| QUALCOMM INC/DE Item 1A Risk Factors You should consider each of the following factors as well as the other information in this Annual Report in evaluating our business and our prospects |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations |
| If any of the following risks actually occur, our business and financial results could be harmed |
| In that case, the trading price of our common stock could decline |
| You should also refer to the other information set forth in this Annual Report, including our financial statements and the related notes |
| Risks Related to Our Businesses If CDMA and CDMA-related technology deployment does not expand as anticipated, our revenues may not grow as anticipated |
| We focus our business primarily on developing, patenting and commercializing CDMA technology for wireless telecommunications applications |
| In addition, with the acquisition of Flarion, we expect an increased emphasis on developing, patenting and commercializing OFDMA technology |
| Other digital wireless communications technologies, particularly GSM technology, have been more widely deployed than CDMA technology |
| OFDMA has not been widely deployed commercially |
| Notwithstanding our portfolio of OFDM/OFDMA intellectual property, technology and products, if CDMA technology does not become the preferred wireless communications industry standard in the countries where our products and those of our customers and licensees are sold, our business and financial results could suffer |
| If wireless operators do not select CDMA for their networks or update their current networks to any CDMA-based third generation (3G) technology, our business and financial results could suffer since we generally have not generated revenues from GSM product sales, and there is no assurance that our OFDM/OFDMA patent portfolio will be as valuable as our CDMA portfolio or that our OFDMA chipset business will be as successful as our CDMA chipset business |
| Further, if OFDMA technology is not adopted and deployed commercially, our investment in Flarion and OFDMA technology may not provide us an adequate return on our investment |
| To increase our revenues in future periods, we are dependent upon the commercial deployment of 3G wireless communications equipment, products and services based on our CDMA technology |
| Although wireless network operators have commercially deployed CDMA2000 and WCDMA, we cannot predict the timing or success of further commercial deployments or expansions of CDMA2000, WCDMA or other CDMA systems |
| If existing deployments are not commercially successful or do not continue to grow their subscriber base, or if new commercial deployments of CDMA2000, WCDMA or other CDMA-based systems are delayed or unsuccessful, our business and financial 21 _________________________________________________________________ [85]Table of Contents results may be harmed |
| In addition, our business could be harmed if wireless network operators deploy competing technologies or switch existing networks from CDMA to GSM without upgrading to WCDMA or if wireless network operators introduce new technologies |
| A limited number of operators have started testing OFDMA technology, but there can be no assurance that OFDMA will be adopted or deployed commercially or that we will be successful in developing and marketing OFDMA products |
| Although the acquisition of Flarion brings us an additional and very strong portfolio of issued and pending patents related to OFDMA technology, and, prior to the acquisition, we had hundreds of issued or pending patents relating to applications of GPRS, EDGE, OFDM, OFDMA and multi in, multi out (MIMO), there can be no assurance that our patent portfolio in these areas would be as valuable as our CDMA portfolio |
| Sprint Nextel has indicated that it is planning to deploy WiMax (an OFDMA based technology) in its 2dtta5 Ghz spectrum, also known as the Broadband Radio Services band |
| Other operators are investigating deployment of WiMax |
| Although we believe that our patented technology is essential and useful to implementation of the WiMax standard, there is no assurance that we will achieve the same royalty revenue on such WiMax deployments as on CDMA or other technology deployments or that we will achieve the same chipset market shares within a WiMax network |
| Our business and the deployment of our technologies, products and services are dependent on the success of our customers, licensees and CDMA-based wireless operators, as well as the timing of their deployment of new services |
| Our licensees and CDMA-based wireless operators may incur lower operating margins on products or services based on our technologies than on products using alternative technologies due to greater competition in the relevant market or other factors |
| If CDMA-based wireless operators, phone and/or infrastructure manufacturers exit the CDMA-based markets, the deployment of CDMA technology could be negatively affected, and our business could suffer |
| Our three largest customers accounted for 39prca, 39prca and 40prca of consolidated revenues in fiscal 2006, 2005 and 2004, 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 |
| Three customers, LG Electronics, Motorola Inc |
| and Samsung Electronics Company, constitute a significant portion of QCT’s revenues such that the loss of any one of these 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 acceptable levels of operating results |
| 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 future purchase orders, if any, 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; • the financial and operational success of our customers; • the success of our customers’ products that incorporate our products; • changes in wireless penetration growth rates; • value added features which drive replacement rates; • shortages of key products and components; • fluctuations in channel inventory levels; • the success of products sold to our customers by licensed competitors; • the rate of deployment of new technology by the wireless network operators and the rate of adoption of new technology by the end consumers; • the extent to which certain customers successfully develop and produce CDMA-based integrated circuits and system software to meet their own needs; • general economic conditions; • changes in governmental regulations in countries where we or our customers currently operate or plan to operate; and • widespread illness |
| Our QTL segment derives royalty revenues primarily from sales of CDMA products by our licensees |
| Although we have more than 135 licensees, we derive a significant portion of our royalty revenue from a limited number of licensees |
| Our future success depends upon the ability of our licensees to develop, introduce and deliver high-volume products that achieve and sustain market acceptance |
| We have little or no control over the sales efforts of our licensees, and we cannot assure you that our licensees will be successful or that the demand for wireless communications devices and services offered by our licensees will continue to increase |
| Any reduction in the demand for or any delay in the development, introduction or delivery of wireless communications devices utilizing our CDMA technology could have a material adverse effect on our business |
| 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 |
| Weakness in the value of foreign currencies in which our customers’ products are sold may reduce the amount of royalties payable to us in US dollars |
| Royalties under our license agreements are generally payable to us for the life of the patents that we license under our agreements |
| 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 |
| Although in the past we have amended many of our license agreements to include later patents without affecting the material terms and conditions of our license agreements, there is no assurance that we will be able to modify our 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 |
| We have a license agreement with Nokia Corp, which in part expires on April 9, 2007 |
| While the parties have been in discussions to conclude an extension or a new license agreement beyond that time period, there is no certainty as to when we will be able to conclude an agreement or the terms of any such agreement |
| There is also a possibility that the parties will not be able to conclude a new or extended agreement by April 2007 |
| In that event after April 9, 2007, unless and until the existing agreement is extended or a new agreement is concluded, Nokia’s right to sell subscriber products under most of our patents (including many that we have declared as essential to the CDMA, WCDMA and other standards) and therefore Nokia’s obligation to pay royalties to us will both cease under the terms of the current agreement, and our rights to sell integrated circuits under Nokia’s patents will likewise cease under the terms of the current agreement |
| Please refer to our discussion below under the subheadings entitled “The enforcement and protection of our intellectual property rights may be expensive and could divert our valuable resources” and “Claims by other companies that we infringe their intellectual property, that patents on which we rely are invalid, or that our business practices are in some way unlawful, could adversely affect our business” and note that any company that makes or sells products without a license under the applicable patents of another company would be exposed to patent infringement litigation by such other company |
| The patent holder, whether we or another company, would generally be entitled to seek all available legal remedies including an injunction against making and selling products infringing such patent without a license and damages for past unlicensed sales in the form of lost profits or a reasonable royalty (which damages may be trebled for willful infringement) |
| Although our patents apply to multiple technologies, such as GPRS, EDGE, OFDM, OFDMA (including WiMax) and MIMO, there can be no assurance that our patent portfolio will generate licensing income or be as valuable in generating licensing income with respect to other technologies, as compared to CDMA-based technologies |
| Efforts by some telecommunications equipment manufacturers and component suppliers to avoid paying fair and reasonable royalties for the use of our intellectual property may create uncertainty about our future business prospects, may require the investment of substantial management time and financial resources, and may result in legal decisions and/or political actions by foreign governments that harm our business |
| Since our founding in 1985, we have focused heavily on technology development and innovation |
| These efforts have resulted in a leading intellectual property portfolio related to wireless technology |
| Because all commercially deployed forms of CDMA and their derivatives require the use of our patents, our patent portfolio is the most widely and extensively licensed portfolio in the industry with over 135 licensees |
| Over the years a number of companies have challenged our patent position but at this time most, if not all, companies recognize that any company seeking 23 _________________________________________________________________ [87]Table of Contents to develop, manufacture and/or sell products that use CDMA technologies will require a patent license from us |
| Notwithstanding the strength of this intellectual property position, we have a policy of, and have succeeded in, licensing our technology to all interested companies on terms that are fair, reasonable and free from unfair discrimination |
| Unlike some other companies in our industry that hold back certain key technologies, we offer interested companies the opportunity to license essentially our entire patent portfolio |
| Our broad licensing strategy has been a catalyst for industry growth, helping to enable a wide range of companies offering a broad array of wireless products and features while driving down average and low-end selling prices for 3G handsets and other wireless devices |
| By licensing a wide range of equipment manufacturers, encouraging innovative applications, supporting equipment manufacturers with a total chipset and software solution, and focusing on improving the efficiency of the airlink for operators, we have helped 3G CDMA evolve, grow, and reduce handset pricing all at a faster pace than the second generation technologies that preceded it (eg GSM) |
| Having failed in their efforts to challenge the strength of our intellectual property position and, in most cases, despite contracts with us that were freely and fairly negotiated and contain fair and reasonable royalty provisions, a small number of companies have now initiated various strategies in an attempt to renegotiate, mitigate and/or eliminate their need to pay royalties to us for the use of our intellectual property in order to negatively affect our business model and that of our other licensees |
| These strategies have included (i) litigation, often alleging infringement of patents held by such companies or unfair competition of some variety, (ii) taking questionable positions on the interpretation of contracts with us, with royalty reduction as the likely true motive, (iii) appeals to governmental authorities, such as the complaints filed with the European Commission (EC) during the fourth calendar quarter of 2005 and the Korean Fair Trade Commission during June 2006, and (iv) lobbying with governmental regulators and elected officials for the purpose of seeking the imposition of some form of compulsory licensing and/or to weaken a patent holder’s ability to enforce its rights or obtain a fair return for such rights |
| We were notified by the Competition Directorate of the EC that six companies (Nokia, Ericsson, Panasonic, Texas Instruments, Broadcom and NEC) submitted separate formal complaints accusing our business practices, with respect to licensing of patents and sales of chipsets, to be in violation of Article 82 of the EC treaty |
| We received the complaints and have submitted a response |
| While we believe that none of our business practices violate the legal requirements of Article 82 of the EC treaty, if the EC decides to formally investigate these accusations and determines liability as to any of the alleged violations, it could impose fines and/or require us to modify our practices |
| Further, such an investigation could be expensive and time consuming to address, divert management attention from our business and harm our reputation |
| Although such potential adverse findings may be appealed within the EC legal system, an adverse final determination could have a significant negative impact on our revenues and/or earnings |
| We also understand that two US companies (Texas Instruments and Broadcom) and two South Korean companies (Nextreaming Corp |
| ) have filed complaints with the Korean Fair Trade Commission alleging that our business practices are, in some way, a violation of South Korean anti-trust regulations |
| While we have not seen these complaints, we believe that none of our business practices violate the legal requirements of South Korean competition law |
| However, any resulting investigation in South Korea could be expensive and time consuming to address, divert management attention from our business and harm our reputation |
| An adverse final determination on these charges could have a significant negative impact on our revenues and/or earnings |
| Given our substantial investment in technology innovation, the demonstrable benefits provided by our intellectual property, and long-standing license agreements with more than 135 licensees including many of the world’s foremost wireless equipment manufacturers, we believe that our royalty rates are reasonable and fair to the companies that benefit from our intellectual property and provide significant incentives for others to invest in CDMA applications, as evidenced by the significant growth in the CDMA portion of the wireless industry, the integration of new features and functionality into CDMA wireless products, and the rapid reduction in the price of low-end CDMA handsets over recent years |
| While the distractions caused by challenges to our business model and licensing program are undesirable and the legal and other costs associated with defending our position have been and continue to be significant, we believe that these challenges are without merit, and we will continue to vigorously defend our intellectual property rights and our right to continue to receive a fair return for our innovations |
| A recent ruling in New Jersey Federal district court granted our motion to dismiss unfounded claims by Broadcom that our business practices have been in violation of anti-trust law in the United States |
| These business practices are essentially the same as cited in the EC complaints |
| The court ruled that, assuming all the facts stated by Broadcom are correct (which we believe is not the case), we have not violated any anti-trust laws |
| Regrettably, we assume, as should investors, that challenges of this nature will continue into the foreseeable future and may require the investment of substantial management time and financial resources to explain and defend our position |
| 24 _________________________________________________________________ [88]Table of Contents Although there can be no guarantees as to the ultimate outcome of these challenges, we intend to expend appropriate resources to educate governmental authorities, elected officials, courts of law, our licensees, wireless service operators and the general public as to the true nature of these disputes |
| We believe that when such information is fairly evaluated by such parties, these challenges by the complainants to the EC will be seen for what they truly are, an attempt to avoid paying the agreed upon and fair compensation for the use of our significant intellectual property portfolio, and to extend their domination of the second generation wireless handset market into the third generation |
| The enforcement and protection of our intellectual property rights may be expensive and could divert our valuable resources |
| We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and processes, including our patent portfolio |
| Policing unauthorized use of our products and technologies is difficult and time consuming |
| We cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully or as readily as United States laws |
| We cannot be certain that the laws and policies of any country, including the United States, or the practices of any of the international standards bodies, foreign or domestic, with respect to intellectual property enforcement or licensing, issuance of wireless licenses or the adoption of standards, will not be changed in a way detrimental to our licensing program or to the sale or use of our products or technology |
| Within the United States Congress, committee work has been initiated to draft a “patent reform law |
| ” The end product of such work could be new patent legislation detrimental to our licensing program or to the sale or use of our products or technology |
| Any action we take to influence such potential changes could absorb significant management time and attention, which, in turn, could negatively impact our operating results |
| The vast majority of our patents and patent applications relate to our wireless communications technology and much of the remainder of our patents and patent applications relate to our other technologies and products |
| Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others |
| As a result of any such litigation, we could lose our proprietary rights or incur substantial unexpected operating costs |
| Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results |
| In addition, failure to protect our trademark rights could impair our brand identity |
| Claims by other companies that we infringe their intellectual property, that patents on which we rely are invalid, or that our business practices are in some way unlawful, could adversely affect our business |
| From time to time, companies have asserted, and may again assert, patent, copyright and other intellectual proprietary rights against our products or products using our technologies or other technologies used in |