-going arbitration with Panasonic, partially offset by an increase in sales of CDMA-based devices by licensees. QTL’s
QTL earnings before taxes for the first six months of fiscal 20102011 were $1.59$2.47 billion, compared to $1.71$1.59 billion for the first six months of fiscal 2009. QTL’s2010. QTL operating margin percentage was 88% in the first six months of fiscal 2011, compared to 84% in the first six months of fiscal 2010, compared to 86% in the first six months of fiscal 2009.2010. The decreaseincreases in QTL earnings before taxes wasand operating margin percentage were primarily attributable to the decreaseincrease in QTL revenues and an increase in selling, general and administrative expenses, which caused a corresponding decline in operating margin percentage.revenues.
QWI Segment.QWI revenues for the first six months of fiscal 20102011 were $294$329 million, compared to $346$294 million for the first six months of fiscal 2009.2010. Revenues decreasedincreased primarily due to a $49$30 million decreaseincrease in QIS revenues. The decrease in QIS revenues was primarily attributable to a $43 million decrease in QChatQES equipment and services revenues resulting primarily from the cessationhigher unit shipments of development efforts under the licensing agreement with Sprint.
our asset-tracking products. QWI earningsloss before taxes for the first six months of fiscal 2010 were $82011 was $135 million, compared to $28earnings before taxes of $8 million for the first six months of fiscal 2009.2010. QWI operating margin percentage was negative in the first six months of fiscal 2011, compared to 1% in the first six months of fiscal 2010, compared to 8% in the first six months of fiscal 2009.2010. The decreasedecreases in QWI earnings before taxes wasand operating margin percentage were primarily attributable to the$120 million in impairment charges related to certain assets of our Firethorn division, including $114 million in goodwill impairment, and a $16 million decrease in QIS revenues, partially offset by a decrease in QES operating expenses. The decrease in QWI operating margin percentage was primarily attributable to a decrease in QIS gross margin percentage and the ongoing operating losses of Firethorn, partially offset by the effect of a decrease in QES operating expenses.income.
QSI Segment. QSI revenues for the first six months of fiscal 20102011 were $4$5 million, compared to $13$4 million for the first six months of fiscal 2009. QSI revenues are attributable to our FLO TV subsidiary. The decrease in FLO TV revenues was primarily due to an increase in customer-related incentives that were recorded as reductions in revenues.2010. QSI loss before taxes for the first six months of fiscal 20102011 was $243$563 million, compared to $200$243 million for the first six months of fiscal 2009.2010. QSI loss before taxes increased by $43$320 million primarily due to a $64$268 million increase in our FLO TV subsidiary’s loss before taxes partially offsetand a $46 million increase in interest expense attributable to the loans related to the BWA spectrum won in the India auction in the third quarter of fiscal 2010.
We are executing on a restructuring plan under which we shut down the FLO TV business and network in March 2011. QSI loss before taxes for the six months of fiscal 2011 included $374 million related to this plan. In addition to our ongoing operating costs, we expect to incur future restructuring and restructuring-related charges associated with this plan of up to $65 million, which are primarily related to lease exit and other costs. Restructuring activities were initiated in the fourth quarter of fiscal 2010 and are expected to be substantially complete by a $22 million decreasethe end of fiscal 2012.
(1) During the first six months of fiscal 2011, some customers built devices that incorporated two MSMs. In such cases, which represent less than 1% of our gross volume, we count only one MSM in net investment losses (unrelated to FLO TV).reporting the MSM shipments.
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 $18.2$22.1 billion at March 28, 2010,27, 2011, an increase of $471 million$3.7 billion from September 27, 2009.2010. This increase included $2.0 billion of proceeds from the issuance of common stock under our equity compensation plans. Our cash, cash equivalents and marketable securities at March 28, 201027, 2011 consisted of $7.1$8.1 billion held domestically and $11.1$14.0 billion held by foreign subsidiaries. Due to tax and accounting considerations, we derive liquidity for operations primarily from domestic cash flow and investments held domestically. Total cash provided by operating activities decreased to $1.8 billion during the first six months of fiscal 2011, compared to $2.0 billion during the first six months of fiscal 2010. The decrease was primarily due to the payment of $1.5 billion to the United States tax authorities in the first quarter of fiscal 2011, offset by an increase in net income for the first six months of fiscal 2010,2011, compared to $4.8 billion during the first six months of fiscal 2009. The decrease was primarily due to collection of the $2.52010.
At March 27, 2011, approximately $1.7 billion trade receivable in the first quarter of fiscal 2009 related to the license and settlement agreements completed with Nokia in September 2008.
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During the first six months of fiscal 2010, we repurchased and retired 43,871,000 shares ofremained authorized for repurchase under our common stock for $1.7 billion. On March 1, 2010, we announced that we had been authorized to repurchase up to $3.0 billion of our common stock, and the entire authorized amount remained available at March 28, 2010.program. The stock repurchase program has no expiration date. We intend to continue toWhile we did not repurchase sharesany of our common stock during the first six months of fiscal 2011, we continue to evaluate repurchases under this program as a means of returning capital to stockholders, subject to capital availability and periodic determinations that stocksuch repurchases are in the best interestsinterest of our stockholders.
We announced cash dividends totaling $279$316 million, or $0.17$0.19 per share, during the second quarter of fiscal 2010,2011, which were paid on March 26, 2010.25, 2011. On March 1, 2010,8, 2011, we announced an increase in our quarterly cash dividend per share of common stock from $0.17$0.19 to $0.19,$0.215, which is effective for quarterly dividends payable after March 28, 2010.25, 2011. On April 8, 2010,7, 2011, we announced a cash dividend per share of $0.19$0.215 per share on our common stock, payable on June 25, 201024, 2011 to stockholders of record as of May 28, 2010.27, 2011. We intend to continue to use cash dividends as a means of returning capital to stockholders, subject to capital availability and periodic determinations that cash dividends are in the best interests of our stockholders.
Accounts receivable increased approximately 10%9% during the second quarter of fiscal 2010.2011. Days sales outstanding, on a consolidated basis, were 2217 days at March 28, 201027, 2011 compared to 2018 days at December 27, 2009.26, 2010. The increasesincrease in accounts receivable and the related days sales outstanding werewas primarily due to the effects of increased revenues and the timing of cashshipments 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 total research and development expenditures were $1.2 billion in the first six months of fiscal 2010 and $2.4 billion in fiscal 2009, and we expect to continue to invest heavily in research and development for new technologies, applications and services for the wireless industry. |
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| • | | Capital expenditures were $196 million in the first six months of fiscal 2010 and $761 million in fiscal 2009. We anticipate that capital expenditures in fiscal 2010 will decrease from fiscal 2009 levels as fiscal 2009 capital expenditures included amounts for the build-out of a manufacturing facility related to our Qualcomm MEMS Technologies division, however, future capital expenditures may be impacted by transactions that are currently not forecasted. On March 17, 2010, we announced that we filed an application with the Indian Government to bid in India’s upcoming auction for Broadband Wireless Access spectrum. If successful in winning spectrum in the auction, we will incur additional capital expenditures. |
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| • | | Our purchase obligations for the remainder of fiscal 2010 and for fiscal 2011, some of which relate to research and development activities and capital expenditures, totaled $899 million and $174 million, respectively, at March 28, 2010. |
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| • | | In the first quarter of fiscal 2011, we are obligated to pay approximately $1.4 billion to the tax authorities in the United States as a result of the cash and intangible assets received in connection with the 2008 license and settlement agreements with Nokia. |
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| • | | Pursuant to the Settlement and Patent License and Non-Assert Agreement with Broadcom, we are obligated to pay a remaining $562 million ratably through April 2013. |
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| • | | Cash used for strategic investments and acquisitions, net of cash acquired, was $28 million in the first six months of fiscal 2010 and $54 million in fiscal 2009, and we expect to continue making strategic investments and acquisitions to open new markets for our technology, expand our technology, obtain development resources, grow our patent portfolio or pursue new business opportunities. |
Our research and development expenditures were $1.4 billion in the first six months of fiscal 2011 and $2.5 billion in fiscal 2010, and we expect to continue to invest heavily in research and development for new technologies, applications and services for the wireless industry.
Capital expenditures were $181 million in the first six months of fiscal 2011 and $426 million in fiscal 2010. We anticipate that capital expenditures will be higher in fiscal 2011 as compared to fiscal 2010, excluding the fiscal 2010 $1.1 billion advance payment on the BWA spectrum in India, primarily due to estimated capital expenditures of $400 million in fiscal 2011 related to the construction of a new manufacturing facility in Taiwan for our QMT division. The estimated cost for the initial phase of the facility is $975 million and is expected to be operational in fiscal 2012. The revised estimate for fiscal 2011 reflects a minor postponement in the expected completion of the manufacturing facility due in part to equipment sourcing delays precipitated by the earthquake in Japan. Future capital expenditures may also be impacted by transactions that are currently not forecasted.
Our purchase obligations for the second quarter of fiscal 2011, some of which relate to research and development activities and capital expenditures, totaled $1.2 billion at March 27, 2011.
We anticipate incurring future cash expenditures associated with the FLO TV restructuring plan in the range of $125 million to $175 million, primarily related to lease exit and other costs. Restructuring activities were initiated in the fourth quarter of fiscal 2010 and are expected to be substantially complete by the end of fiscal 2012. We expect the majority of the cash payments associated with this restructuring plan to be made by the end of fiscal 2012.
Cash used for strategic investments and acquisitions, net of cash acquired, was $89 million in the first six months of fiscal 2011 and $94 million in fiscal 2010. On January 5, 2011, we announced that we had entered into a definitive agreement under which we intend to acquire Atheros Communications, Inc. for $45 per share in cash. We expect to
use approximately $3.1 billion in existing cash, cash equivalents and marketable securities to effect this transaction, net of the cash equivalents and marketable securities expected to be acquired from Atheros upon the close of the transaction. We continue to assess the potential for future cash expenditures for income taxes resulting from the acquisition of Atheros and any subsequent restructuring of legal entities. We expect the transaction to close in the third quarter of fiscal 2011. We expect to continue making strategic investments and acquisitions to open new markets for our technology, expand our technology, obtain development resources, grow our patent portfolio or pursue new business opportunities.
In the first quarter of fiscal 2011, the $1.1 billion short-term loan related to the BWA spectrum purchase in India was refinanced with new loan agreements that bear interest at an annual rate based on the highest base rate among the bank lenders, which is reset quarterly, plus 0.25% with interest payments due monthly. The new loans are due and payable in full in December 2012. However, each lender has the right to demand prepayment of its portion of the outstanding loans on December 15, 2011 subject to sufficient prior written notice. As a result, the loans are classified as a component of current liabilities.
Pursuant to the Settlement and Patent License and Non-Assert Agreement with Broadcom, we are obligated to pay a remaining $389 million ratably through April 2013, including imputed interest, of which $86 million is payable in the remainder of fiscal 2011.
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 March 27, 2011 includes an aggregate of $1.1 billion in loans that are payable in full in Indian rupees in December 2012. We have no material off-balance sheet arrangements as defined in S-K 303(a)(4)(ii).
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Additional information regarding our financial commitments at March 28, 201027, 2011 is provided in the notes to our condensed consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 6 — Income Taxes” andTaxes,” “Note 8 — Commitments and Contingencies.Contingencies” and “Note 12 — Acquisition.”
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 markettrading 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 27, 2009,26, 2010, including our financial statements and the related notes.
IfRisks Related to Our Businesses
Our revenues are dependent on the commercial deployment of our CDMA- and OFDMA-based technologies and upgrades of 3G and 3G/4G multimode wireless communications equipment, products and services based on our technologies.
We develop, patent and commercialize CDMA- and OFDMA-based technologies. Our revenues are dependent upon the commercial deployment of our technologies does not expand as expected, our revenues may not grow as anticipated.
We have focused our business primarily on developing, patenting and commercializing CDMA technology for wireless telecommunications applications. Other digitalupgrades of 3G and 3G/4G multimode 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 ourequipment, products and those ofservices based on our customerstechnologies. Our business may be harmed, and licensees are sold, our business and financial results could suffer. If GSM wireless operators do not select CDMA for their networks or upgrade their current networks to any CDMA-based third-generation (3G) technology, our business and financial results could suffer since we have not previously generated significant revenues from sales of single-mode GSM products. In addition to CDMA technology, we have invested and increasingly continue to invest in developing, patenting and commercializing OFDMA technology, which has not yet been widely adopted and commercially deployed, and our MediaFLO technology, which was commercially deployed in the United States in fiscal 2007. If OFDMA is not widely adopted and commercially deployed and/or MediaFLO technology is not more widely adopted by consumers in the United States or commercially deployed internationally, our investments in OFDMA and MediaFLOthese technologies may not provide us an adequate return.return if:
wireless operators delay 3G and/or 3G/4G multimode deployments, expansions or upgrades;
LTE, an OFDMA-based wireless standard, is not widely deployed or commercial deployment is delayed; or
wireless operators deploy other technologies.
Our business is dependent on our ability to increase our market share and to continue to drive the deploymentadoption of our technologies, products and services into 3G, 3G/4G multimode and 4G wireless device markets. We are also dependent on the success of our customers, licensees and CDMA-basedCDMA- and OFDMA-based wireless operators, as well as the timing of their deployment of new services. Our licensees and CDMA-basedCDMA- or OFDMA-based wireless operators may incur lower gross 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, thecommercial deployment of CDMA technology could be negatively affected, and our business could suffer.
We are dependent on the commercial deploymenttechnologies and upgrades ofto 3G, wireless communications equipment, products and services to increase our revenues, and our business may be harmed if wireless network operators delay3G/4G multimode or are unsuccessful in the commercial deployment or upgrade of 3G technology or if they deploy other technologies.
To increase our revenues in future periods, we are dependent upon the commercial deployment and upgrades of 3G4G 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 or upgrades of CDMA2000, WCDMA or other CDMA systems. If existing deployments are not commercially successful ortechnologies 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 businessrevenues could be negatively impacted, and financial results may be harmed. In addition, our business could suffer.
Our revenues can be harmed if wireless network operators deployimpacted by the deployment of other technologies or switch existing networks from CDMA to GSM without upgrading to WCDMA or if wireless network operators introduce new technologies. A limited numberin place of wireless operators have deployedCDMA- and/or started testing OFDMA technology, butOFDMA-based technologies or by the timing and extent ofneed to extend certain existing license agreements to cover additional OFDMA deployments is uncertain, and we might not be successful in developing and marketing OFDMA products.later patents.
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.
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Although we own a very strong portfolio of issued and pending patents related to GSM, GPRS, EDGE, OFDM, OFDMA and/or Multiple Input, Multiple Output (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. Many wireless operators are investigating or have selected LTE (or to a lesser extent WiMAX)WiMax) as next-generation technologies for deployment in existing or future spectrum bands as complementary to their existing CDMA-based networks. Although we believe that our patented technology is essential and useful to implementation of the LTE and WiMAXWiMax industry standards and have granted royalty-bearing licenses to nine11 companies to make and sell products implementing those standards (including Nokia, LG Electronics and Samsung),but not implementing 3G standards, we might not achieve the same royalty revenues on such LTE or WiMAX deploymentsWiMax products as on CDMA-based deployments, and we might not achieve the same level of success in selling LTE or WiMAX products as we have in CDMA-basedmultimode CDMA/OFDMA-based products.
Our earnings are subject to substantial quarterly and annual fluctuations and to market downturns.
Our revenues and earnings have fluctuated significantly in the past and may fluctuate significantly in the future. General economic or other conditions have caused a downturn in the market for our products or technology. Despite the recent improvements in market conditions, a future downturn in the demand for our products or technology could adversely affect our operating results and increase the risk of substantial quarterly and annual fluctuations in our earnings. Any prolonged financial or economic crisis may result in the insolvency of key suppliers resulting in product delays; delays in reporting and/or payments from our licensees; customer/licensee insolvencies that impact our customers’/licensees’ ability to pay us, which may delay or impede our ability to recognize revenue and/or result in bad debt expense; the inability of our customers to obtain credit to finance purchases of our products and/or cause our customers to change delivery schedules, cancel committed purchase orders or reduce purchase order commitment projections; uncertainty in global economies, which could impact demand for CDMA-based products in various regions; counterparty failures negatively impacting our treasury operations; and the inability to utilize federal and/or state capital loss carryovers.
Financial market volatility has impacted, and could continue to impact, the value and performance of our marketable securities. Net investment income could vary depending on the gains or losses realized on the sale or exchange of securities, gains or losses from equity method investments, impairment charges related to marketable securities and other investments, changes in interest rates and changes in fair values of derivative instruments. Our cash equivalent and marketable securities investments represent significant assets 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.
Our future operating results may 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 products developed, licensed, produced and sold; seasonal customer demand; disputes with our customers and licensees; and other factors described elsewhere in this Quarterly Report and in these risk factors.
These factors affecting our future earnings are difficult to forecast and could harm our quarterly and/or annual operating results. If our earnings 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.
Global economic conditions that impact the wireless communications industry could negatively affect our revenues and operating results.
Despite the recent improvements in market conditions, a future decline in global economic conditions could have adverse, wide-ranging effects on demand for our products and for the products of our customers, particularly wireless communications equipment manufacturers or other members of the wireless industry, such as wireless network operators. We cannot predict other negative events that may have adverse effects on the economy, on demand for wireless device products or on wireless device inventories at CDMA-based equipment manufacturers and wireless operators. Inflation and/or deflation and economic recessions that adversely affect the global economy and capital markets also adversely affect our customers and our end consumers. For example, our customers’ ability to purchase or pay for our products and services, obtain financing and upgrade wireless networks could be
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adversely affected, leading to cancellation or delay of orders for our products. Also, our end consumers’ standards of living could be lowered, and their ability to purchase wireless devices based on our technology could be diminished. Inflation could also increase our costs of raw materials and the cost of our products, our operating expenses and harm our business in other ways, and deflation could reduce our revenues if product prices fall. Any of these results from worsening global economic conditions could negatively affect our revenues and operating results.
A significant downturn in the economies of Asian countries where many of our customers and licensees are located or the economies of the other major markets (e.g., Europe and North America) they serve could materially harm our business. During the first six months of fiscal 2010, 66% of our revenues were from customers and licensees based in South Korea, China and Taiwan as compared to 62% during the first six months of fiscal 2009, respectively. During fiscal 2009, 66% of our revenues were from customers and licensees based in South Korea, China and Taiwan, as compared to 61% during fiscal 2008. These customers sell their products to markets worldwide, including in Japan, South Korea, China, India, North America, South America and Europe. In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of war or terrorism, may cause disruptions to the global economy and to the wireless communications industry and create uncertainties. 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.
Our four largest customers accounted for 45% and 49% of consolidated revenues in the first six months of fiscal 2010 and 2009, respectively, and 49% and 42% in fiscal 2009 and 2008, 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 segment’s 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 four 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:
| • | | the product requirements of our customers and the network operators; |
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| • | | the level of component integration and interoperability required by our customers; |
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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 that 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 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; and |
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changes in governmental regulations in countries where we or our customers currently operate or plan to operate.
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 today derives royalty revenues primarily from sales of CDMA products by our licensees. Although we have more than 180 licensees, we derive a significant portion of our royalty 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 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.licensees, and such modifications may impact our revenues.
Global economic conditions that impact the wireless communications industry could negatively affect the demand for our products and our customers’ products, which may negatively affect our revenues.
Despite the improvements in market conditions, a future 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 wireless communications equipment manufacturers or others in the wireless industry, such as wireless operators. Other unexpected negative events may have adverse effects on the economy, on demand for wireless device products or on wireless device inventories at equipment manufacturers and wireless operators. 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 cancellation or delay of orders for our products.
Our industry is subject to competition in an environment of rapid technological change that could result in decreased demand for our products and the products of our customers and licensees, declining average selling prices for our licensees’ products and our products and/or 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. 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. Our products, services and technologies face significant competition, and we cannot assure you that the revenues generated or the timing of their deployment, which may be dependent on the actions of others, will meet our expectations. Competition in the telecommunications market is affected by various factors that include, among others: evolving industry standards, evolving methods of transmission for wireless voice and data communications; value-added features that drive replacement rates and selling prices; 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:
continue to keep pace with technological developments;
drive adoption of our integrated circuit products across a broad spectrum of wireless devices sold by our customers and licensees;
develop and introduce new products, services, technologies and enhancements on a timely basis;
effectively develop and commercialize turnkey, integrated product offerings that incorporate our integrated circuits, software, user interface and applications;
become a preferred partner for operating system platforms, such as Android and Windows Mobile;
focus our service businesses on key platforms that create standalone value or contribute to the success of our other businesses; and
succeed in significant foreign markets, such as China, India and Europe.
Companies that promote non-CDMA technologies (e.g., GSM, WiMax) and companies that design CDMA-based integrated circuits are generally competitors or potential competitors. Examples (some of whom are strategic partners of ours in other areas) include Broadcom, Freescale, Fujitsu, Icera, Intel, Marvell Technology, Mediatek, nVidia, Renesas Electronics, 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; government support of other technologies; and more extensive relationships with indigenous distribution and original equipment manufacturer (OEM) companies in developing territories (e.g., China).
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 and associated software, that will incorporate “open source” software elements and operate in an “open source” environment, which may offer accessibility to a portion of a product’s source code and may expose related intellectual property to adverse licensing conditions. 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.
Competition may reduce average selling prices for our chipset products and the products of our customers and licensees. Reductions in the average selling prices of our licensees’ products, unless offset by an increase in volumes, generally result in reduced royalties payable to us. We anticipate that additional competitors 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.
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, our operating results could be negatively affected.
Our QCT segment derives a significant portion of revenues from a small number of customers. The loss of any one of our QCT segment’s 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 deferral or cancellation and harm our ability to achieve or sustain expected levels of operating results. Accordingly, unless and until our QCT segment diversifies and expands its customer base, our future success will largely depend upon the timing and size of any future purchase orders from these customers.
Although we have more than 195 licensees, our QTL segment derives a significant portion of royalty 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 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 sold by our major licensees, without a sufficient increase in the volumes of such devices sold, could have a material adverse effect on our revenues.
Efforts by some telecommunications equipment manufacturers or their customers 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, Standards Development Organizations (SDOs) or other industry groups that harm our business.
A small number of companies, in the past, 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, patent misuse, patent exhaustion and patent and license unenforceability, or some form of unfair competition, (ii) taking questionable positions on the interpretationcontrary to our understanding of their contracts with us, (iii) appeals to governmental authorities, such as the complaints filed with the Korea Fair Trade Commission (KFTC) and the Japan Fair Trade Commission (JFTC) during 2006, (iv) collective action, including working with carriers, standards bodies, other like-minded technology 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 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 holder’s ability to enforce its rights or obtain a fair return for such rights. 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 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. 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. There is a risk that relevant courts or governmental agencies will interpret those policies in a manner adverse to our interests.
Although we believe that these challenges If such proposals and strategies continue and are without merit, and we will continue to vigorously defend our intellectual property and contract rights and our right to continue to receive a fair return for our innovations,successful in the distractions caused by challenges to
future, our business model would be harmed, either by artificially limiting our return on investment with respect to new technologies or forcing us to work outside of the SDOs or such other industry groups to promote our new technologies, and licensing program are undesirable andour 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 as should investors, 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.
The enforcement and protection of our intellectual property rights may be expensive, and could divertfail to prevent misappropriation or unauthorized use of our valuable resources.proprietary intellectual property rights or could result in the loss of our ability to enforce one or more patents.
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
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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. 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 wirelessspectrum 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. We may have 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; adoption of mandatory licensing provisions by foreign jurisdictions (either with controlled/regulated royalties or royalty free); and challenges pending before foreign competition agencies to the pricing and integration of additional features and functionality into our wireless chipset products.
The vast majorityA substantial portion 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 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. In addition, failure to protect our trademark rights could impair our brand identity.
Claims by other companies that we infringe their intellectual property or that patents on which we rely are invalid 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.
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 purchases of our chipsets less economical for our customers. A negative outcome in 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 share of worldwide chipset sales and/or a reduction in our licensees’ sales to wireless operators, causing a corresponding decline in our chipset and/or licensing revenues.
In addition, as the number of competitors or other patent holders in the 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 suppliersfoundries 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 a material adverse effect on our results of operations. Furthermore, any such litigation could severely disrupt the supply of our products and 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 sales and/or a reduction in our licensees’ sales to wireless operators, 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 a material 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 not be successful in such proceedings, 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 purchases of our chipsets 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 hurt our relationships with our chipset customers and wireless operators 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 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 OFDMA standards or implementations of OFDM and OFDMA systems. If we or other product
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manufacturers are required to obtain additional licenses and/or pay royalties to one or more of such other patent holders, this could have a material adverse effect on the commercial implementation of our CDMA, GSM, OFDMA or multimode products and technologies, demand for our licensees’ products and our profitability.
Other companies or entities also have commenced, 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 isearnings and stock price are subject to competition that could resultsubstantial quarterly and annual fluctuations and to market downturns.
The stock market in decreased demand for our productsgeneral, and the productsstock 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, among others:
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;
proprietary rights or product or patent litigation against us or against our customers or licensees;
strategic transactions, such as spin-offs, acquisitions and licenseesdivestitures;
unexpected and/or decliningsignificant changes in the average selling prices forprice 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; or
rumors or allegations regarding our financial disclosures or practices.
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 potential volatility of 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.
Any prolonged financial or economic crisis may result in a downturn in demand for our products or technology; the insolvency of key suppliers resulting in product delays; delays in reporting and/or payments from our licensees and/or customers; and counterparty failures negatively impacting our treasury operations.
Financial market volatility has impacted, and could continue to impact, the value and performance of our marketable securities. Net investment income could vary depending on the gains or losses realized on the sale or exchange of securities, impairment charges related to marketable securities and other investments, changes in interest rates and changes in fair values of derivative instruments. Our cash equivalent and marketable securities investments represent significant assets 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 earnings are difficult to forecast and could harm our quarterly and/or annual operating results. If our earnings 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.
We depend upon a limited number of third-party suppliers to manufacture and test component parts, subassemblies and finished goods for our products. If these third-party suppliers do not allocate adequate manufacturing and test capacity in their facilities to produce products on our behalf, or if there are any disruptions in the operations of, or a loss of, any of these third
parties, it could harm our ability to meet our delivery obligations to our customers, reduce our revenues, increase our cost of sales and harm our business.
Our ability to meet customer demand depends, in part, on 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. The loss of a significant 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 and operating results.business operations. 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 involve delay and expense, resulting in possible loss of customers.
While our goal is to establish alternate suppliers for 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. 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.
QCT Segment. Although we have entered into long-term contracts with our suppliers, most of these contracts do not provide for long-term capacity commitments, except as may be provided in a particular purchase order that has been accepted by our supplier. 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 capacity to manufacture or test our products. Accordingly, capacity for our products may not be available when we need it or available at reasonable prices. We currently face significant competitionhave 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 marketsfailure to meet customer demand. 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, revenues and expect that competition will continue. Competitioncost 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.
QMT Division. Our QMT division needs to form and maintain reliable business relationships with component supply partners to support the manufacture of interferometric modulator (IMOD) displays and/or modules 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 telecommunications market is affected by various factors, including:component supply partners entering into material supply relationships with us.
| • | | comprehensiveness of products and technologies; |
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| • | | value-added features that drive replacement rates and selling prices; |
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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. |
Our suppliers may also be our competitors, putting us at a disadvantage for pricing and capacity allocation. This competitionOne or more of our suppliers may resultobtain 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 increased development costsour operations that could harm our ability to meet our delivery obligations to our customers or increase our cost of sales.
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 reduced average selling prices forinternational strategic investments.
Our international customers sell their products to markets throughout the world, including China, India, Japan, South Korea, North America, South America and Europe. Consolidated revenues from international customers as a percentage of total revenues were greater than 90% in the first six months of fiscal 2011 and in the last three fiscal years. We are exposed to risk from fluctuations in currencies that could negatively affect our operating results. Adverse movements in currency exchange rates may negatively affect our business due to a number of situations, including the following, among others:
Our products and those of our customers and licensees. Reductions in the average selling prices of our licensees’ products, unless offset by an increase in volumes, generally result in reduced royalties payable to us. While pricing pressures from competitionlicensees that are sold into foreign markets may to a large extent, be mitigated by the introduction of new features and functionality in our licensees’ products as evidenced by the recent success of smartphones and other feature-rich, data-capable devices, there is no guarantee that such mitigation will continue to occur. We anticipate that additional competitors will enter our marketsbecome less price-competitive as a result of growth opportunitiesadverse currency fluctuations;
Certain of our revenues, such as royalty revenues, are derived from licensee or customer sales that are denominated in wireless telecommunications,foreign currencies. Weakening of currency values versus the trend toward global expansion by foreign and domestic competitors, technological and public policy changes and relatively low barriers to entryU.S. dollar in selected segmentsregions could adversely affect our revenues and cash flows;
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, 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;
Our loans payable are denominated in Indian rupees. If the U.S. dollar weakens, additional cash will be required to
settle this obligation and the related interest; and
Currency exchange rate fluctuations may reduce the U.S. dollar value of our marketable securities that are denominated directly or indirectly in foreign currencies.
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 and other assets, including spectrum licenses and other intangible assets, enter into joint ventures or other strategic transactions and purchase equity and debt securities, including minority interests in publicly-traded and private companies. Many of our strategic investments are in early-stage companies to support our business, including the global adoption of CDMA- or OFDMA-based technologies and related services. Most of our acquisitions or 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 some cases, we may be required to consolidate or record our share of the industry.earnings or losses of companies in which we have acquired ownership interests. Our share of any losses will adversely affect our financial results until we exit from or reduce our exposure to these investments.
Companies that promote non-CDMA technologies (e.g., GSM, WiMAX)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 design competing CDMA-based integrated circuits are generally included amongsthave 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: retaining key employees; maintaining important relationships of Qualcomm and 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 cannot assure you that the integration of acquired businesses with our competitors or potential competitorsbusiness will result in the United Statesrealization of the full benefits anticipated by us to result from the acquisitions. We may not derive any commercial value from acquired technology, products and abroad. Examples (some of whom are strategic partners of ours in other areas) include Broadcom, Freescale, Fujitsu, Icera, Infineon, Intel, Mediatek, NEC, nVidia, Renesas, ST-Ericsson (a joint venture between Ericsson Mobile Platformsintellectual property or from future technologies and ST-NXP Wireless), Texas Instruments and VIA Telecom.
Many of these current and potential competitors have advantages over us, including:
| • | | longer operating histories and market presence; |
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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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| • | | greater sales and marketing, manufacturing, distribution, technical and other resources; |
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| • | | government support of other technologies; and |
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| • | | more extensive relationships with indigenous distribution and original equipment manufacturer (OEM) companies in developing territories (e.g., China). |
As a result of these and other factors, our competitors may be more successful than us. In addition, we anticipate new competitors, including companies not previously engaged in manufacturing telecommunications chipsets, to begin offering and selling products based on 3G standards, LTEthe acquired technology and/or intellectual property, and WiMAX. These competitorswe 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 the products of our customers 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 more establishedan adverse impact on our customers, which could damage our reputation, harm our customer relationships and distribution channelsexpose us to liability. Defects or impurities in marketsour 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, customer or licensee demand for our products or the commitment of financial and/or engineering resources that could reduce operating margins and affect future product release schedules. Additionally, a defect or failure, including those related to security vulnerabilities, in our products or the products of our customers or licensees could lead to liability claims, harm our reputation and/or adversely affect the growth of 3G and 3G/4G multimode wireless markets.
Manufacturing, testing, 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. 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.
Our Firethorn business does not currently deploying CDMA-based wireless communications technology. These competitors alsogenerate operating income and may have establishednot succeed or its operating results may establish financial or strategic relationships among themselves or withnot meet our existing or potential customers, resellers or other third parties. These relationshipsexpectations.
While we continue to believe that our Firethorn division's mCommerce products will offer competing advantages to consumers and merchants, there can be no assurance that our mCommerce efforts will be successful. If our Firethorn business does not succeed, our investment in its technology may affectnot provide us an adequate return, and our customers’ decisions to purchase products or license technology from us or to use alternative technologies. Accordingly, new competitors or alliances among competitorsbusiness could emerge and rapidly acquire significant market sharebe harmed. Consumer acceptance of sales to our detriment. In addition to the foregoing, we have seen, and believe weFirethorn service offerings will continue to see, an increasebe affected by competition, technology-based differences and by the operational performance, quality and reliability of our services platforms. After $120 million in customers requesting that
impairment charges recorded during the second quarter of fiscal 2011, our Firethorn business had $65 million in assets (including $40 million in goodwill) at March 27, 2011. If we developdo not expect to achieve adequate market penetration with our mobile commerce products, including chipsets, that will operate in an “open source” environment,our remaining assets may become impaired, which offers practical accessibility to a portion of a product’s source code. Developing open source compliant products, without imperiling the intellectual property rights upon whichcould negatively affect our licensingoperating results.
Our QMT division’s business depends,does not currently generate operating income and may prove difficult under certain circumstances, thereby placing us at a competitive disadvantage for new product designs.not succeed or its operating results may not meet our expectations.
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.
We continue to believe our FLO TV service offering provides compelling advantages to consumers. However, we face indirect competition to our FLO TV products and services from wireless delivery of streaming and downloadable video content via wireless operators, OEMs and other providers of mobile video content, as well as from internet video content accessed through the mobile web browser.
While we continue to believe our QMT division’s interferometric modulator (IMOD)IMOD displays will offer compelling advantages to users of displays, there can be no assurance that our IMOD product development efforts will be successful, that we will be able to cost-effectively manufacture these new products, that we will be able to successfully market these products or that other technologies will not continue to improve in ways that reduce the advantages we anticipate from our IMOD displays. Sales of flat panel displays are currently dominated, and we believe will likely continue to be dominated 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 displaydevice manufacturers to avoid entering into commercial relationships with us or to not renew planned or existing relationships with us. Our QMT division had $398$437 million in assets (including $128$130 million in goodwill) at March 28, 2010.27, 2011. If we do not expect to achieve adequate market penetration with our IMOD display technology, our assets may become impaired, which could negatively impact our operating results.
Attempts by certain companies, if successful, 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 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. In May 2007, seven companies (Nokia, Nokia-Siemens, NEC, Ericsson, SonyEricsson, Alcatel-Lucent and NextWave) issued a press release announcing their commitment to the principles described above with respect to the licensing of patents essential to LTE and inviting all other industry participants
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to join them in adopting such policies. Although the European Telecommunications Standards Institute (ETSI) IPR Special Committee 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, and no other companies have joined these seven companies, such proposals as described above might be revisited within ETSI and might be adopted by other SDOs or industry groups, formal and/or informal, resulting in a potential disadvantage to our business model either by artificially 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 and test component parts, subassemblies and finished goods for our products. If these third-party suppliers do not allocate adequate manufacturing and test capacity in their facilities to produce products on our behalf, or if there are any disruptions in the operations, or the loss, of any of these third parties, it could harm our ability to meet our delivery obligations to our customers, reduce our revenues, increase our cost of sales and harm our business.
A supplier’s ability to meet our product manufacturing and test demand is limited mainly by its overall capacity and current capacity availability. Our ability to meet customer demand depends, in part, on 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 or test 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.Although we have entered into long-term contracts with our suppliers, most of these contracts do not provide for long-term capacity commitments, except as may be provided in a particular purchase order that has been accepted by our supplier. 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 and testing of products for their other customers while reducing capacity to manufacture or test 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 capacity commitments. 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. 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, which may result in lowering our operating margins. 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, revenues 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 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
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integrated circuit production to a new foundry supplier may cause a temporary decline in shipments of specific integrated circuits to individual customers.
Under our Integrated Fabless Manufacturing (IFM) model, we purchase die from semiconductor manufacturing foundries, contract with separate third-party manufacturers for back-end assembly and test services and ship the completed integrated circuits to our customers. 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, manufacturing yields, quality assurance and product delivery schedules. This lack of control could cause disruptions in our operations that could harm our ability to meet our delivery obligations to our customers, reduce our revenues or increase our cost of sales.
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.
FLO TV Business.FLO TV depends on a limited number of third-party suppliers to manufacture and test component parts, subassemblies and finished goods for products related to our direct-to-consumer FLO TV service offering. If these third-party suppliers do not allocate adequate manufacturing and test capacity in their facilities to produce products on our behalf, or if there are any disruptions in the operations, or the loss, of any of these third parties, our ability to meet our or our partners’ delivery obligations to customers could be harmed, which could negatively impact our operating results. Lack of devices could also delay subscriber adoption of our FLO TV service.
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 market locations. 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 to sell products in additional countries and locations. 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 QTL’s licensing and royalty revenues, the invoiced address of our licensees. Consolidated revenues from international customers as a percentage of total revenues were greater than 90% in the first six months of both fiscal 2010 and 2009. 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:
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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| • | | adoption of mandatory licensing provisions by foreign jurisdictions (either with controlled/regulated royalties or royalty free); |
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| • | | challenges pending before foreign competition agencies to the pricing and integration of additional features and functionality into our wireless chipset products; |
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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, energy blackouts, 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, environmental protection, 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, implement limitations on intellectual property rights or make 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.
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.
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:
| • | | 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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| • | | 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. |
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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 increase our presence in existing markets or 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 near term revenues and cash flows. In addition, continued weakening of currency values in selected regions over an extended period of time could adversely affect our future 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, they may limit the U.S. dollar value of royalties from licensees’ sales that are denominated in foreign currencies, and they expose us to counterparty risk if the counterparty fails to perform. |
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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 currency values in selected regions may adversely affect our operating results because the activities of our foreign subsidiaries, and the costs of procuring component parts and chipsets from foreign vendors, may become more expensive in U.S. dollars. |
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| • | | Strengthening 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. |
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| • | | Currency exchange rate fluctuations may reduce the U.S. dollar value of our marketable securities that are denominated directly or indirectly in foreign currencies. |
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 and exchange-traded funds, corporate bonds/notes, auction rate securities and other mortgage/asset-backed securities. Many of our strategic investments are in early-stage companies to support our business, including the global adoption of CDMA-based technologies and related services. 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. In some cases, we may be required to consolidate or record our share of the earnings or losses of those companies. Our share of any losses will adversely affect our financial results until we exit from or reduce our exposure to these investments.
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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| • | | maintaining important relationships of Qualcomm and the acquired business; |
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| • | | minimizing the diversion of management’s 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, rework 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.
Manufacturing, testing, 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 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.
FLO TV does not fully control promotional activities necessary to stimulate demand for our services that are offered on a wholesale basis through the wireless operator channel.
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As part of our FLO TV business, FLO TV provides mobile entertainment and information service to our wireless operator partners on a wholesale basis. Under wholesale arrangements, we do not set the retail price of our service, nor do we directly control all of the marketing and promotion of the service to the wireless operator’s subscriber base. Therefore, we are dependent upon our wireless operator partners to price, market and otherwise promote our service to their end users. If our wireless operator partners do not effectively price, market and otherwise promote the service offered through the wireless operator channel 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 and mobile commerce applications will have a considerable impact on the success of our FLO TV and Firethorn businesses, respectively.
Consumer acceptance of our FLO TV and Firethorn service offerings are, and will continue to be, affected by technology-based differences and by the operational performance, quality, reliability and coverage of our wireless network and services platforms. Consumer demand could be impacted by differences in technology, coverage and service areas, network quality, consumer perceptions, program and service offerings and rate plans. We and our wireless operator and financial services partners may have difficulty retaining subscribers if we are unable to meet subscriber expectations for network quality and coverage, customer care, content or security. Obtaining content for our FLO TV business that is appealing to subscribers on economically feasible 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, placing us at a competitive disadvantage, which could adversely affect our operating results. 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, wireless operator selection of competing technologies or consumer preferences. If MediaFLO technology is not more widely adopted by consumers in the United States or commercially deployed internationally, our investment in MediaFLO technology may not provide us an adequate return.
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 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:
| • | | 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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| • | | disruption in the United States and foreign credit and financial markets affecting both the availability of credit and credit spreads on investment securities; |
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| • | | government regulations, including tax regulations; |
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| • | | natural disasters, energy blackouts, acts of terrorism, widespread illness and war; |
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| • | | inflation and deflation; |
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| • | | concerns regarding global economic conditions that may impact one or more of the countries in which we, our customers or our licensees compete; |
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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 potential 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 management’s attention and resources. In addition, stock price volatility may be precipitated by failure to meet earnings expectations or other factors.
Our industry is subject to rapid technological change, and we must make substantial investments in new products, services 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 Plaza and BREW applications development platform, our MediaFLO MDS, MediaFLO technology and FLO TV service offering and our IMOD display technology. Certain of these new products, services 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.
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| | The market for our wireless products, services and technologies is characterized by many factors, including: |
| • | | rapid technological advances and evolving industry standards; |
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| • | | changes in customer requirements and consumer expectations and preferences; |
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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, services, technologies 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, meet consumer expectations, price our products and services 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 technologies, and products and technologies 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 technologies in commercial quantities, demand for our products and our customers’ and licensees’ products that use our technologies could decrease, and our competitive position could be damaged.
Changes in assumptions used to estimate the values of certain 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 certain share-based payments, such as employee stock options and stock units, using the fair value method. This method has a significant effect on our reported earnings, although it generally 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 such 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.
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 certain share-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.
Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for certain 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. 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 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 be materially different than that which isdiffer from amounts 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.be negatively affected. 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 indefinitely invested 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 our foreign subsidiaries. Our future reported financial results
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and liquidity may be adversely affected if accounting 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.
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 may 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, interestInterest 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 concernconcerns 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 FLO TV businesses depend on the availability of satellite and other networks.
Our satellite-based mobile fleet management services are provided using leased Kurtz-under band (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 September 2012 and includes transponder and satellite protection (back-up capacity in the event of a transponder or satellite failure). The service term of the transponder lease for the system in Mexico runs through the end of May 2010 and has transponder protection. We are currently negotiating to extend the lease in Mexico. Our agreement with a third party to provide network management and satellite space (including procuring satellite space) in Europe expires in February 2013. We believe our agreements will provide sufficient transponder capacity for our satellite-based 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.
Our FLO TV 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 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 United States FLO TV service through fiscal 2012. Additionally, our FLO TV 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.failures or security breaches.
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
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computer viruses, unauthorized access, energy blackouts natural disasters, terrorism, war and telecommunication failures.failures, among other factors. As has been widely reported, attempts by others to gain unauthorized access to information technology systems are becoming more sophisticated and are sometimes successful. The theft or publication of our confidential business information could harm our competitive position, reduce the value of our strategic initiatives or otherwise adversely affect our business. Any system failure, accident or security breach that causes interruptions in our operations, or in our vendors’, 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 their confidential information, we may incur liability as a result. In addition, we expect to devote additional resources to the security of our information technology systems, and we may incur additional costs to remedy theany damages caused by these disruptions or security breaches.
Data transmissions for QES operations are formatted and processed at the Network Management and Data Center in San Diego, California, with a redundant backup Network Management and Data Center located in Las Vegas, Nevada. Content from third parties for FLO TV operations is received, processed and retransmitted at the Broadcast Operations Center in San Diego, California. Certain Plaza and BREW products and services provided by our QIS operations are hosted at the Network Operations Center in San Diego, California with a fully redundant backup Network Operations Center located in Las Vegas, Nevada. 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.
We are subject to government regulation pertaining to environmental and safety laws, to our industry, products and regulations.services, to corporate governance and public disclosure and to health care.
Our operations are affected by national,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. 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. WeThere is also recognize the potential for higher costs driven by climate change regulations. Our costs could increase if our vendors (e.g., third-party manufacturers or utility companies) pass on their costs to us.
As part of the development and commercialization of our IMOD display technology, we are operating both a development and a production fabrication facility. The development and commercialization of IMOD display prototypes is a complex and precise process involving hazardousrestricted materials subject to environmental and safety regulations. Our 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 and production activities.
Our stock repurchase program may not result in a positive return of capital to stockholders and may expose us to counterparty risk.
At March 28, 2010, we had authority to repurchase up to $3.0 billion of our common stock. 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 repurchase program is intended to deliver stockholder value over the long-term, but stock price fluctuations can reduce the program’s effectiveness.
As part of our stock repurchase program, we may sell put options or engage in structured derivative transactions to reduce the cost of repurchasing stock. In the event of a significant and unexpected drop in stock price, these arrangements may require us to repurchase stock at price levels that are significantly above the then-prevailing market price of our stock. Such overpayments may have an adverse effect on the effectiveness of our overall stock repurchase program and may reduce value for our stockholders. In the event of financial insolvency or distress of a counterparty to our put options, structured derivative transactions or 10b5-1 stock repurchase plan, we may be unable to settle transactions if the counterparty does not provide us with sufficient collateral to secure its net settlement obligations to us.
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 cash 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 and state income tax law and changes to our business model. Our dividend payments
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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. ChangesThe adoption of new laws or regulations, 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, liquidityincluding, among other factors, changes in laws, policies, practices or enforcement affecting trade, foreign investments, licensing practices, spectrum license issuance, adoption of standards, the provision of wireless device subsidies by wireless operators to their customers, taxation, environmental protection, loans and financial position.employment.
We hold licenses to use spectrum in the United States fromand the FCC forUnited Kingdom, and we expect that licenses to use the BWA spectrum referred to as Block Dwon in the Lower 700 MHz Band (also known as TV Channel 55) covering the entire nation and spectrum referredauction in India will be assigned to as Block Eus in the Lower 700 MHz Band (also known as TV Channel 56) covering five economic areas on the east and west coasts for use in our FLO TV business. In addition, we holdthird quarter of fiscal 2011. All of these licenses for the spectrum referred to as B Block in the Lower 700 MHz Band for use initially in our various research and development initiatives. In using the licensed spectrum, we are regulated by the FCC pursuant to the terms of our licenses and the Federal Communications Act of 1934, as amended, and pursuant to Part 27 of the FCC’s 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 toin these respective countries. Additionally, certain of our FLO TV 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 hold licenses in the United KingdomStates are subject to minimum build-out requirements to be met at various dates beginning in June 2013. On December 20, 2010, we announced that we have agreed to sell substantially all of our licenses in the United States, subject to the satisfaction of customary closing conditions, including approval by the FCC and clearance from the OfficeU.S. Department of Communications (Ofcom)Justice. If we do not receive approval to use 40 MHzsell these licenses pursuant to this agreement, there is no assurance that we would be able to obtain a comparable price from another party or that we would be able to meet the applicable build-out requirements for those licenses. The BWA spectrum licenses will be subject to minimum build-out requirements to be met within five years of spectrumthe effective date of the license. If we do not meet these requirements, the relevant government authorities could impose a fine or could rescind the license in the so-called L-Band (1452 MHz to 1492 MHz). Thesearea(s) in which the build-out requirements are not met. Changes in the allocation of available spectrum by the countries in which we hold licenses give uscould have a material adverse risk on our business and the right to use this spectrum throughout the entire United Kingdom. In using this spectrum, we are regulated by Ofcom pursuant to the termsvalue of our licenseassets.
Changing laws, regulations and the United Kingdom’s Wireless Technology Actstandards relating to corporate governance, public disclosure and health care 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 2006. The adoptioncorporate governance and public disclosure and complying with laws and regulations. Evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies, procedures, and/or health plans and may divert management time and attention to compliance activities. Our efforts to comply with new or changed laws, regulations and standards may fail, particularly if there is ambiguity as to how such new or changed laws, regulations or changes toand standards should be applied in practice. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the existing regulatory frameworkperformance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could adversely affectharm our business plans.business.
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. We do not have employment agreements with our key management personnel. 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 resource needs, particularly in engineering. If we are unable to attract and retain the qualified employees that we need, our business may be harmed.
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 share-based awards 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, public disclosure and health care may result in additional expenses.
Changing laws, regulations and standards relating to corporate governance, public disclosure and health care may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to
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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 and complying with laws and regulations. Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies, procedures, and/or health plans 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. 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.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 20092010 Annual Report on Form 10-K. At March 28, 2010,27, 2011, there have been no other material changes to the market risks described at September 27, 200926, 2010 except as described below. Additionally, we do not anticipate any other near-term changes in the nature of our market risk exposures or in management’s objectives and strategies with respect to managing such exposures.
Interest Rate Risk.The following table provides information about our interest-bearing cash and cash equivalents, marketable securities and loans payable that are sensitive to changes in interest rates. The table presents principal cash flows, weighted-average yield at cost and contractual maturity dates. Additionally, we have assumed that thesethe interest-bearing securities are similar enough within the specified categories to aggregate thesethe securities for presentation purposes.
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Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | No Single | | | | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | | Maturity | | | Total | |
Fixed interest-bearing securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 837 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 837 | |
Interest rate | | | 0.2 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment grade | | $ | 1,409 | | | $ | 1,105 | | | $ | 671 | | | $ | 376 | | | $ | 618 | | | $ | 271 | | | $ | 2,696 | | | $ | 7,146 | |
Interest rate | | | 1.0 | % | | | 2.7 | % | | | 3.4 | % | | | 3.6 | % | | | 4.5 | % | | | 6.2 | % | | | 1.9 | % | | | | |
Non-investment grade | | $ | 9 | | | $ | 12 | | | $ | 32 | | | $ | 69 | | | $ | 137 | | | $ | 904 | | | $ | 29 | | | $ | 1,192 | |
Interest rate | | | 8.1 | % | | | 14.2 | % | | | 7.7 | % | | | 10.5 | % | | | 9.4 | % | | | 10.0 | % | | | 0.6 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Floating interest-bearing securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,474 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,474 | |
Interest rate | | | 0.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment grade | | $ | 448 | | | $ | 757 | | | $ | 412 | | | $ | 164 | | | $ | 17 | | | $ | 381 | | | $ | 605 | | | $ | 2,784 | |
Interest rate | | | 1.2 | % | | | 0.9 | % | | | 0.7 | % | | | 0.7 | % | | | 1.3 | % | | | 8.3 | % | | | 3.7 | % | | | | |
Non-investment grade | | $ | 8 | | | $ | 5 | | | $ | 61 | | | $ | 169 | | | $ | 340 | | | $ | 275 | | | $ | 953 | | | $ | 1,811 | |
Interest rate | | | 11.0 | % | | | 7.5 | % | | | 6.2 | % | | | 6.7 | % | | | 7.0 | % | | | 7.6 | % | | | 3.8 | % | | | | |
Interest Rate Sensitivity Principal Amount by Expected Maturity Average Interest Rates (Dollars in millions) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | Thereafter | | No Single Maturity | | Total |
Fixed interest-bearing securities: | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 4,134 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,134 | |
Interest rate | 0.2 | % | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | |
Investment grade | $ | 1,281 | | | $ | 757 | | | $ | 685 | | | $ | 725 | | | $ | 254 | | | $ | 606 | | | $ | 1,979 | | | $ | 6,287 | |
Interest rate | 0.7 | % | | 2.8 | % | | 2.6 | % | | 3.4 | % | | 3.3 | % | | 5.3 | % | | 1.0 | % | | |
Non-investment grade | $ | 6 | | | $ | 8 | | | $ | 11 | | | $ | 43 | | | $ | 118 | | | $ | 800 | | | $ | 14 | | | $ | 1,000 | |
Interest rate | 12.8 | % | | 10.3 | % | | 8.8 | % | | 9.7 | % | | 10.6 | % | | 8.3 | % | | 0.8 | % | | |
Floating interest-bearing securities: | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 1,659 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,659 | |
Interest rate | 0.2 | % | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | |
Investment grade | $ | 314 | | | $ | 505 | | | $ | 335 | | | $ | 353 | | | $ | 30 | | | $ | 458 | | | $ | 506 | | | $ | 2,501 | |
Interest rate | 0.9 | % | | 1.3 | % | | 1.0 | % | | 1.2 | % | | 4.4 | % | | 8.7 | % | | 2.6 | % | | |
Non-investment grade | $ | 1 | | | $ | 15 | | | $ | 96 | | | $ | 273 | | | $ | 178 | | | $ | 848 | | | $ | 1,127 | | | $ | 2,538 | |
Interest rate | 7.3 | % | | 7.4 | % | | 5.9 | % | | 6.4 | % | | 6.3 | % | | 5.9 | % | | 4.1 | % | | |
Loans payable(1) | $ | — | | | $ | 1,100 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,100 | |
Floating interest rate | | | 9.3 | % | | | | | | | | | | | | |
(1) Denominated in Indian rupees.
Cash and cash equivalents and available-for-sale securities are recorded at fair value. The loans payable approximate fair value.
Credit Market Risk.At March 28, 2010, a portion of our corporate cash in diversified portfolios of fixed- and floating-rate, investment-grade marketable securities, mortgage- and asset-backed securities, non-investment-grade bank loans and bonds, certain preferred stocks and other securities continue to be affected by credit market concerns and had temporary gross unrealized losses of $23 million. Although we consider these unrealized losses to be temporary, there is a risk that we may incur net other-than-temporary impairment charges or realized losses on the values of these and other similarly affected securities if they do not recover in value in the coming quarters.
Equity Price Risk.We have a diversified marketable securities portfolio that includes equity securities held by mutual and exchange-traded fund shares that are subject to equity price risk. We have made investments in marketable equity securities of 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 March 28, 2010 would cause a decrease in the carrying amounts of these securities of $273 million. At March 28, 2010, gross unrealized losses of our marketable equity securities and equity mutual and exchange-traded fund shares were approximately $19 million. Although we consider these unrealized losses to be temporary, there is a risk that we may incur net other-than-temporary impairment charges or realized losses on the values of these securities if they do not recover in value within a reasonable period of time.
Foreign Exchange Risk.We manage our exposure to foreign exchange market risks, when deemed appropriate, through the use of derivative financial instruments, including foreign currency forward and option contracts with financial counterparties. Such derivative financial instruments are viewed as hedging or risk management tools and are not used for speculative or trading purposes. At March 28, 2010,27, 2011, we had a net assetliability of $12$2 million related to a foreign currency option contractsforward contract that werewas designated as hedges of foreign currency risk on royalties earned from certain international licensees on their sales of CDMA-based devices and a net liability of less than $1 million related to foreign currency option contracts that have been rendered ineffective as a result of changes in our forecast of royalty revenues. Counterparties to our derivative contracts are all major banking institutions. In the event of the financial insolvency or distress of a counterparty to our derivative financial instruments, we may be unable to settle transactions if the counterparty does not provide us with sufficient collateral to secure its net settlement obligations to us, which could materially impact our results. If our forecasted royalty revenues were to decline by 20% and foreign exchange rates were to change unfavorably by 20% for eachinvestment hedge of our hedged foreign currencies, we would incurinvestment in a loss of approximately $12 million resulting from a decreasewholly-owned subsidiary in the fair value of the portion of our hedges that would be rendered ineffective. In addition, weAustralia. We are subject to market risk on foreign currency option contracts that
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have been deemed ineffective.such contract. If foreignthe exchange rates relevant to those contractsthat contract were to change unfavorably by 20%, we would incur a loss of approximately $38$39 million.
At March 27, 2011, we had variable-rate long-term loans in the aggregate of $1.1 billion, which are payable in full in Indian rupees in December 2012. The loans are payable in the functional currency of our consolidated subsidiaries that are party to the
loans; however, we are subject to foreign currency translation risk, which may impact our liability for principal repayment and interest expense that we will record in the future. If the foreign currency exchange rate were to change unfavorably by 20%, we would incur additional principal and interest expense of $208 million and $42 million, respectively, through the remainder of the contractual terms of the loans.
Our analysis methods used to assess and mitigate the risks discussed above should not be considered projections of future risks.
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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).amended. 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.During the second quarter of fiscal 2010, we implemented a new set of software applications that we use to accumulate financial data used in financial reporting. There werehave been no other changes in our internal control over financial reporting during the second quarter of fiscal 20102011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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 8 — 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.
We have provided updated Risk Factors in the section labeled “Risk Factors” in Part I, Item 2, Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations. The “Risk Factors” section provides updated information inTo reflect the anticipated sale of certain areas, but700 MHz spectrum related to our decision to shut down the FLO TV business and network, we revised the risk factor entitled:
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.