Home Substantial portion QUALCOMM INC/DE MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

QUALCOMM INC/DE MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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This information should be read in conjunction with the condensed consolidated
financial statements and the notes thereto included in "Part I, Item 1" of this
Quarterly Report and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for the fiscal year ended September 26,
2021 contained in our 2021 Annual Report on Form 10-K.
This Quarterly Report (including but not limited to this section titled
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "may,"
"will," "would" and similar expressions or variations of such words are intended
to identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Quarterly Report. Additionally,
statements concerning future matters such as our future business, prospects,
results of operations, financial condition or research and development or
technology investments; new or enhanced products, services or technologies;
emerging industries or business models; design wins or product launches;
industry, market, business, product, technology, commercial, competitive or
consumer trends, including seasonality; the 5G transition; our expectations
regarding future demand or supply conditions; strategic investments or
acquisitions, and the anticipated timing or benefits thereof; potential impacts
of the COVID-19 pandemic, legal or regulatory matters, U.S./China trade or
national security tensions or vertical integration by our customers;
competition; and other statements regarding matters that are not historical are
also forward-looking statements.
Although forward-looking statements in this Quarterly Report reflect our good
faith judgment, such statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are inherently subject to
risks and uncertainties and actual results and outcomes may differ materially
from the results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to such differences in
results and outcomes include without limitation those discussed under the
heading "Risk Factors" below, as well as those discussed elsewhere in this
Quarterly Report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Quarterly
Report. We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Quarterly Report. Readers are urged to carefully review and
consider the various disclosures made in this Quarterly Report, which attempt to
advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
First Quarter Fiscal 2022 Overview
Revenues for the first quarter of fiscal 2022 were $10.7 billion, an increase of
30% compared to the year ago quarter, with net income of $3.4 billion, an
increase of 38% compared to the year ago quarter. Highlights from the first
quarter of fiscal 2022 included:
•QCT revenues increased by 35% in the first quarter of fiscal 2022 compared to
the year ago quarter, primarily due to an increase in average selling prices and
favorable mix toward higher-tier 5G products in handsets, in part reflecting
demand from certain Chinese OEMs as they continue to gain device share, along
with higher IoT revenues.
•QTL revenues increased by 10% in the first quarter of fiscal 2022 compared to
the year ago quarter, primarily due to higher estimated revenues per unit, which
was primarily driven by favorable mix, including 5G.
•On October 4, 2021, we and SSW Partners, a New York-based investment
partnership, entered into a definitive agreement to acquire Veoneer, Inc.
(Veoneer) for $37.00 per share in cash, which values the estimated total cash
consideration to be paid to Veoneer's shareholders, inclusive of amounts
expected to be paid at closing for Veoneer's outstanding equity awards and
convertible senior notes due 2024, at approximately $4.5 billion. At closing,
SSW Partners will acquire all of the outstanding capital stock of Veoneer,
shortly after which it will sell Veoneer's Arriver business to Qualcomm and
retain Veoneer's Tier-1 automotive supplier businesses. Following close of the
Arriver business sale, we intend to incorporate Arriver's computer vision, drive
policy and driver assistance technologies into our Snapdragon automotive
platform to deliver an ADAS (advanced driver assistance systems) platform for
automakers and Tier-1 automotive suppliers. The acquisition is expected to close
in 2022, subject to certain closing conditions.
Our Business and Operating Segments
We develop and commercialize foundational technologies and products used in
mobile devices and other wireless products. We derive revenues principally from
sales of integrated circuit products and licensing our intellectual property,
including patents and other rights.
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We are organized on the basis of products and services and have three reportable
segments. We conduct business primarily through our QCT (Qualcomm CDMA
Technologies) semiconductor business and our QTL (Qualcomm Technology Licensing)
licensing business. Our QSI (Qualcomm Strategic Initiatives) reportable segment
makes strategic investments. We also have nonreportable segments, including QGOV
(Qualcomm Government Technologies), our cloud AI inference processing initiative
and other technology and service initiatives.
Our reportable segments are operated by QUALCOMM Incorporated and its direct and
indirect subsidiaries. QTL is operated by QUALCOMM Incorporated, which owns the
vast majority of our patent portfolio. Substantially all of our products and
services businesses, including QCT, and substantially all of our engineering and
research and development functions, are operated by Qualcomm Technologies, Inc.
(QTI), a wholly-owned subsidiary of QUALCOMM Incorporated, and QTI's
subsidiaries. Neither QTI nor any of its subsidiaries has any right, power or
authority to grant any licenses or other rights under or to any patents owned by
QUALCOMM Incorporated.
Seasonality. Many of our products and much of our intellectual property are
incorporated into consumer wireless devices, which are subject to seasonality
and other fluctuations in demand. Our revenues have historically fluctuated
based on consumer demand for devices, as well as on the timing of
customer/licensee device launches and/or innovation cycles (such as the
transition to the next generation of wireless technologies). This has resulted
in fluctuations in QCT revenues in advance of and during device launches
incorporating our products and in QTL revenues when licensees' sales occur.
These trends may or may not continue in the future. Further, the trends for QTL
have been, and may in the future be, impacted by disputes and/or resolutions
with licensees and/or governmental investigations or proceedings.
Results of Operations
Revenues (in millions)
                                         Three Months Ended
                            December 26,       December 27,
                                2021               2020           Change
Equipment and services     $       8,682      $       6,442      $ 2,240
Licensing                          2,023              1,793          230
                           $      10,705      $       8,235      $ 2,470


First quarter 2022 vs. 2021
The increase in revenues in the first quarter of fiscal 2022 was primarily due
to:
+  $2.2 billion in higher equipment and services revenues from our QCT segment
+  $158 million in higher licensing revenues from our QTL segment
Costs and Expenses (in millions, except percentages)
                                               Three Months Ended
                                   December 26,      December 27,
                                       2021              2020          Change
Cost of revenues                  $     4,303       $     3,489       $  814
Gross margin                               60  %             58  %


First quarter 2022 vs. 2021
Gross margin percentage increased in the first quarter of fiscal 2022 primarily
due to:
+ increase in QCT gross margin
- decrease in higher margin QTL licensing revenues in proportion to QCT revenues

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                                        Three Months Ended
                            December 26,      December 27,
                                2021              2020          Change
Research and development   $     1,930       $     1,653       $  277
% of revenues                       18  %             20  %


First quarter 2022 vs. 2021
The increase in research and development expenses in the first quarter of fiscal
2022 was primarily due to:
+  $197 million increase driven by higher costs related to the development of
wireless and integrated circuit technologies (including 5G and application
processor technologies), primarily driven by an increase in employee-related
expenses
+  $91 million increase in share-based compensation expense
                                                    Three Months Ended
                                        December 26,      December 27,
                                            2021              2020          Change

Selling, general and administrative    $       608       $      567        $    41
% of revenues                                    6  %             7  %


First quarter 2022 vs. 2021
The increase in selling, general and administrative expenses in the first
quarter of fiscal 2022 was primarily due to:
+  $69 million increase in employee-related expenses
-  $29 million decrease in expenses driven by revaluation of our deferred
compensation obligation on lower relative stock market performance (which
resulted in a corresponding decrease in net gains on deferred compensation plan
assets within investment and other income, net due to the revaluation of the
related assets)
Interest Expense and Investment and Other Income, Net (in millions)
                                                                            Three Months Ended
                                                          December 26,           December 27,
                                                              2021                   2020                Change
Interest expense                                         $      139            $         141          $      (2)

Investment and other income, net
Interest and dividend income                             $       17            $          21          $      (4)
Net gains on marketable securities                               17                      118               (101)
Net gains on other investments                                   93                       34                 59
Net gains on deferred compensation plan assets                   13                       54                (41)
Impairment losses on other investments                           (1)                      (1)                 -

Net (losses) gains on derivative instruments                    (13)                       9                (22)
Equity in net earnings (losses) of investees                      7                       (2)                 9

Net gains (losses) on foreign currency transactions               7                      (14)                21
                                                         $      140            $         219          $     (79)


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Income Tax Expense (in millions, except percentages)
The following table summarizes the primary factors that caused our income tax
provision to differ from the expected income tax provision at the U.S. federal
statutory rate:
                                                                               Three Months Ended
                                                                     December 26,               December 27,
                                                                         2021                       2020

Provided provision for income tax at the federal statutory tax rate $812

                $      547
Excess tax benefit associated with share-based awards                      (188)                     (163)
Benefit from foreign-derived intangible income (FDII) deduction            (140)                      (75)
Benefit related to the research and development tax credit                  (58)                      (59)

Foreign currency loss (gains) related to foreign withholding tax
receivable                                                                   12                       (79)

Other                                                                        28                       (22)
   Income tax expense                                               $       466                $      149
Effective tax rate                                                           12  %                      6  %


We estimate our annual effective income tax rate to be 14% for fiscal 2022,
which is lower than the U.S. federal statutory rate, primarily due to a
significant portion of our income qualifying for preferential treatment as FDII
at a 13% effective tax rate, excess tax benefits associated with share-based
awards and benefits from our federal research and development tax credit.
The current U.S. presidential administration and Congress have proposed to
increase U.S. tax rates and/or eliminate or reduce the FDII deduction.
Substantially all of our income is taxable in the U.S., of which a significant
portion qualifies for preferential treatment as FDII. If such proposals are
enacted into law, our provision for income taxes, results of operations and cash
flows would be adversely (potentially materially) affected.
Segment Results
The following should be read in conjunction with our financial results for the
first quarter of fiscal 2022 for each reportable segment included in this
Quarterly Report in "Notes to Condensed Consolidated Financial Statements, Note
6. Segment Information."
QCT Segment (in millions, except percentages)
                                                       Three Months Ended
                                          December 26,      December 27,
                                              2021              2020           Change
          Revenues
          Handsets (1)                   $     5,983       $     4,216       $  1,767
          RFFE (2)                             1,132             1,061             71
          Automotive (3)                         256               212             44
          IoT (internet of things) (4)         1,476             1,044            432
          Total revenues                 $     8,847       $     6,533       $  2,314
          EBT (5)                        $     3,114       $     1,919       $  1,195
          EBT as a % of revenues                  35  %             29  %   

6 points


(1) Includes revenues from products sold for use in mobile handsets, excluding
RFFE (radio frequency front-end) components.
(2) Includes all revenues from sales of 4G, 5G sub-6 and 5G millimeter wave RFFE
products (a substantial portion of which are sold for use in mobile handsets)
and excludes radio frequency transceiver components.
(3) Includes revenues from products sold for use in automobiles, including
telematics, connectivity and digital cockpit.
(4) Primarily includes products sold for use in the following industries and
applications: consumer (including computing, voice and music and XR), edge
networking (including mobile broadband and wireless access points) and
industrial (including handhelds, retail, transportation and logistics and
utilities).
(5) Earnings (loss) before income taxes.
Substantially all of QCT's revenues consist of equipment and services revenues,
which were $8.6 billion and $6.4 billion in the first quarter of fiscal 2022 and
2021, respectively. QCT handsets, automotive and IoT revenues mostly relate to
sales of
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our Snapdragon platforms (which include processors and modems), stand-alone
Mobile Data Modems, radio frequency transceiver, power management and wireless
connectivity integrated chipsets.
First quarter 2022 vs. 2021
The increase in QCT revenues in the first quarter of fiscal 2022 was primarily
due to:
+  higher handsets revenues, primarily driven by $1.9 billion in higher revenues
per chipset, which was primarily due to increases in average selling prices and
favorable mix toward higher-tier 5G products, particularly from certain Chinese
OEMs as they continue to gain device share
+  higher RFFE revenues, primarily driven by an increase in demand for 4G/5G
products from major OEMs
+  higher automotive revenues, primarily driven by an increase in demand for
digital cockpit products
+  higher IoT revenues, primarily driven by a $245 million increase in revenues
per unit due to an increase in average selling prices and favorable mix
primarily in consumer products and a $187 million increase in demand across edge
networking and industrial products
QCT EBT as a percentage of revenues increased in the first quarter of fiscal
2022 primarily due to:
+  higher revenues
+  higher gross margin percentage, primarily driven by higher average selling
prices and favorable mix due to an increase in demand for 5G products, partially
offset by higher product costs
-  higher operating expenses, primarily driven by higher research and
development expenses
QTL Segment (in millions, except percentages)
                                                    Three Months Ended
                                        December 26,      December 27,
                                            2021              2020          Change

              Licensing revenues       $     1,818       $     1,660       $  158

              EBT                            1,406             1,270          136

              EBT as a % of revenues            77  %             77  %           -


First quarter 2022 vs. 2021
The increase in QTL licensing revenues in the first quarter of fiscal 2022 was
primarily due to a $144 million increase in estimated revenues per unit,
primarily driven by favorable mix, including 5G.
QTL EBT as a percentage of revenues remained flat in the first quarter of fiscal
2022 primarily due to:
+  higher revenues
-  higher operating expenses, primarily driven by higher selling, general and
administrative expenses
QSI Segment (in millions)
                                                         Three Months Ended
                                             December 26,       December 27,
                                                 2021               2020          Change

       Equipment and services revenues     $    8              $          9      $    (1)

       EBT                                    122                       158          (36)


First quarter 2022 vs. 2021
The decrease in QSI EBT in the first quarter of fiscal 2022 was primarily due to
a $36 million decrease in net gains on investments.
Looking Forward
In the coming years, we expect consumer demand for 3G/4G/5G multimode and 5G
products and services to continue to ramp around the world as we continue to
transition from 3G/4G multimode and 4G products and services. We believe that 5G
will continue to drive adoption of certain technologies that are already
commonly used in smartphones by industries and applications beyond mobile
handsets, such as automotive and IoT. We believe it is important that we remain
a leader in 5G technology development, standardization, intellectual property
creation and licensing, and a leading developer and supplier of 5G integrated
circuit products in order to sustain and grow our business long-term.
As we look forward to the next several quarters, our business may be impacted by
the following key items:
•We expect QCT revenues to continue to be favorably impacted compared to the
prior year, reflecting continued strength across handsets, RFFE, automotive and
IoT revenue streams.
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•While we and the semiconductor industry continue to experience capacity
constraints, we have entered into several, and we expect to enter into
additional, multi-year capacity purchase commitments with certain suppliers of
our integrated circuit products in an effort to secure commitments for future
supply, which we expect will allow us to continue to realize benefits from
increased demand for integrated circuit products, particularly from certain
Chinese OEMs as they continue to gain device share. Despite these realized
benefits, there continues to be supply chain complexities and challenges that
have prevented, and we expect will continue to prevent, us from securing supply
to fully realize the benefits of increased customer demand.
•We expect commercial 5G network deployments and device launches will continue.
•We expect our research and development costs will increase compared to the
prior year, primarily due to increased investment towards advancements in 5G and
application processor technologies and certain other long-term initiatives, as
well as an increase in share-based compensation expense.
•We expect continued intense competition, particularly in China.
•Current U.S./China trade relations and/or national security protection policies
may negatively impact our business, growth prospects and results of operations.
See "Risk Factors" in this Quarterly Report, including the Risk Factor titled "A
significant portion of our business is concentrated in China, and the risks of
such concentration are exacerbated by U.S./China trade and national security
tensions."
•We currently do not expect a significant impact on our results of operations in
the future due to COVID-19. The degree to which the COVID-19 pandemic impacts
our business, financial condition and results of operations will depend on
future developments, which are highly uncertain. See "Risk Factors" in this
Quarterly Report, specifically the Risk Factor titled "The coronavirus
(COVID-19) pandemic had an adverse effect on our business and results of
operations, and may continue to impact us in the future."
In addition to the foregoing business and market-based matters, we continue to
devote resources to working with and educating participants in the wireless
industry and governments as to the benefits of our licensing program and our
extensive technology investments in promoting a highly competitive and
innovative wireless industry. However, we expect that certain companies may be
dissatisfied with the need to pay reasonable royalties for the use of our
technologies and not welcome the success of our licensing program in enabling
new, highly cost-effective competitors to their products. Accordingly, such
companies and/or governments or regulators may continue to challenge our
business model in various forums throughout the world.
Further discussion of risks related to our business is provided in the section
titled "Risk Factors" included in this Quarterly Report.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and
marketable securities, cash generated from operations and cash provided by our
debt programs. The following tables present selected financial information
related to our liquidity at December 26, 2021 and September 26, 2021 and for the
first three months of fiscal 2022 and 2021 (in millions):
                                                          December 26,      

September 26,

                                                              2021                   2021                Change
Cash and cash equivalents                               $       6,607          $        7,116          $   (509)
Marketable securities                                           4,703                   5,298              (595)

Cash, cash equivalents and marketable securities $11,310

   $       12,414          $ (1,104)


                                                              Three Months Ended
                                                December 26,       December 27,
                                                    2021               2020            Change

Net cash flow generated by operating activities $2,057 $3,175 $(1,118)

  Net cash used by investing activities                 (112)            

(1,202) 1,090

  Net cash used by financing activities               (2,446)            

(1,645) (801)


Cash, cash equivalents and marketable securities. The net decrease in cash, cash
equivalents and marketable securities was primarily due to $1.2 billion in
payments to repurchase shares of our common stock, $765 million in cash
dividends paid, $583 million in capital expenditures, $500 million in payments
of tax withholdings related to the vesting of share-based awards and $238
million in cash paid for acquisitions and other investments. This was partially
offset by net cash provided by
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operating activities, which was impacted by advanced payments of $1.4 billion
made to suppliers of our integrated circuit products under multi-year capacity
commitments, as well as $1.0 billion of net changes in other operating assets
and liabilities, consisting of increased working capital, including higher
inventory and related operating liabilities to support QCT demand, an increase
in accounts receivable as a result of higher revenues (net of an increase in
amounts accrued for customer incentive arrangements recorded as a reduction to
accounts receivable) and the timing of payments related to payroll, benefits and
other liabilities. We currently expect our working capital requirements to
increase in the near term to support QCT demand.
Capital Return Program. On October 12, 2021, we announced a new $10.0 billion
stock repurchase program, which was in addition to the then-remaining repurchase
authority of $0.9 billion under the previous program. The stock repurchase
programs have no expiration date. In the first three months of fiscal 2022, we
repurchased and retired 8 million shares of our common stock for $1.2 billion,
before commissions. At December 26, 2021, $10.1 billion remained authorized for
repurchase under our stock repurchase programs. Our stock repurchase program is
subject to periodic evaluations to determine when and if repurchases are in the
best interests of our stockholders, and we may accelerate, suspend, delay or
discontinue repurchases at any time.
In the first quarter of fiscal 2022, we paid cash dividends totaling $765
million, or $0.68 per share. On January 18, 2022, we announced a cash dividend
of $0.68 per share on our common stock, payable on March 24, 2022 to
stockholders of record as of the close of business on March 3, 2022. We
currently intend to continue to use cash dividends as a means of returning
capital to stockholders, subject to capital availability and our view that cash
dividends are in the best interests of our stockholders, among other factors.
Debt. At December 26, 2021, we had $15.5 billion of principal floating- and
fixed-rate notes outstanding, $1.5 billion of which matures in May 2022. The
remaining debt has maturity dates in 2023 through 2050. We have an unsecured
commercial paper program, which provides for the issuance of up to $4.5 billion
of commercial paper. Net proceeds from this program are used for general
corporate purposes. At December 26, 2021, we had $500 million of commercial
paper outstanding. We also have a Revolving Credit Facility, which provides for
unsecured revolving facility loans, swing line loans and letters of credit in an
aggregate amount of up to $4.5 billion, which expires on December 8, 2025. At
December 26, 2021, no amounts were outstanding under the Revolving Credit
Facility. We expect to issue debt in the future. The amount and timing of such
debt will depend on a number of factors, including but not limited to maturities
of our existing debt, acquisitions and strategic investments, favorable and/or
acceptable interest rates and changes in corporate income tax law. Additional
information regarding our outstanding debt is provided in "Notes to Consolidated
Financial Statements, Note 6. Debt" in our 2021 Annual Report on Form 10-K.
Acquisitions. In October 2021, we and SSW Partners entered into a definitive
agreement to acquire Veoneer for total estimated cash consideration of
approximately $4.5 billion, substantially all of which will be funded by
Qualcomm, and in the first quarter of fiscal 2022, we paid a $110 million
termination fee to Magna International Inc. on behalf of Veoneer. Further, we
have entered into a loan facility under which we will provide financing to
Veoneer of up to $480 million under certain conditions. The acquisition is
expected to close in 2022, subject to certain closing conditions. Additional
information related to this definitive agreement to acquire Veoneer and our
obligations under the loan facility is included in this Quarterly Report in
"Notes to Condensed Consolidated Financial Statements, Note 7. Acquisitions." We
expect to continue making strategic investments and acquisitions, the amounts of
which could vary significantly, to open new opportunities for our technologies,
obtain development resources, grow our patent portfolio or pursue new
businesses.
Long-term Capacity Commitments. We have entered into several multi-year capacity
purchase commitments with certain suppliers of our integrated circuit products.
In the first quarter of fiscal 2022, we made $1.4 billion in advance payments
related to certain obligations under these purchase agreements, which were
included within other assets and other current assets at December 26, 2021.
Additional information regarding long-term capacity commitments and other
purchase obligations is provided in "Notes to Consolidated Financial Statements,
Note 7. Commitments and Contingencies" in our 2021 Annual Report on Form 10-K.
Additional Capital Requirements. Expected working and other capital requirements
are described in our 2021 Annual Report on Form 10-K in "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." At December 26, 2021, other than for the changes disclosed in the
"Notes to Condensed Consolidated Financial Statements" and "Liquidity and
Capital Resources" in this Quarterly Report, there have been no other material
changes to our expected working and other capital requirements described in our
2021 Annual Report on Form 10-K.
Further, regulatory authorities in certain jurisdictions have investigated our
business practices and instituted proceedings against us and they or other
regulatory authorities may do so in the future. Additionally, certain of our
direct and indirect customers and licensees have pursued, and they or others may
in the future pursue, litigation, arbitration or other strategies
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against us related to our business. Unfavorable resolutions of one or more of
these matters have had and could in the future have a material adverse effect on
our business, revenues, results of operations, financial condition and cash
flows. See "Notes to Condensed Consolidated Financial Statements, Note 5.
Commitments and Contingencies" and "Risk Factors" in this Quarterly Report.
We believe, based on our current business plan and the facts and factors known
by us, our cash, cash equivalents and marketable securities, our expected cash
flow generated from operations and our expected financing activities will
satisfy our working and other capital requirements for at least the next 12
months and thereafter for the foreseeable future. See "Risk Factors" in this
Quarterly Report.
Risk Factors
You should consider each of the following factors in evaluating our business and
our prospects, any of which could negatively impact our business, results of
operations, cash flows and financial condition, and require significant
management time and attention. Further, 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
negatively impact our business, results of operations, cash flows and financial
condition, and require significant management time and attention. In such cases,
the trading price of our common stock could decline. You should also consider
the other information set forth in this Quarterly Report in evaluating our
business and our prospects, including but not limited to our financial
statements and the related notes, and "Part I, Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations." References to
"and," "or" and "and/or" should be read to include the others, as appropriate.
RISKS RELATED TO THE CORONAVIRUS (COVID-19) PANDEMIC
The coronavirus (COVID-19) pandemic had an adverse effect on our business and
results of operations, and may continue to impact us in the future.
The rapid, global spread of COVID-19 and the fear it created resulted in
significant economic uncertainty, significant declines in business and consumer
confidence and global demand in the wireless industry (among others) and a
global economic slowdown, which resulted in a global recession. Specifically,
throughout most of calendar 2020 and into early calendar 2021, the decline in
demand for smartphones and other consumer devices sold by our customers or
licensees resulted in decreased demand for our integrated circuit products
(which are incorporated into such devices) and a decrease in the royalties we
earned on the licensing of our intellectual property (which is dependent upon
the number of such devices sold that utilize our intellectual property).
The COVID-19 pandemic could impact our business, results of operations and
financial condition in the future as described above, and/or through delayed,
reduced or cancelled customer orders; disruptions or delays in our supply chain;
the inability of our customers or licensees to purchase or pay for our products
or technologies; the insolvency of key suppliers, customers or licensees; delays
in reporting or payments from our customers or licensees; or failures by other
counterparties. Additionally, federal, state or foreign governments may in the
future increase corporate tax rates, increase employer payroll tax obligations
and/or otherwise change tax laws to pay for stimulus and other actions that have
been and may in the future be taken as a result of the COVID-19 pandemic.
The COVID-19 pandemic also caused us to modify our workforce practices, such as
having the vast majority of our employees working from home. We could be
negatively affected in the future if, among others, a significant number of our
employees, or employees who perform critical functions, become ill and/or are
quarantined as the result of exposure to COVID-19, or if government policies
restrict the ability of those employees to perform their critical functions.
Further, our efforts to reopen our offices safely may not be successful, could
expose our employees, customers, licensees and partners to health risks and us
to associated liability, and could result in disruptions among our employees.
See also the Risk Factor titled "We may not be able to attract and retain
qualified employees, and our attempts to fully reopen our offices and operate
under a hybrid working environment may not be successful."
The degree to which the COVID-19 pandemic impacts our future business, results
of operations and financial condition will depend on future developments, which
are uncertain, including but not limited to the duration, spread and severity of
the pandemic; the availability, adoption and efficacy of vaccines; the
emergence, spread and severity of new variants of COVID-19, and the protection
afforded by vaccines against such variants; government responses and other
actions to mitigate the spread of and to treat COVID-19; and when and to what
extent normal business, economic and social activity and conditions resume. We
are similarly unable to predict the extent to which the pandemic impacts our
customers, licensees, suppliers and other partners and their financial
conditions, but adverse effects on these parties could also adversely affect us.
Finally, the COVID-19 pandemic may make it harder for management to estimate the
future performance of our business. To
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the extent the COVID-19 pandemic adversely affects our business, results of
operations and financial condition, it may also have the effect of exacerbating
the other risks discussed in this "Risk Factors" section.
RISKS RELATED TO OUR OPERATING BUSINESSES
We derive a significant portion of our revenues from a small number of customers
and licensees, and particularly from their sale of premium tier devices. If
revenues derived from these customers or licensees decrease or the timing of
such revenues fluctuates, our business and results of operations could be
negatively affected.
We derive a significant portion of our revenues from a small number of customers
and licensees, and particularly from their sale of premium tier devices, and we
expect this trend to continue in the foreseeable future. Our industry is
experiencing and may continue to experience concentration of device share among
a few companies, particularly at the premium tier, contributing to this trend.
Certain Chinese OEMs continue to grow their device share in China and are
increasing their device share in regions outside of China, and we derive a
significant portion of our revenues from a small number of these OEMs as well.
See also "Notes to Condensed Consolidated Financial Statements, Note 2.
Composition of Certain Financial Statement Items - Concentrations."
In addition, a number of our largest integrated circuit customers have
developed, are developing or may develop their own integrated circuit products,
or may choose our competitors' integrated circuit products, which they have in
the past utilized, currently utilize and may in the future utilize in some (or
all) of their devices, rather than our products, which could significantly
reduce the revenues we derive from these customers. See also the Risk Factor
titled "Our business, particularly our semiconductor business, may suffer as a
result of our customers vertically integrating (i.e., developing their own
integrated circuit products)."
Further, political actions, including trade and/or national security protection
policies, or other actions by governments, particularly the U.S. and Chinese
governments, have in the past, currently are and could in the future limit or
prevent us from transacting business with certain of our customers, limit,
prevent or discourage those customers from transacting business with us, or make
it more expensive to do so, any of which could also significantly reduce the
revenues we derive from these customers. See also the Risk Factor titled "A
significant portion of our business is concentrated in China, and the risks of
such concentration are exacerbated by U.S./China trade and national security
tensions."
In addition, we spend a significant amount of engineering and development time,
funds and resources in understanding our key customers' feedback and/or
specifications and attempt to incorporate such input into our product launches
and technologies. These efforts may not require or result in purchase
commitments from such customers or we may have lower purchases from such
customers than expected, and consequently, we may not achieve the anticipated
revenues from these efforts, or these efforts may result in non-recoverable
costs.
The loss of any one of our significant customers, a reduction in the purchases
of our products by such customers or the cancellation of significant purchases
by any of these customers, whether due to the use of their own integrated
circuit products or our competitors' integrated circuit products, government
restrictions, the COVID-19 pandemic or otherwise, would reduce our revenues and
could harm our ability to achieve or sustain expected results of operations, and
a delay of significant purchases, even if only temporary, would reduce our
revenues in the period of the delay. Any such reduction in revenues would also
impact our cash resources available for other purposes, such as research and
development.
Further, the concentration of device share among a few companies, and the
corresponding purchasing power of these companies, may result in lower prices
for our products which, if not accompanied by a sufficient increase in the
volume of purchases of our products, could have an adverse effect on our
revenues and margins. In addition, the timing and size of purchases by our
significant customers may be impacted by the timing of such customers' new or
next generation product introductions, over which we have no control, and the
timing and success of such introductions may cause our revenues and results of
operations to fluctuate.
Apple purchases our MDM (or thin modem) products, which do not include our
integrated application processor technology, and which have lower revenue and
margin contributions than our combined modem and application processor products.
Consequently, to the extent Apple takes device share from our customers who
purchase our integrated modem and application processor products, our revenues
and margins may be negatively impacted.
Our industry has also experienced slowing growth in the premium-tier device
segment due to, among other factors, a maturing premium-tier smartphone industry
in which demand is increasingly driven by new product launches and innovation
cycles.
A reduction in sales of premium-tier devices, a reduction in sales of our
premium-tier integrated circuit products (which have a higher revenue and margin
contribution than our lower-tier integrated circuit products), or a shift in
share away from
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OEMs that utilize our premium-tier products, would reduce our revenues and
margins and may harm our ability to achieve or sustain expected financial
results. Any such reduction in revenues would also impact our cash resources
available for other purposes, such as research and development.
Further, while our product and revenue diversification strategies have resulted
in an increasing portion of our revenues coming from outside of mobile handsets,
e.g., from industries such as automotive and IoT, certain product categories
within those industries may in themselves be subject to high levels of customer
concentration.
Although we have more than 300 licensees, we derive a significant portion of our
licensing revenues from a limited number of licensees, which includes a number
of Chinese OEMs. In the event that one or more of our significant licensees fail
to meet their reporting and payment obligations, or we are unable to renew or
modify one or more of their license agreements under similar terms as their
existing agreements, our revenues, results of operations and cash flows would be
adversely impacted. Moreover, the future growth and success of our core
licensing business will depend in part on the ability of our licensees to
develop, introduce and deliver high-volume products that achieve and sustain
customer acceptance. We do not have control over the product development, sales
efforts or pricing of products by our licensees, and our licensees might not be
successful. Reductions in sales of our licensees' products, or reductions in the
average selling prices of wireless devices sold by our licensees without a
sufficient increase in the volumes of such devices sold, would generally have an
adverse effect on our licensing revenues.
Our business, particularly our semiconductor business, may suffer as a result of
our customers vertically integrating (i.e., developing their own integrated
circuit products).
Certain of our largest integrated circuit customers (for example, Samsung)
develop their own integrated circuit products, which they have in the past
utilized, and currently utilize, in certain of their devices and may in the
future utilize in some (or all) of their devices, rather than our products (and
they have and may continue to sell their integrated circuit products to third
parties, discretely or together with certain of their other products, in
competition with us).
Apple has utilized modem products of one of our competitors in some of its
devices rather than our products, and solely utilized one of our competitors'
products in several of its prior device launches. In April 2019, we entered into
a multi-year chipset supply agreement with Apple and began shipping modems under
this agreement in the third quarter of fiscal 2020. In December 2019, Apple
acquired Intel's modem assets and is developing its own modem products using
these assets. Accordingly, Apple is expected to use its own modem products,
rather than our products, in some or all of its future devices.
Similarly, we derive a significant portion of our revenues from Chinese OEMs.
Certain of our customers in China have developed, and others may in the future
develop, their own integrated circuit products and use such integrated circuit
products in their devices rather than our integrated circuit products, including
due to pressure from or policies of the Chinese government (whose Made in China
2025 campaign targets 70% semiconductor self-sufficiency by 2025), concerns over
losing access to our integrated circuit products as a result of actual,
threatened or potential U.S. or Chinese government actions or policies,
including trade protection or national security policies, or other reasons. See
also the Risk Factor titled "A significant portion of our business is
concentrated in China, and the risks of such concentration are exacerbated by
U.S./China trade and national security tensions."
In addition, supply/capacity constraints within the semiconductor industry may
further incentivize our integrated circuit customers to vertically integrate in
an effort to secure additional control over their supply chains.
If some or all of our largest customers and/or the largest smartphone OEMs
utilize their own integrated circuit/modem products in some (or all) of their
devices rather than our products, our business, revenues, results of operations,
cash flows and financial position could be materially adversely impacted. See
also the Risk Factor titled "We derive a significant portion of our revenues
from a small number of customers and licensees, and particularly from their sale
of premium tier devices. If revenues derived from these customers or licensees
decrease or the timing of such revenues fluctuates, our business and results of
operations could be negatively affected."
A significant portion of our business is concentrated in China, and the risks of
such concentration are exacerbated by U.S./China trade and national security
tensions.
We derive a significant portion of our revenues from Chinese OEMs, and from
non-Chinese OEMs that utilize our integrated circuit products in their devices
and sell those devices into China, which has the largest number of smartphone
users in the world. We also source certain critical integrated circuit products
from suppliers in China.
Due to various factors, including pressure, encouragement or incentives from, or
policies of, the Chinese government (including its Made in China 2025 campaign),
concerns over losing access to our integrated circuit products as a result of
actual, threatened or potential U.S. or Chinese government actions or policies,
including trade protection or national security
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policies, or other reasons, some of our Chinese integrated circuit customers
have developed, and others may in the future develop, their own integrated
circuit products and use such integrated circuit products in their devices, or
use our competitors' integrated circuit products in their devices, rather than
our products, which could materially harm our business, revenues, results of
operations, cash flows and financial position. See also the Risk Factor titled
"Our business, particularly our semiconductor business, may suffer as a result
of our customers vertically integrating (i.e., developing their own integrated
circuit products)."
Political actions, including trade protection and national security policies of
the U.S. and Chinese governments, such as tariffs, bans or placing companies on
restricted entity lists, have in the past, currently are and could in the future
limit or prevent us from transacting business with certain of our Chinese
customers or suppliers, limit, prevent or discourage certain of our Chinese
customers or suppliers from transacting business with us, or make it more
expensive to do so. Given our revenue concentration in China, if, due to actual,
threatened or potential U.S. or Chinese government actions or policies: we were
further limited in, or prohibited from, selling our integrated circuit products
to Chinese OEMs; our non-Chinese OEM customers were limited in, or prohibited
from, selling devices into China that incorporate our integrated circuit
products; Chinese OEMs develop and use their own integrated circuit products or
use our competitors' integrated circuit products in some (or all) of their
devices rather than our integrated circuit products; Chinese tariffs on our
integrated circuit products or on devices which incorporate our integrated
circuit products made purchasing such products or devices more expensive to
Chinese OEMs or Chinese consumers; or our Chinese licensees delay or cease
making payments of license fees they owe us, our business, revenues, results of
operations, cash flows and financial position could be materially harmed.
Similarly, if, due to U.S. or Chinese government actions or policies, we were
limited in or prohibited from obtaining critical integrated circuit products
from our suppliers in China, our business, revenues, results of operations, cash
flows and financial position could be materially harmed. See also the Risk
Factor titled "We derive a significant portion of our revenues from a small
number of customers and licensees, and particularly from their sale of premium
tier devices. If revenues derived from these customers or licensees decrease or
the timing of such revenues fluctuates, our business and results of operations
could be negatively affected."
Finally, government policies in China that regulate the amount and timing of
funds that may flow out of the country have impacted and may continue to impact
the timing of our receipt of, and/or ability to receive, payments from our
customers and licensees in China, which may negatively impact our cash flows.
RISKS RELATED TO NEW INITIATIVES
Our growth depends in part on our ability to extend our technologies and
products into new and expanded product areas, and industries and applications
beyond mobile handsets. Our research, development and other investments in these
new and expanded product areas, industries and applications, and related
technologies and products, as well as in our existing technologies and products,
and new technologies, may not generate operating income or contribute to future
results of operations that meet our expectations.
While we continue to invest significant resources toward advancements primarily
in support of 4G- and 5G-based technologies, we also invest in new and expanded
product areas, and industries and applications beyond mobile handsets, by
utilizing our existing technical and business expertise and through acquisitions
or other strategic transactions.
In particular, our future growth depends in part on new and expanded product
areas, such as RFFE, and industries and applications beyond mobile handsets,
such as automotive and IoT; our ability to develop leading and cost-effective
technologies and products for these new and expanded product areas, industries
and applications; and third parties incorporating our technologies and products
into devices used in these product areas, industries and applications.
Accordingly, we intend to continue to make substantial investments in these new
and expanded product areas, industries and applications, and in developing new
products and technologies for these product areas, industries and applications.
Our growth also depends significantly on our ability to develop and patent 5G
technologies, and to develop and commercialize products using 5G technologies.
However, our research, development and other investments in these new and
expanded product areas, industries and applications, and corresponding
technologies and products, as well as in our existing, technologies and products
and new technologies, such as 5G, use of licensed, shared and unlicensed
spectrum and convergence of cellular and Wi-Fi, may not succeed because, among
other reasons: we may not be issued patents on the technologies we develop; the
technologies we develop may not be incorporated into relevant standards; new and
expanded product areas, industries and applications beyond mobile handsets, and
consumer demand therein, may not develop or grow as anticipated; we may be
unable to attract or retain employees with the necessary skills in such new and
expanded product areas, industries and applications; our strategies or the
strategies of our customers, licensees or partners may not be successful;
alternate technologies or products may be better or may reduce the advantages we
anticipate from our investments; competitors' technologies or products may be
more cost
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effective, have more capabilities or fewer limitations or be brought to market
faster than our new technologies or products; we may not be able to develop, or
our competitors may have more established and/or stronger, customer, vendor,
distributor or other channel relationships; and competitors may have longer
operating histories in industries and applications that are new to us. We may
also underestimate the costs of, or overestimate the future revenues or margins
that could result from, these investments, and these investments may not, or may
take many years to, generate material returns.
Further, the automotive industry is subject to long design-in time frames, long
product life cycles and a high degree of regulatory and safety requirements,
necessitating suppliers to the industry to comply with stringent qualification
processes, very low defect rates and high reliability standards, all of which
results in significant barriers to entry and increased costs.
In addition, in order to successfully extend our technologies and products into
new and expanded product areas, and industries and applications beyond mobile
handsets, we may need to transition to new business models and transform aspects
of our organization, and we may not be successful in doing so.
If we are not successful in extending our technologies and products into new and
expanded product areas, and industries and applications beyond mobile handsets,
if our new technologies and products are not successful, or if we are not
successful in the time frames we anticipate, we may incur significant costs and
asset impairments, our business and revenues may not grow or grow as
anticipated, our revenues and margins may be negatively impacted, our stock
price may decline and our reputation may be harmed.
We may engage in acquisitions and other strategic transactions or make
investments, or be unable to consummate planned strategic acquisitions, which
could adversely affect our results of operations or fail to enhance stockholder
value.
We engage in acquisitions and other strategic transactions, including joint
ventures, and make investments, which we believe are important to the future of
our business, with the goal of maximizing stockholder value. From time to time,
we acquire businesses and other assets, including patents, technology and other
intangible assets, enter into joint ventures or other strategic transactions and
purchase minority equity interests in or make loans to companies, including
those that may be private and early-stage. Our strategic activities are
generally focused on opening or expanding opportunities for our products and
technologies and supporting the design and introduction of new products (or
enhancing existing products) for mobile handsets, and for new industries and
applications beyond mobile handsets. Many of our strategic activities entail a
high degree of risk and require the use of significant amounts of capital, and
investments may not become liquid for several years after the date of the
investment, if at all. Our strategic activities may not be successful, generate
financial returns or result in increased adoption or continued use of our
technologies or products. We may underestimate the costs or overestimate the
benefits, including product, revenue, cost and other synergies and growth
opportunities that we expect to realize, and we may not achieve those benefits.
In some cases, we may be required to consolidate or record our share of the
earnings or losses of companies in which we have acquired ownership or variable
interests. In addition, we have in the past recorded, and may in the future
record, impairment or other charges related to our strategic activities. Any
losses or impairment charges that we incur related to strategic activities will
have a negative impact on our results of operations and financial condition, and
we may continue to incur new or additional losses related to strategic assets or
investments that we have not fully impaired or exited.
Achieving the anticipated benefits of business acquisitions depends in part upon
our ability to integrate the businesses in an efficient and effective manner and
achieve anticipated synergies, and we may not be successful in these efforts.
Such integration is complex and time consuming and involves significant
challenges, including, among others: retaining key employees; successfully
integrating new employees, facilities, technology, products, processes,
operations (including supply and manufacturing operations), sales and
distribution channels, business models and business systems; retaining customers
and suppliers of the businesses; consolidating research and development
operations; minimizing the diversion of management's attention from ongoing
business matters; consolidating corporate and administrative infrastructures;
and managing the increased scale, complexity and globalization of our business,
operations and employee base. We may not derive any commercial value from
associated technologies or products or from future technologies or products
based on these technologies, and we may be subject to liabilities that are not
covered by indemnification protection that we may obtain, and we may become
subject to litigation. Additionally, we may not be successful in entering or
expanding into new sales or distribution channels, business or operational
models, geographic regions, industries and applications served by or adjacent to
the associated businesses or in addressing potential new opportunities that may
arise out of our strategic acquisitions.
If we do not achieve the anticipated benefits of business acquisitions or other
strategic activities, our business and results of operations may be adversely
affected, and we may not enhance stockholder value by engaging in these
transactions.
Many of our acquisitions and other strategic investments require approval by the
United States and/or foreign government agencies. Certain agencies in the past
have, and may in the future, deny the transaction or fail to approve in a timely
manner, resulting in us not realizing the anticipated benefits of the proposed
transaction. Future acquisitions or other
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strategic investments may be more difficult, complex or expensive to the extent
that our reputation for our ability to consummate acquisitions has been harmed.
Further, if U.S./China relations remain strained, our ability to consummate any
transaction that would require approval from the relevant regulatory agency(ies)
in China may be severely impacted.
RISKS RELATED TO SUPPLY AND MANUFACTURING
We depend on a limited number of third-party suppliers for the procurement,
manufacture, assembly and testing of our products manufactured in a fabless
production model. If we fail to execute supply strategies that provide supply
assurance, technology leadership and reasonable margins, our business and
results of operations may be harmed. We are also subject to order and shipment
uncertainties that could negatively impact our results of operations.
We primarily utilize a fabless production model, which means that we do not own
or operate foundries for the production of silicon wafers from which our
integrated circuits are made. Other than the facilities we own that manufacture
certain of our RFFE modules and RF (radio frequency) filter products, we rely on
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. There are a limited number of such third-party suppliers,
and even fewer who are capable of manufacturing at the leading process
technology nodes or who are willing to operate at older process technology
nodes. The semiconductor manufacturing foundries that supply our products are
primarily located in Asia, as are our primary warehouses where we store finished
goods for fulfillment of customer orders.
The following issues related to our third-party suppliers could have an adverse
effect on our ability to meet customer demand and negatively impact our
revenues, business operations, profitability and cash flows:
•demand for integrated circuits that exceeds suppliers' capacity to meet that
demand;
•a reduction, interruption, delay or limitation in our product supply sources;
•a failure by our suppliers to procure raw materials or allocate adequate raw
materials for our products;
•an inability to procure or utilize raw materials, components or products from
our suppliers due to government prohibitions or restrictions on transactions
with certain countries and/or companies, and alternative suppliers, raw material
sources or raw materials are not available or not available in acceptable time
frames or upon acceptable terms;
•a failure by our suppliers to allocate adequate manufacturing, assembly or test
capacity for our products;
•our suppliers' inability to react to shifts in product demand or an increase in
raw material or component prices;
•our suppliers' inability to develop or maintain, or a delay in developing or
building out, manufacturing capacity for leading process technologies, including
transitions to smaller geometry process technologies;
•the loss of a supplier or the inability of a supplier to meet performance,
quality or yield specifications or delivery schedules;
•additional expense or production delays as a result of qualifying a new
supplier and commencing volume production or testing in the event of a loss of,
or a decision to add or change, a supplier;
•natural disasters, the effects of climate change or geopolitical conflicts
impacting our suppliers and their manufacturing foundries or assembly, test or
other facilities;
•health crises, including epidemics or pandemics such as the COVID-19 pandemic,
and government and business responses thereto, which impact our suppliers,
including as a result of quarantines or closures;
•cyber-attacks on our suppliers' information technology (IT) systems, including
those related to their manufacturing foundries or assembly, test or other
facilities; and
•trade or national security protection policies, particularly U.S. or Chinese
government policies, that limit or prevent us from transacting business with
suppliers of critical integrated circuit products, or that limit or prevent such
suppliers from transacting business with us or from procuring materials,
machinery or technology necessary to manufacture goods for us.
While we have established alternate suppliers for certain technologies, there
are a limited number of such suppliers, and even fewer who are capable of
operating at the leading process technology nodes or who are willing to operate
at older process technology nodes. We rely on sole- or limited-source suppliers
for certain products, which may exacerbate the risks identified above, and
subject us to other significant risks, including poor product performance and
reduced control over delivery schedules, manufacturing capability and yields,
quality assurance, quantity and costs. To the extent we have
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established or in the future establish alternate suppliers, these suppliers may
require significant amounts of time and levels of support to bring such
technologies to production, both of which may increase for complex or leading
process technologies. As a result, we may invest a significant amount of effort
and resources and incur higher costs to support and maintain such alternate
suppliers. Further, the elimination or limitation of a foundry supplier's
ability to manufacture components or products for us due to trade or national
security protection policies could increase our vulnerability to sole- or
limited-source arrangements and limit or prevent us from procuring critical
components or products from those suppliers. Future consolidation of foundry
suppliers could also increase our vulnerability to sole- or limited-source
arrangements and reduce our suppliers' willingness to negotiate pricing, which
could negatively impact our ability to achieve cost reductions, increase our
manufacturing costs and limit the amount of capacity available to us. Our
arrangements with our suppliers may obligate us to incur costs to manufacture,
assemble and test our products that do not decrease at the same rate as
decreases in pricing to our customers. Our ability, and that of our suppliers,
to develop or maintain leading process technologies, including transitions to
smaller geometry process technologies (which adds risk to manufacturing yields
and reliability), and to effectively compete with the manufacturing processes
and performance of our competitors, could impact our ability to introduce new
products and meet customer demand, could increase our costs (possibly decreasing
our margins) and could subject us to the risk of excess inventories. Any of the
above could negatively impact our business, results of operations and cash
flows.
Although we have long-term contracts with our suppliers, some of these contracts
do not provide for long-term capacity commitments. To the extent 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 manufacture, assembly and testing of products for their other
customers (including our competitors) while reducing or limiting capacity to
manufacture, assemble or test our products, and such capacity may be limited
based on our suppliers' ability and willingness to invest in the capital
required to manufacture in the leading process technologies. Our suppliers or
potential alternate suppliers may also manufacture their own integrated circuits
that compete with our products. Such suppliers have in the past allocated and
may again allocate raw materials and manufacturing capacity to their own
products and reduce or limit the production of our products. Accordingly,
capacity for our products may not be available when we need it. To the extent we
do obtain long-term capacity commitments, we may incur additional costs related
to those commitments or make non-refundable payments for capacity commitments
that are not used. In addition, we may not receive reasonable pricing,
manufacturing or delivery terms from our suppliers, and our ability to obtain
favorable terms may be diminished during times of high demand and/or limited
manufacturing capacity for integrated circuit products.
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. To the extent we are unable to
obtain adequate supply to meet our delivery obligations, we may be obligated to
make payments to our customers for such shortfalls. Currently, the global
semiconductor industry is experiencing demand for integrated circuits that
exceeds the industry's capacity to meet that demand. Our ability to meet
increased demand for our products has been and may continue to be limited due to
the inability to obtain the additional manufacturing, assembly and test capacity
necessary to fully meet such demand. If we are unable to fully meet customer
demand, this could result in lost sales opportunities, reduced revenue growth
and harm to our customer relationships. These issues may be exacerbated if
customers overstate their expected demand requirements in order to procure
additional supply, which could negatively impact our ability to forecast and to
allocate supply appropriately among our customers. These issues may also be
exacerbated with respect to our platform solutions, which already entail a great
deal of complexity due to differing lead-times, technologies and suppliers for
each integrated circuit product included in such solutions.
Additionally, we place orders with our suppliers using our and our customers'
forecasts of demand for our products, which are based on a number of assumptions
and estimates. As we move to smaller geometry process technologies, the
manufacturing lead-time increases. As a result, the orders we place with our
suppliers are generally only partially covered by commitments from our
customers. If we, or our customers, overestimate demand, or if demand is
impacted by factors outside of our or our customers' control, and such demand is
not covered by a binding commitment from our customers, we may experience
increased excess or obsolete inventory, which would negatively impact our
results of operations.
See also the Risk Factor below titled "There are numerous risks associated with
the operation and control of our manufacturing facilities, including a higher
portion of fixed costs relative to a fabless model; environmental compliance and
liability; impacts related to climate change; exposure to natural disasters,
health crises and cyber-attacks; timely supply of equipment and materials; and
various manufacturing issues" as similar risks, as well as additional risks, may
be applicable to our third-party suppliers' manufacturing facilities, which
could result in disruptions to our business or additional costs to us, and
negatively impact our results of operations.
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There are numerous risks associated with the operation and control of our
manufacturing facilities, including a higher portion of fixed costs relative to
a fabless model; environmental compliance and liability; impacts related to
climate change; exposure to natural disasters, health crises and cyber-attacks;
timely supply of equipment and materials; and various manufacturing issues.
We own and operate various facilities that manufacture certain of our RFFE
modules and RF filter products. Manufacturing facilities are characterized by a
higher portion of fixed costs relative to a fabless model. We may be faced with
a decline in the utilization rates of our manufacturing facilities due to
decreases in demand for our products, including in less favorable industry
environments, or due to our failure to win and/or retain designs with OEMs.
During such periods, our manufacturing facilities could operate at lower
capacity levels, while the fixed costs associated with such facilities would
continue to be incurred, resulting in lower gross profit.
We are subject to many complex environmental, health and safety laws,
regulations and rules in each jurisdiction in which we operate our manufacturing
(and research and development) facilities. The regulatory landscape in these
areas continues to evolve, and we anticipate additional laws, regulations and
rules in the future. In particular, new, or changes in, environmental and
climate change laws, regulations or rules, including relating to GHG emissions,
could lead to new or additional investments in production processes and could
increase environmental compliance expenditures. In addition, certain
environmental laws impose strict, and in certain circumstances joint and
several, liability on current or previous owners or operators of real property,
or parties who arranged for hazardous substances to be sent to disposal or
treatment facilities, for the cost of investigation, removal or remediation of
hazardous substances. As a result, we may incur clean-up costs in connection
with any such removal or remediation efforts, as well as other third-party
claims in connection with contaminated sites. In addition, we could be held
liable for consequences arising out of human exposure to hazardous substances or
other environmental damage. If we, or companies or facilities we acquire or have
acquired, in the past failed or in the future fail to comply with any such laws
and regulations, then we could incur regulatory penalties, fines and legal
liabilities; suspension of production; significant compliance requirements;
alteration of our manufacturing, assembly or test processes; restriction on our
ability to modify or expand our facilities; damage to our reputation; and
restrictions on our operations or sales. We are also required to obtain and
maintain environmental permits from governmental authorities for certain of our
operations. We cannot make assurances that we will at all times be in compliance
with such laws, regulations, rules and permits. See also the risk factor titled
"Our business may suffer due to the impact of, or our failure to comply with,
the various existing, new or amended laws, regulations, policies or standards to
which we are subject."
Climate change concerns and the potential resulting environmental impact may
result in new environmental, health and safety laws and regulations that may
affect us, our suppliers and our customers. Such laws or regulations could cause
us to incur additional direct costs for compliance, including costs associated
with changes to manufacturing processes or the procurement of raw materials used
in manufacturing processes, as well as increased indirect costs resulting from
our customers, suppliers or both incurring additional compliance costs that are
passed on to us. These costs may adversely impact our results of operations and
financial condition. In addition, climate change could cause certain natural
disasters, such as drought, wildfires, storms, flooding or rising sea levels, to
occur more frequently or with greater intensity, which could pose physical risks
to our manufacturing facilities or our suppliers' facilities, could disrupt the
availability of water necessary for the operation of our manufacturing
facilities or our suppliers' facilities, and could increase or decrease
temperatures resulting in increased operating costs and/or business disruption.
We have manufacturing facilities in Asia and Europe. If tsunamis, flooding,
earthquakes, volcanic eruptions, drought or other natural disasters, effects of
climate change or geopolitical conflicts, were to damage, destroy or disrupt our
manufacturing facilities, it could disrupt our operations, cease or delay
production and shipments of inventory and result in costly repairs, replacements
or other costs and lost business. In addition, natural disasters, effects of
climate change or geopolitical conflicts may result in disruptions in
transportation, distribution channels and supply chains, and significant
increases in the prices of raw materials. Further, health crises, including
epidemics or pandemics, such as the COVID-19 pandemic, and government and
business responses thereto, could affect our manufacturing facilities, including
by resulting in quarantines and/or closures, which would result in disruptions
to and potential closures of our manufacturing operations. Our manufacturing
operations could also be disrupted by cyber-attacks on our IT systems, as
described in the Risk Factor below titled "Our business and operations could
suffer in the event of security breaches of our IT systems, or other
misappropriation of our technology, intellectual property or other proprietary
or confidential information."
Our manufacturing operations depend on securing raw materials and other supplies
in adequate quality and quantity in a timely manner from multiple suppliers, and
in some cases, we rely on a limited number of suppliers, including in some cases
sole suppliers, particularly in Asia. There may be cases where supplies of raw
materials and other products are interrupted by disaster, accident or some other
event at a supplier; supply is suspended due to quality or other issues; there
is a shortage of supply due to a rapid increase in demand; and/or we or our
suppliers are prohibited from utilizing certain raw materials, or
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products or components that incorporate such raw materials, due to government
restrictions related to the countries from which such raw materials originate,
and acceptable alternative suppliers, raw materials or raw materials sources are
not available or not available in acceptable time frames or upon acceptable
terms, among others, which could impact production and prevent us from supplying
our products to our customers. If the supply-demand balance is disrupted, it may
considerably increase costs of manufacturing due to increased prices we pay for
raw materials. From time to time, suppliers may extend lead times, limit amounts
supplied to us or increase prices due to capacity constraints or other factors.
Additionally, supply and costs of raw materials may be negatively impacted by
trade and/or national security protection policies, such as tariffs, or actions
by governments that limit or prevent us from transacting business with certain
countries or companies or that limit or prevent certain companies from
transacting business with us, or trade tensions, particularly with countries in
Asia. Further, it may be difficult or impossible to substitute one piece of
equipment for another or replace one type of material with another. A failure by
our suppliers to deliver our requirements could result in disruptions to our
manufacturing operations.
Our manufacturing processes are highly complex, require advanced and costly
equipment and must be continuously modified to improve yields and performance.
Difficulties in the production process can reduce yields or interrupt
production, and as a result, we may not be able to deliver our products or do so
in a timely, cost-effective or competitive manner. Further, to remain
competitive and meet customer demand, we may be required to improve our
facilities and process technologies and carry out extensive research and
development, each of which may require investment of significant amounts of
capital and may have a material adverse effect on our results of operations,
cash flows and financial condition.
From time to time, we begin to purchase equipment to meet expected customer
demand in advance of any purchase orders or long-term purchase commitments.
Further, we typically begin manufacturing our products using our or our
customers' forecasts of demand for our products, which are based on a number of
assumptions and estimates and may not be covered by long-term purchase
commitments. As a result, we may incur increased inventory and manufacturing
costs and/or record impairment charges to the extent anticipated sales
ultimately do not materialize or are lower than expected. If we or our customers
overestimate demand, or if demand is impacted by factors outside of our or our
customers' control such as the COVID-19 pandemic or trade or national security
protection policies, that is not under a binding commitment from our customers,
we may experience higher inventory carrying and operating costs and/or increased
excess or obsolete inventory, which would negatively impact our results of
operations
RISKS RELATED TO CYBERSECURITY OR MISAPPROPRIATION OF OUR CRITICAL INFORMATION
Our business and operations could suffer in the event of security breaches of
our IT systems, or other misappropriation of our technology, intellectual
property or other proprietary or confidential information.
Third parties regularly attempt to gain unauthorized access to our IT systems,
and many such attacks are increasingly more sophisticated. These attacks, which
might be related to industrial, corporate or other espionage, criminal hackers
or state-sponsored intrusions, include trying to covertly introduce malware to
our computers and networks, including those in our manufacturing operations,
exploiting vulnerabilities in hardware, software or other IT infrastructure and
impersonating authorized users, among others. We may also be subject to
ransom-style cyber-attacks, which could impact our IT systems and cause
widespread disruption to our business, including our manufacturing operations,
and expose our confidential or propriety information. Third parties that store
and/or process our confidential information, or that provide products, software
or services used in our IT infrastructure (including applications), may be
subject to similar attacks, which could also result in malware being introduced
into our IT infrastructure, e.g., through the third parties' software and/or
software updates. Such attacks could result in the misappropriation, theft,
misuse, disclosure, loss or destruction of the technology, intellectual
property, or the proprietary, confidential or personal information, of us or our
employees, customers, licensees, suppliers or other third parties, as well as
damage to or disruptions in our IT systems. We believe that we have a robust
cybersecurity program that is aligned to international cybersecurity frameworks,
and that we leverage industry best practices across people, processes and
technologies in an attempt to mitigate cybersecurity threats. However, we may
not be able to anticipate, detect, repel or implement effective preventative
measures against all cybersecurity threats, particularly because the techniques
used are increasingly sophisticated and constantly evolving. As part of our
cybersecurity program, we seek to identify and remediate vulnerabilities in our
IT systems and software (including third party software used in our IT systems)
that could be exploited by hackers or other malicious actors. However, we may
not be aware of all such vulnerabilities, and we may fail to identify and/or
remediate such vulnerabilities before they are exploited. Attempts to gain
unauthorized access to our IT systems or other attacks have in the past, in
certain instances and to certain degrees, been successful (but have not caused
significant harm), and may in the future be successful, and in some cases, we
might be unaware of an incident or its magnitude and effects.
In addition, employees and former employees, in particular former employees who
become employees of our competitors, customers, licensees or other third
parties, including state actors, have in the past and may in the future
misappropriate, wrongfully use, publish or provide to our competitors,
customers, licensees or other third parties, including
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state actors, our technology, intellectual property or other proprietary or
confidential information. This risk is exacerbated as competitors for talent,
particularly engineering talent, increasingly attempt to hire our employees. See
also the Risk Factor titled "We may not be able to attract and retain qualified
employees, and our attempts to fully reopen our offices and operate under a
hybrid working environment may not be successful." Similarly, we provide access
to certain of our technology, intellectual property and other proprietary or
confidential information to our direct and indirect customers and licensees and
certain of our consultants, who have in the past and may in the future
wrongfully use such technology, intellectual property or information, or
wrongfully disclose such technology, intellectual property or information to
third parties, including our competitors or state actors. We also provide access
to certain of our technology, intellectual property and other proprietary or
confidential information to certain of our joint venture partners, including
those affiliated with state actors and including in foreign jurisdictions where
ownership restrictions may require us to take a minority ownership interest in
the joint venture. Such joint venture partners may wrongfully use such
technology, intellectual property or information, or wrongfully disclose such
technology, intellectual property or information to third parties, including our
competitors or state actors.
The misappropriation, theft, misuse, disclosure, loss or destruction of the
technology, intellectual property, or the proprietary, confidential or personal
information, of us or our employees, customers, licensees, suppliers or other
third parties, could harm our competitive position, reduce the value of our
investment in research and development and other strategic initiatives, cause us
to lose business, damage our reputation, subject us to legal or regulatory
proceedings, cause us to incur other loss or liability and otherwise adversely
affect our business. We expect to continue to devote significant resources to
the security of our IT systems, and our technology, intellectual property and
proprietary and confidential information.
Further, China has implemented, and other countries or regions may implement,
cybersecurity laws that require our overall IT security environment to meet
certain standards and/or be certified. Such laws may be complex, ambiguous and
subject to interpretation, which may create uncertainty regarding compliance. As
a result, our efforts to comply with such laws may be expensive and may fail,
which could adversely affect our business, results of operations and cash flows.
In addition, our contracts with certain of our customers will require us to
obtain cybersecurity certifications for our IT systems. Failure to obtain or
maintain the necessary cybersecurity certifications could result in loss of
future revenues, damage to our customer relationships and reputation, and a
shifting of business to our competitors.
RISKS RELATED TO HUMAN CAPITAL MANAGEMENT
We may not be able to attract and retain qualified employees, and our attempts
to fully reopen our offices and operate under a hybrid working environment may
not be successful.
Our future success depends upon the continued service of our executive officers
and other key management and technical personnel, and on our ability to continue
to identify, attract, retain and motivate them. Implementing our business
strategy requires specialized engineering and other talent, as our revenues are
highly dependent on technological and product innovations. In addition, in order
to extend our business into certain new and expanded product areas and
industries and applications beyond mobile handsets, we will be required to
attract, retain and motivate engineering and other technical personnel with
specialized skills in these areas, and these skills are in high demand among our
competitors. The market for employees in our industry is extremely competitive,
and competitors for talent, particularly engineering talent, increasingly
attempt to hire, and to varying degrees have been successful in hiring, our
employees or employment candidates, including by establishing or expanding local
offices near our headquarters in San Diego, California. Further, the increased
availability of remote working arrangements, largely driven by the COVID-19
pandemic, has expanded the pool of companies that can compete for our employees
and employment candidates. A number of such competitors for talent are
significantly larger than us and are able to offer compensation in excess of
what we are able to offer or other benefits that we generally do not offer, such
as the ability to permanently work from home. Further, existing immigration laws
make it more difficult for us to recruit and retain highly skilled foreign
national graduates of universities in the United States, making the pool of
available talent even smaller. If we are unable to attract and retain qualified
employees, our business may be harmed.
The COVID-19 pandemic caused us to modify our workforce practices, including
having the vast majority of our employees work from home. As we reopen our
offices, we intend to operate under a "hybrid" working environment, meaning that
the majority of our employees will have the flexibility to work remotely at
least some of the time for the foreseeable future. The hybrid working
environment may impair our ability to maintain our collaborative and innovative
culture, and may cause disruptions among our employees, including decreases in
productivity, challenges in communications between on-site and off-site
employees and, potentially, employee dissatisfaction and attrition. If our
attempts to safely reopen our offices and operate under a hybrid working
environment are not successful, our business could be adversely impacted.
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RISKS SPECIFIC TO OUR LICENSING BUSINESS
The continued and future success of our licensing programs requires us to
continue to evolve our patent portfolio and to renew or renegotiate license
agreements that are expiring.
We own a very strong portfolio of issued and pending patents related to 3G, 4G,
5G and other technologies. It is critical that we continue to evolve our patent
portfolio, particularly in 5G. If we do not maintain a strong portfolio that is
applicable to current and future standards, products and services, our future
licensing revenues could be negatively impacted.
Our patent license agreements in effect that generate a significant portion of
our licensing revenues are effective for a specified term. To receive royalties
after the expiration date of the specified term, we will need to extend or
modify such license agreements or enter into new license agreements with such
licensees. We might not be able to extend or modify license agreements, or enter
into new license agreements, in the future without negatively affecting the
material terms and conditions of our license agreements with such licensees, and
such modifications or new agreements may negatively impact our revenues. In some
circumstances, we may extend, modify or enter into new license agreements as a
result of arbitration or litigation, and terms imposed by arbitrators or courts
may be less favorable to us than existing terms, and may impact the financial or
other terms of license agreements not subject to the litigation or arbitration.
If there is a delay in extending, modifying or entering into a new license
agreement with a licensee, there would be a delay in our ability to recognize
revenues related to that licensee's product sales. Further, if we are unable to
reach agreement on such modifications or new agreements, it could result in
patent infringement litigation with such licensees.
Efforts by some original equipment manufacturers (OEMs) to avoid paying fair and
reasonable royalties for the use of our intellectual property may require the
investment of substantial management time and financial resources and may result
in legal decisions or actions by governments, courts, regulators or agencies,
Standards Development Organizations (SDOs) or other industry organizations that
harm our business.
From time to time, companies initiate various strategies to attempt to
negotiate, renegotiate, reduce and/or eliminate their need to pay royalties to
us for the use of our intellectual property. These strategies have included: (i)
litigation, often alleging infringement of patents held by such companies,
patent misuse, patent exhaustion, patent invalidity or unenforceability of our
patents or licenses, alleging that we do not license our patents on fair,
reasonable and nondiscriminatory (FRAND) terms, or alleging some form of unfair
competition or competition law violation; (ii) taking positions contrary to our
understanding (and/or the plain language) of their contracts with us; (iii)
appeals to governmental authorities; (iv) collective action, including working
with wireless operators, standards bodies, other like-minded companies and
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; (v) lobbying governmental regulators and
elected officials for the purpose of seeking the reduction of royalty rates or
the base on which royalties are calculated, seeking to impose some form of
compulsory licensing or weakening a patent holder's ability to enforce its
rights or obtain a fair return for such rights; and (vi) attempts by licensees
to shift their royalty obligation to their suppliers in order to lower the
wholesale (i.e., licensee's) selling price on which the royalty is calculated.
In addition, certain licensees have disputed, underreported, underpaid, not
reported or not paid royalties owed to us under their license agreements or
reported to us in a manner that is not in compliance with their contractual
obligations, and certain companies have yet to enter into or have delayed
entering into or renewing license agreements with us for their use of our
intellectual property, and they or others may engage in such behavior in the
future. The fact that one or more licensees dispute, underreport, underpay, do
not report or do not pay royalties owed to us may encourage other licensees to
take similar actions or not renew their existing license agreements, and may
encourage other licensees or unlicensed companies to delay entering into, or to
not enter into, new license agreements. Further, to the extent such licensees
and companies increase their device share, the negative impact of their
underreporting, underpayment, non-payment or non-reporting on our business,
revenues, results of operations, cash flows and financial condition will be
exacerbated.
We have been in the past and are currently subject to various litigation and/or
governmental investigations and proceedings. Certain of these matters are
described in this Quarterly Report in "Notes to Condensed Consolidated Financial
Statements, Note 5. Commitments and Contingencies." We may become subject to
other litigation or governmental investigations or proceedings in the future.
Additionally, certain of our direct and indirect customers and licensees have
pursued, and others may in the future pursue, litigation or arbitration against
us related to our business. Unfavorable resolutions of one or more of these
matters have had and could in the future have a material adverse effect on our
business, revenues, results of operations, cash flows and financial condition.
See also the Risk Factors below titled "Changes in our patent licensing
practices, whether due to governmental investigations, legal challenges or
otherwise, could adversely impact our business and results of operations" and
"Our business may suffer as a result of adverse rulings in governmental
investigations or proceedings."
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In addition, in connection with our participation in SDOs, we, like other patent
owners, generally have made contractual commitments to such organizations to
license those of our patents that would necessarily be infringed by
standard-compliant products as set forth in those commitments (referred to as
standard-essential patents). Some manufacturers and users of standard-compliant
products advance interpretations of these commitments that are adverse to our
licensing business, including interpretations that would limit the amount of
royalties that we could collect on the licensing of our standard-essential
patent portfolio.
Further, some third parties have proposed significant changes to existing
intellectual property policies for implementation by SDOs and other industry
organizations with the goal of significantly devaluing standard-essential
patents. For example, some have put forth proposals which would require a
maximum aggregate intellectual property royalty rate for the use of all
standard-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 standard-essential patents based upon the number of
standard-essential patents held by such company. Others have proposed that
injunctions should not be an available remedy for infringement of
standard-essential patents and have made proposals that could severely limit
damage awards and other remedies by courts for patent infringement (e.g., by
limiting the base upon which the royalty rate may be applied). A number of these
strategies are purportedly based on interpretations of the policies of certain
SDOs concerning the licensing of patents that are or may be essential to
industry standards and on our (or other companies') alleged failure to abide by
these policies.
Some SDOs, courts and governmental agencies have adopted, and may in the future
adopt, some or all of these interpretations or proposals in a manner adverse to
our interests, including in litigation to which we may not be a party. Further,
SDOs in certain countries may attempt to modify widely accepted standards and
claim the resulting standard as their own.
We expect that such proposals, interpretations and strategies will continue in
the future, and if successful, our business model would be harmed, either by
limiting or eliminating our ability to collect royalties (or by reducing the
royalties we can collect) on all or a portion of our standard-essential patent
portfolio, limiting our return on investment with respect to new technologies,
limiting our ability to seek injunctions against infringers of our
standard-essential patents, constraining our ability to make licensing
commitments when submitting our technologies for inclusion in future standards
(which could make our technologies less likely to be included in such standards)
or forcing us to work outside of SDOs or other industry groups to promote our
new technologies, and our revenues, results of operations and cash flows could
be negatively impacted. In addition, the legal and other costs associated with
asserting or defending our positions have been and may in the future be
significant. We expect that such challenges, regardless of their merits, will
continue into the foreseeable future and will require the investment of
substantial management time and financial resources.
Changes in our patent licensing practices, whether due to governmental
investigations, legal challenges or otherwise, could adversely impact our
business and results of operations.
As described in the Risk Factor below titled "Our business may suffer as a
result of adverse rulings in governmental investigations or proceedings," we
have been in the past, currently are and may in the future be subject to various
governmental investigations and legal proceedings challenging our patent
licensing (or chipset sales) practices. We are currently subject to certain
governmental investigations and/or legal proceedings, including those described
in this Quarterly Report in "Notes to Condensed Consolidated Financial
Statements, Note 5. Commitments and Contingencies." We believe that one intent
of certain of these governmental investigations and legal proceedings has been
to reduce the amount of royalties that licensees are required to pay to us for
their use of our intellectual property.
If we were required to reduce the royalty rates in our patent license
agreements, our revenues, earnings and cash flows would be negatively impacted
absent a sufficient increase in the volume of sales of devices upon which
royalties are paid. Similarly, if we were required to reduce the base on which
our royalties are calculated, our revenues, results of operations and cash flows
would be negatively impacted unless there was a sufficient increase in the
volume of sales of devices upon which royalties are paid or we were able to
increase our royalty rates to offset the decrease in revenues resulting from
such lower royalty base (assuming the absolute royalty dollars were below any
relevant royalty caps).
If we were required to grant patent licenses to chipset manufacturers (which
could lead to implementing a more complex, multi-level licensing structure in
which we license certain portions of our patent portfolio to chipset
manufacturers and other portions to OEMs), we would incur additional transaction
costs, which may be significant, and we could incur delays in recognizing
revenues until license negotiations were completed. In addition, our licensing
revenues and earnings would be negatively impacted if we were not able to
obtain, in the aggregate, equivalent revenues under such a multi-level licensing
structure.
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If we were required to sell chipsets to OEMs that do not have a license to our
patents, our licensing program could be negatively impacted by patent exhaustion
claims raised by such unlicensed OEMs (i.e., claims that our sale of chipsets to
such OEMs forecloses us from asserting any patents substantially embodied by the
chipsets against such OEMs). Such sales could provide OEMs with a defense in the
event we asserted our patents against them to obtain licensing revenue for those
patents. This could have a material adverse effect on our licensing program and
our results of operations, cash flows and financial condition.
To the extent that we were required to implement any of these licensing and/or
business practices, including by modifying or renegotiating our existing license
agreements or pursuing other commercial arrangements, we would incur additional
transaction costs, which may be significant, we could incur delays in
recognizing revenues until license negotiations were completed, and our
business, revenues, results of operations, cash flows and financial condition
could be harmed. The impact of any such changes to our licensing practices could
vary widely and by jurisdiction, depending on the specific outcomes and the
geographic scope of such outcomes. In addition, if we were required to make
modifications to our licensing practices in one jurisdiction, licensees or
governmental agencies in other jurisdictions may attempt to obtain similar
outcomes for themselves or for such other jurisdictions, as applicable, which
could result in increased legal costs and further harm to our business,
revenues, results of operations, cash flows and financial condition.
RISKS RELATED TO REGULATORY AND LEGAL CHALLENGES
Our business may suffer as a result of adverse rulings in governmental
investigations or proceedings.
We have been in the past and currently are subject to various governmental
investigations and proceedings. Certain of these matters are described in this
Quarterly Report in "Notes to Condensed Consolidated Financial Statements, Note
5. Commitments and Contingencies." Key allegations or findings in those matters
include or have in the past included, among others: that we violate FRAND
licensing commitments by refusing to grant licenses to chipset manufacturers;
that our royalty rates are too high; that the base on which our royalties are
calculated should be something less than the wholesale (i.e., licensee's)
selling price of the applicable device (minus certain permitted deductions);
that we unlawfully require customers to execute a patent license before we sell
them cellular modem chipsets; that we have entered into exclusive agreements
with chipset customers that foreclose competition; that we leverage our position
in baseband chipsets in the RFFE space; and that we violate antitrust laws and
engage in anticompetitive conduct and unfair methods of competition. We may
become subject to other litigation or governmental investigations or proceedings
in the future.
Unfavorable resolutions of one or more of these matters have had and could in
the future have a material adverse effect on our business, revenues, results of
operations, cash flows and financial condition. Depending on the matter, various
remedies that could result from an unfavorable resolution include, among others:
the loss of our ability to enforce one or more of our patents; injunctions;
monetary damages, fines or other orders to pay money; the issuance of orders to
cease certain conduct or modify our business practices, such as requiring us to
reduce our royalty rates, reduce the base on which our royalties are calculated,
grant patent licenses to chipset manufacturers, sell chipsets to unlicensed OEMs
or modify or renegotiate some or all of our existing license agreements; and
determinations that some or all of our license agreements are invalid or
unenforceable. In addition, a governmental body in a particular country or
region may successfully assert and impose remedies with effects that extend
beyond the borders of that country or region. If some or all of our license
agreements are declared invalid or unenforceable and/or we are required to
renegotiate these license agreements, we may not receive, or may not be able to
recognize, some or any licensing or royalty revenues under the impacted license
agreements unless and until we enter into new license agreements; and even
licensees whose license agreements are not impacted may demand to renegotiate
their agreements or invoke the dispute resolution provision in their agreements,
and we may not be able to recognize some or any revenues under such agreements.
The renegotiation of license agreements could result in terms that are less
favorable to us than existing terms, or lead to arbitration or litigation to
resolve the licensing terms, which could also be less favorable to us than
existing terms, and each of which could take months or possibly years. Licensees
may underreport, underpay, not report or not pay royalties owed to us pending
the conclusion of such negotiations, arbitration or litigation. In addition, we
may be sued for alleged overpayments of past royalties paid to us, including
private antitrust actions seeking treble damages under U.S. antitrust laws. The
occurrence of any of the above could have a material adverse effect on our
business, revenues, results of operations, cash flows and financial condition,
and our stock price could decline, possibly significantly, in which case we may
have to significantly cut costs and other uses of cash, including in research
and development, significantly impairing our ability to maintain product and
technology leadership and invest in next generation technologies. Further,
depending on the breadth and severity of the circumstances above, we may have to
reduce, suspend or eliminate our capital return programs, and our ability to
timely pay our indebtedness may be impacted.
These challenges have required, and may in the future require, the investment of
significant management time and attention and have resulted, and may in the
future result, in significant legal costs.
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RISKS RELATED TO INDUSTRY DYNAMICS AND COMPETITION
Our revenues depend on our customers' and licensees' sales of products and
services based on CDMA, OFDMA and other communications technologies, including
5G, and customer demand for our products based on these technologies.
We develop, patent and commercialize technology and products based on CDMA,
OFDMA and other communications technologies, which are primarily wireless. We
depend on our customers and licensees to develop devices and services based on
these technologies to drive consumer demand for new 3G/4G and 3G/4G/5G multimode
and single-mode devices, and to establish the selling prices for such devices.
Further, the timing of our shipments of our products is dependent on the timing
of our customers' and licensees' deployments of new devices and services based
on these technologies. Increasingly, we also depend on operators of wireless
networks, our customers and licensees and other third parties to incorporate
these technologies into new device types and into industries and applications
beyond mobile handsets, such as automotive and IoT, among others.
We have historically been successful during wireless technology transitions,
including 3G, 4G and now 5G. Commercial deployments of 5G networks and devices
have begun and will continue. However, the timing and scale of such deployments,
in certain regions, have been and may in the future be delayed due to the
COVID-19 pandemic or for other reasons that are beyond our control.
Our revenues and growth in revenues could be negatively impacted, our business
may be harmed and our substantial investments in these technologies may not
provide us an adequate return, if: our customers' and licensees' revenues and
sales of products, particularly premium-tier products, and services using these
technologies, and average selling prices of such products, decline due to, for
example, the maturity of smartphone penetration in developed regions, including
China; we do not continue to maintain our intellectual property and technical
leadership in 5G, including in ongoing 5G standardization efforts; we are unable
to drive the adoption of our products into networks and devices, including
devices beyond mobile handsets; or consumers' rates of replacement of
smartphones and other computing devices decline.
Our industry is subject to intense competition in an environment of rapid
technological change. Our success depends in part on our ability to adapt to
such change and compete effectively; and such change and competition could
result in decreased demand for our products and technologies or declining
average selling prices for our products or those of our customers or licensees.
Our products and technologies face significant competition. Competition may
intensify as our current competitors expand their product offerings, improve
their products or reduce the prices of their products as part of a strategy to
maintain existing business and customers or attract new business and customers,
as new opportunities develop, and as new competitors enter the industry.
Competition in wireless communications is affected by various factors that
include, among others: OEM concentrations; vertical integration; competition in
certain geographic regions; government intervention or support of national
industries or competitors; the ability to maintain product differentiation in
light of evolving industry standards and speed of technological change
(including the transition to smaller geometry process technologies and the
demand for always on, always connected capabilities); access to capacity in the
supply chain; and value-added features that drive selling prices and consumer
demand for new 3G/4G and 3G/4G/5G multimode and single-mode devices.
We anticipate that additional competitors will introduce products as a result of
growth opportunities in wireless communications, the trend toward global
expansion by foreign and domestic competitors, and technological and public
policy changes. Additionally, the semiconductor industry has experienced and may
continue to experience consolidation, which could result in significant changes
to the competitive landscape. For example, if any key supplier of technologies
and intellectual property to the semiconductor industry was sold to one of our
competitors, it could negatively affect our ability to procure or license such
technologies and intellectual property in the future, at all or upon acceptable
terms, which could have wide-ranging impacts on our business and operations.
We expect that our future success will depend on, among other factors, our
ability to:
•differentiate our integrated circuit products with innovative technologies
across multiple products and features (e.g., modem, radio frequency front-end
(RFFE), including millimeter wave (mmWave), graphics and other processors,
camera and connectivity) and with smaller geometry process technologies that
drive both performance and lower power consumption;
•develop and offer integrated circuit products at competitive cost and price
points and to effectively cover all geographic regions and all device tiers;
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•continue to be a leader in mobile, and drive the adoption of our technologies
and integrated circuit products, including RFFE, into the most popular device
models and across a broad spectrum of devices in mobile, such as smartphones,
tablets, laptops and other mobile computing devices;
•increase or accelerate adoption of our technologies and products in industries
and applications outside of mobile handsets, including automotive and IoT;
•maintain or accelerate demand for our integrated circuit products at the
premium device tier, while also driving the adoption of our products into high,
mid- and low-tier devices across all regions;
•remain a leader in 5G (and 4G) technology development, standardization,
intellectual property creation and licensing, and develop, commercialize and
remain a leading supplier of 5G (and 4G) integrated circuit products, including
RFFE products;
•maintain access to sufficient capacity in the supply chain relative to our
competitors to meet customer demand;
•create standalone value and contribute to the success of our existing
businesses through acquisitions, joint ventures and other strategic
transactions, and by developing customer, licensee, vendor, distributor and
other channel relationships in new industries and applications;
•identify potential acquisition targets that will grow or sustain our business
or address strategic needs, reach agreement on terms acceptable to us, close the
transactions and effectively integrate these new businesses, products,
technologies and employees;
•provide leading products and technologies to OEMs, high level operating systems
(HLOS) providers, operators, cloud providers and other industry participants as
competitors, new industry entrants and other factors continue to affect the
industry landscape;
•be a preferred partner and sustain preferred relationships providing integrated
circuit products that support multiple operating system and infrastructure
platforms to industry participants that effectively commercialize new devices
using these platforms; and
•continue to develop brand recognition to effectively compete against better
known companies in computing and other consumer driven segments and to deepen
our presence in significant emerging regions and China.
We compete with many different semiconductor companies, ranging from
multinational companies with integrated research and development, manufacturing,
sales and marketing organizations across a broad spectrum of product lines, to
companies that are focused on a single application, industry or standard
product, including those that produce products for mobile handsets, automotive
and IoT, among others. Most of these competitors compete with us with respect to
some, but not all, of our businesses or product lines. Companies that design
integrated circuits based on CDMA, OFDMA, Wi-Fi or their derivatives are
generally competitors or potential competitors. Examples (some of which are
strategic partners of ours in other areas) include Broadcom, MediaTek, Nvidia,
NXP Semiconductors, Qorvo, Samsung, Skyworks, Texas Instruments and UNISOC
(formally known as Spreadtrum Communications). Some of these current and
potential competitors may have advantages over us that include, among others:
motivation by our customers in certain circumstances to use our competitors'
integrated circuit products, to utilize their own internally-developed
integrated circuit products and/or sell such products to others, or to utilize
alternative technologies; lower cost structures or a willingness and ability to
accept lower prices or lower margins for their products, particularly in China;
foreign government support of other technologies, competitors or OEMs that sell
devices that do not contain our integrated circuit products; better known brand
names; ownership and control of manufacturing facilities and greater expertise
in manufacturing processes; more extensive relationships with local distribution
companies and OEMs in certain geographic regions (such as China); more
experience in industries and applications beyond mobile handsets (such as
automotive and IoT); and a more established presence in certain regions.
In addition, certain of our largest integrated circuit customers have in the
past utilized, currently utilize and may in the future utilize our competitors'
integrated circuit products in some (or all) of their devices, rather than our
products. Further, certain of those customers have developed, are developing or
may develop their own integrated circuit products (effectively making them
competitors), which they have in the past utilized, currently utilize and may in
the future utilize in some (or all) of their devices, rather than our products.
See also the Risk Factor titled "Our business, particularly our semiconductor
business, may suffer as a result of our customers vertically integrating (i.e.,
developing their own integrated circuit products)."
Further, political actions, including trade and/or national security protection
policies, or other actions by governments, particularly the U.S. and Chinese
governments, have in the past, currently are and could in the future limit or
prevent us from transacting business with certain of our customers or suppliers,
limit, prevent or discourage certain of our customers or
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suppliers from transacting business with us, or make it more expensive to do so.
This could advantage our competitors by enabling them with increased sales,
economies of scale, operating income and/or cash flows and/or enable critical
technology transfer, allowing them to increase their investments in technology
development, research and development and commercialization of products. See
also the Risk Factor titled "A significant portion of our business is
concentrated in China, and the risks of such concentration are exacerbated by
U.S./China trade and national security tensions."
Further, certain of our competitors develop and sell multiple components
(including integrated circuit products) for use in devices and sell those
components together to OEMs. Our competitors' sales of multiple components put
us (and our discrete integrated circuit products) at a competitive disadvantage.
Certain of our competitors also develop and sell infrastructure equipment for
wireless networks and can optimize their integrated circuit products to perform
on such networks to a degree that we are not able to, which again puts us at a
competitive disadvantage.
Competition in any or all product tiers may result in the loss of business or
customers, which would negatively impact our business, revenues, results of
operations, cash flows and financial condition. Such competition may also reduce
average selling prices for our chipset products or the products of our customers
and licensees. Certain of these dynamics are particularly pronounced in emerging
regions and China where competitors may have lower cost structures or may have a
willingness and ability to accept lower prices or lower margins on their
products. Reductions in the average selling prices of our chipset products,
without a corresponding increase in volumes, would negatively impact our
revenues, and without corresponding decreases in average unit costs, would
negatively impact our margins. In addition, reductions in the average selling
prices of our licensees' products, unless offset by an increase in volumes,
would generally decrease total royalties payable to us, negatively impacting our
licensing revenues.
RISKS RELATED TO PRODUCT DEFECTS OR SECURITY VULNERABILITIES
Failures in our products, or in the products of our customers or licensees,
including those resulting from security vulnerabilities, defects or errors,
could harm our business.
Our products (including for purposes of this Risk Factor, related software) are
complex and may contain defects, errors or security vulnerabilities, or
experience failures or unsatisfactory performance, due to any number of issues,
including issues in materials, design, fabrication, packaging and/or use within
a system. Development of products in new domains of technology, such as the
transition to 5G, and the migration to integrated circuit technologies with
smaller geometric feature sizes, increases complexity and adds risk to
manufacturing yields and reliability, and increases the likelihood of product
defects, errors or security vulnerabilities. Defects, errors, security
vulnerabilities or other unintended functionality could also be introduced into
our products by cyber-attacks or other actions by malicious actors, either
directly or through third-party products or software used in our products or IT
infrastructure (including applications). Further, because of the complexity of
our products, defects, errors or security vulnerabilities might only be detected
when the products are in use. Risks associated with product or technology
defects, errors or security vulnerabilities are exacerbated by the fact that our
customers typically integrate our products into consumer and other devices.
The use of devices containing our products to interact with untrusted systems or
otherwise access untrusted content creates a risk of exposing the system
hardware and software in those devices to malicious attacks. Further, security
vulnerabilities in our products or the technologies we use could expose our
customers, or end users of our customers' products, to hackers or other
unscrupulous third parties who develop and deploy malware that could attack our
products or our customers' products or IT infrastructure. Such attacks could
result in the disruption of our customers' businesses or the misappropriation,
theft, misuse, disclosure, loss or destruction of the technology or intellectual
property, or the proprietary, confidential or personal information, of our
customers, their employees or the end users of our customers' devices. While we
continue to focus on this issue and take measures to safeguard our products from
cybersecurity threats, device capabilities continue to evolve, enabling more
elaborate functionality and applications, and increasing the risk of security
failures, and techniques used to perpetrate cybersecurity attacks are
increasingly sophisticated and constantly evolving. See also the Risk Factor
titled "Our business and operations could suffer in the event of security
breaches of our IT systems, or other misappropriation of our technology,
intellectual property or other proprietary or confidential information."
Our products may be responsible for critical functions in our customers'
products and networks. Failure of our products to perform to specifications, or
other product defects, errors or security vulnerabilities, could lead to
substantial damage to the products we sell to our customers, the devices into
which our products are integrated and the end users of such devices, and,
potentially, to our customers' IT infrastructure. Such defects, errors or
security vulnerabilities could give rise to significant costs, including costs
related to developing solutions, recalling products, repairing or replacing
defective products, writing down defective inventory, or indemnification
obligations under our agreements, and could result in the loss of sales and
divert the attention of our engineering personnel from our product development
efforts. In addition, defects, errors or security vulnerabilities in our
products could result in failure to achieve market acceptance, a loss of design
wins, a shifting of
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business to our competitors, and litigation or regulatory action against us, and
could harm our reputation, our relationships with customers and partners and our
ability to attract new customers, as well as the perceptions of our brand. Other
potential adverse impacts of product defects, errors or security vulnerabilities
include shipment delays, write-offs of property, plant and equipment and
intangible assets, and losses on unfavorable purchase commitments. In addition,
defects, errors or security vulnerabilities in the products of our customers or
licensees could cause a delay or decrease in demand for the products into which
our products are integrated, and thus for our products.
In addition, the occurrence of defects, errors or security vulnerabilities may
give rise to product liability claims, particularly if such defects, errors or
security vulnerabilities in our products or the technology we use, or the
products into which they are integrated, result in personal injury or death, and
could result in significant costs, expenses and losses. If a product liability
claim is brought against us, the cost of defending the claim could be
significant, and could divert the attention of our technical and management
personnel and harm our business, even if we are successful. We may be named in
product liability claims even if there is no evidence that our products caused
the damage in question, and even though we may have indemnity from our
customers, and such claims could result in significant costs and expenses.
Further, our business liability insurance may be inadequate, or future coverage
may be unavailable on acceptable terms, which could adversely impact our
financial results. The above is exacerbated by the fact that our products may be
used, and perform critical functions, in various high-risk applications such as:
(i) automobiles, including autonomous driver assistance programs; (ii) cameras
and artificial intelligence, including home and enterprise security; (iii) home
automation, including smoke and noxious gas detectors; (iv) medical condition
monitoring; (v) location and asset tracking and management, including wearables
for child safety and elderly health; (vi) robotics, including public safety
drones and autonomous municipality vehicles; and (vii) extended reality (XR) for
treatment of phobias or PTSD, early detection of disorders or special needs,
among others.
Accordingly, defects, errors or security vulnerabilities in our products or the
technologies we use could have an adverse impact on us, on our customers and the
end users of our customers' products. If any of these risks materialize, there
could be a material adverse effect on our business, results of operations and
financial condition.
RISKS RELATED TO INTELLECTUAL PROPERTY
The enforcement and protection of our intellectual property may be expensive,
could fail to prevent misappropriation or unauthorized use of our intellectual
property, could result in the loss of our ability to enforce one or more
patents, and could be adversely affected by changes in patent laws, by laws in
certain foreign jurisdictions that may not effectively protect our intellectual
property and by ineffective enforcement of laws in such jurisdictions.
We rely primarily on patent, copyright, trademark and trade secret laws, as well
as nondisclosure and confidentiality agreements, international treaties and
other methods, to protect our intellectual property, including our patent
portfolio. Policing unauthorized use of our products, technologies and
intellectual property is difficult and time consuming. The steps we have taken
have not always prevented, and we cannot be certain the steps we will take in
the future will prevent, the misappropriation or unauthorized use of our
products, technologies or intellectual property, particularly in foreign
countries where the laws may not protect our rights as fully or as readily as
U.S. laws or where the enforcement of such laws may be lacking or ineffective.
See also the Risk Factor titled "Our business and operations could suffer in the
event of security breaches of our IT systems, or other misappropriation of our
technology, intellectual property or other proprietary or confidential
information."
Some industry participants who have a vested interest in devaluing patents in
general, or standard-essential patents in particular, have mounted attacks on
certain patent systems, increasing the likelihood of changes to established
patent laws. In the United States, there is continued discussion regarding
potential patent law changes and current and potential future litigation
regarding patents, the outcomes of which could be detrimental to our licensing
business. The laws in certain foreign countries in which our patents are or may
be licensed, or our products are or may be manufactured or sold, including
certain countries in Asia, may not protect our intellectual property rights to
the same extent as the laws in the United States. We cannot predict with
certainty the long-term effects of any potential changes. In addition, we cannot
be certain that the laws and policies of any country or the practices of any
standards bodies, foreign or domestic, with respect to intellectual property
enforcement or licensing or the adoption of standards, will not be changed in
the future in ways that are detrimental to our licensing program or to the sale
or use of our products or technologies.
We have had and may in the future have difficulty in certain circumstances in
protecting or enforcing our intellectual property and contracts, including
collecting royalties for use of our patent portfolio due to, among others:
refusal by certain licensees to report and pay all or a portion of the royalties
they owe to us; policies or political actions of governments, including trade
protection and national security policies; challenges to our licensing practices
under competition laws; adoption of mandatory licensing provisions by foreign
jurisdictions; failure of foreign courts to recognize and enforce
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judgments of contract breach and damages issued by courts in the United States;
and challenges before competition agencies to our licensing business and the
pricing and integration of additional features and functionality into our
chipset products. See also the Risk Factors titled "Efforts by some original
equipment manufacturers (OEMs) to avoid paying fair and reasonable royalties for
the use of our intellectual property may require the investment of substantial
management time and financial resources and may result in legal decisions or
actions by governments, courts, regulators or agencies, Standards Development
Organizations (SDOs) or other industry organizations that harm our business" and
"Our business may suffer as a result of adverse rulings in governmental
investigations or proceedings."
We have engaged in litigation and arbitration in the past and may need to
further litigate or arbitrate in the future to enforce our contract and
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 or arbitration, we could lose our ability to enforce one or more
patents, portions of our license agreements could be determined to be invalid or
unenforceable (which may in turn result in other licensees either not complying
with their existing license agreements or initiating litigation or arbitration),
license terms (including but not limited to royalty rates for the use of our
intellectual property) could be imposed that are less favorable to us than
existing terms, and we could incur substantial costs. Any action we take to
enforce our contract or intellectual property rights could be costly and could
absorb significant management time and attention, which, in turn, could
negatively impact our results of operations and cash flows. Further, even a
positive resolution to our enforcement efforts may take time to conclude, which
may reduce our revenues and cash resources available for other purposes, such as
research and development, in the periods prior to conclusion.
Additionally, although our license agreements generally provide us with the
right to audit the books and records of licensees, audits can be expensive, time
consuming, incomplete and subject to dispute. Further, certain licensees may not
comply with the obligation to provide full access to their books and records. To
the extent we do not aggressively enforce our rights under our license
agreements, licensees may not comply with their existing license agreements, and
to the extent we do not aggressively pursue unlicensed companies to enter into
license agreements with us for their use of our intellectual property, other
unlicensed companies may not enter into license agreements. Similarly, we
provide access to certain of our intellectual property and proprietary and
confidential business information to our direct and indirect customers and
licensees, who have in the past and may in the future wrongfully use such
intellectual property and information or wrongfully disclose such intellectual
property and information to third parties, including our competitors. See also
the Risk Factor titled "Efforts by some original equipment manufacturers (OEMs)
to avoid paying fair and reasonable royalties for the use of our intellectual
property may require the investment of substantial management time and financial
resources and may result in legal decisions or actions by governments, courts,
regulators or agencies, Standards Development Organizations (SDOs) or other
industry organizations that harm our business."
Claims by other companies that we infringe their intellectual property could
adversely affect our business.
From time to time, companies have asserted, and may again assert, patent,
copyright or other intellectual property claims 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, and we are
currently involved in such litigation, including those described in this
Quarterly Report in "Notes to Condensed Consolidated Financial Statements, Note
5. Commitments and Contingencies." We may not prevail in such litigation given,
among other factors, the complex technical issues and inherent uncertainties in
intellectual property litigation. If any of our products were found to infringe
another company's intellectual property, we could be subject to an injunction or
be required to redesign our products, or to license such intellectual property
or pay damages or other compensation to such other company (any of which could
be costly). If we are unable to redesign our products, license such intellectual
property used in our products or otherwise distribute our products (e.g.,
through a licensed supplier), we could be prohibited from making and selling our
products. Similarly, our suppliers could be found to infringe another company's
intellectual property, and such suppliers could then be enjoined from providing
products or services to us.
In any potential dispute involving us and another company's patents or other
intellectual property, our chipset foundries, semiconductor assembly and test
providers and customers could also become the targets of litigation. We are
contingently liable under certain product sales, services, license and other
agreements to indemnify certain customers, chipset foundries and semiconductor
assembly and test service providers against certain types of liability and
damages arising from qualifying claims of patent infringement by products sold
by us, or by intellectual property provided by us to our chipset foundries and
semiconductor assembly and test service providers. Reimbursements under
indemnification arrangements could have an adverse effect on our results of
operations and cash flows. Furthermore, any such litigation could severely
disrupt the supply of our products and the businesses of our chipset customers
and their customers, which in turn could harm our relationships with them and
could result in a decline in our chipset sales or a reduction in our licensees'
sales, causing a corresponding decline in our chipset or licensing revenues. Any
claims, regardless of their merit, could be time consuming to address, result
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in costly litigation, divert the efforts of our technical and management
personnel and/or cause product release or shipment delays, any of which could
have an adverse effect on our results of operations and cash flows.
We may continue to be involved in litigation and may have to appear in front of
administrative bodies (such as the United States 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 is very broad and may include, for example,
monetary damages or fines or other orders to pay money, royalty payments,
injunctions on the sale of certain of our integrated circuit products (or on the
sale of our customers' devices using such products) or the issuance of orders to
cease certain conduct or modify our business practices. Further, a governmental
body in a particular country or region may assert, and may be successful in
imposing, remedies with effects that extend beyond the borders of that country
or region. In addition, a negative outcome in any such proceeding could severely
disrupt the business of our customers and their wireless operator customers,
which in turn could harm our relationships with them and could result in a
decline in our chipset sales or a reduction in our licensees' sales, causing
corresponding declines in our chipset or licensing revenues.
Our use of open source software may harm our business.
Certain of our software and our suppliers' software may contain or may be
derived from "open source" software, and we have seen, and believe that we will
continue to see, customers request that we develop products, including software
associated with our integrated circuit products, that incorporate open source
software elements and operate in an open source environment, which, under
certain open source licenses, may offer accessibility to a portion of our
products' source code and may expose our related intellectual property to
adverse licensing conditions. Licensing of such software may impose certain
obligations on us if we were to distribute derivative works of that software.
For example, these obligations may require us to make source code for the
derivative works available to our customers in a manner that allows them to make
such source code available to their customers or license such derivative works
under a particular type of license that is different than what we customarily
use to license our software. Furthermore, in the course of product development,
we may make contributions to third-party open source projects that could subject
our intellectual property to adverse licensing conditions. For example, to
encourage the growth of a software ecosystem that is interoperable with our
products, we may need to contribute certain implementations under the open
source licensing terms that govern such projects, which may adversely impact our
associated intellectual property. Developing open source products, while
adequately protecting the intellectual property upon which our licensing program
depends, may prove burdensome and time-consuming under certain circumstances,
thereby placing us at a competitive disadvantage, and we may not adequately
protect our intellectual property. Also, our use and our customers' use of open
source software may subject our products and our customers' products to
governmental and third-party scrutiny and delays in product certification, which
could cause customers to view our products as less desirable than our
competitors' products.
GENERAL RISK FACTORS
We operate in the highly cyclical semiconductor industry, which is subject to
significant downturns. We are also susceptible to declines in global, regional
and local economic conditions generally. Our stock price and financial results
are subject to substantial quarterly and annual fluctuations due to these
dynamics, among others.
The semiconductor industry is highly cyclical, volatile, subject to downturns
and characterized by constant and rapid technological change, price erosion,
evolving technical standards, frequent new product introductions, short product
life cycles and fluctuations in product supply and demand. Periods of downturns
have been characterized by diminished demand for end-user products, high
inventory levels, excess or obsolete inventory adjustments, underutilization of
manufacturing capacity, changes in revenue mix and erosion of average selling
prices. We expect our business to continue to be subject to such cyclical
downturns. Consequently, our revenues may decline, and our results of operations
and financial condition may be adversely impacted.
A decline in global, regional or local economic conditions, a slow-down in
economic growth, particularly in geographic regions with high concentrations of
wireless voice and data users or high concentrations of our customers or
licensees, could also have adverse, wide-ranging effects on our business and
financial results, including: a decrease in demand for our products and
technologies; a decrease in demand for the products and services of our
customers or licensees; the inability of our suppliers to deliver on their
supply commitments to us, our inability to supply our products to our customers
and/or the inability of our customers or licensees to supply their products to
end users; the insolvency of key suppliers, customers or licensees; delays in
reporting or payments from our customers or licensees; failures by
counterparties; and/or negative effects on wireless device inventories. In
addition, our customers' and licensees' ability to purchase or pay for our
products and intellectual property and network operators' ability to upgrade
their wireless networks could be adversely affected, potentially leading to a
reduction, cancellation or delay of orders for our products. Further,
inflationary pressure may increase our costs,
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reduce demand for our products or those of our customers or licensees due to
increased prices of those products, or result in employee attrition to the
extent our compensation does not keep up with inflation, particularly if our
competitors' compensation does.
Our stock price and financial results have fluctuated in the past and are likely
to fluctuate in the future. Factors that may have a significant impact on the
market price of our stock and our financial results include those identified
above and throughout this Risk Factors section, as well as: volatility of the
stock market in general and technology and semiconductor companies in
particular; announcements concerning us, our suppliers, our competitors or our
customers or licensees; and variations between our actual financial results or
guidance and expectations of securities analysts or investors, among others. In
the past, securities class action litigation has been brought against companies
following periods of volatility in the market price of their securities, among
other reasons. We are and may in the future be the target of securities
litigation. Securities litigation could result in substantial uninsured costs
and divert management's attention and our resources. Certain legal matters,
including certain securities litigation brought against us, are described in
this Quarterly Report in "Notes to Condensed Consolidated Financial Statements,
Note 5. Commitments and Contingencies."
Our business may suffer due to the impact of, or our failure to comply with, the
various existing, new or amended laws, regulations, policies or standards to
which we are subject.
Our business and products, and those of our customers and licensees, are subject
to various laws, rules and regulations globally as well as government policies
and the specifications of international, national and regional communications
standards bodies (collectively, Regulations). These include, among others:
Regulations affecting: patent licensing practices; antitrust, competition and
competitive business practices; the flow of funds out of certain countries
(e.g., China); cybersecurity; import and export regulations, such as the U.S.
Export Administration Regulations administered by the U.S. Department of
Commerce; protection of intellectual property; trade and trade protection
including tariffs; foreign policy and national security; environmental
protection (including climate change), health and safety; supply chain,
responsible sourcing, including the use of conflict minerals, and human rights;
spectrum availability and license issuance; adoption of standards; taxation;
privacy and data protection; labor, employment and human capital; corporate
governance; public disclosure; and business conduct. Compliance with, or changes
in the interpretation of, existing Regulations, the adoption of new Regulations,
changes in the oversight of our activities by governments or standards bodies,
or rulings in court, regulatory, administrative or other proceedings relating to
such Regulations, among others, could have an adverse effect on our business and
results of operations. See also the Risk Factors titled "Our business may suffer
as a result of adverse rulings in governmental investigations or proceedings,"
"Changes in our patent licensing practices, whether due to governmental
investigations, legal challenges or otherwise, could adversely impact our
business and results of operations," "A significant portion of our business is
concentrated in China, and the risks of such concentration are exacerbated by
U.S./China trade and national security tensions," "There are numerous risks
associated with the operation and control of our manufacturing facilities,
including a higher portion of fixed costs relative to a fabless model;
environmental compliance and liability; impacts related to climate change;
exposure to natural disasters, health crises and cyber-attacks; timely supply of
equipment and materials; and various manufacturing issues," and "Tax liabilities
could adversely affect our results of operations."
Regulations are complex and changing (which may create uncertainty regarding
compliance), are subject to varying interpretations, and their application in
practice may evolve over time. As a result, our efforts to comply with
Regulations may fail, particularly if there is ambiguity as to how they should
be applied in practice. Failure to comply with any Regulation may adversely
affect our business, results of operations and cash flows. New Regulations, or
evolving interpretations thereof, may cause us to incur higher costs as we
revise current practices, policies or procedures and may divert management time
and attention to compliance activities.
There are risks associated with our debt.
Our outstanding debt and any additional debt we incur may have negative
consequences on our business, including, among others: requiring us to use cash
to pay the principal of and interest on our debt, thereby reducing the amount of
cash available for other purposes; limiting our ability to obtain additional
financing for working capital, capital expenditures, acquisitions, stock
repurchases, dividends, general corporate or other purposes; and limiting our
flexibility in planning for, or reacting to, changes in our business, industries
or the market. Our ability to make payments of principal and interest on our
indebtedness depends upon our future performance, which is subject to economic
and political conditions, industry cycles and financial, business and other
factors, many of which are beyond our control. If we are unable to generate
sufficient cash flow from operations to service our debt, we may be required to,
among other things: refinance or restructure all or a portion of our debt;
reduce or delay planned capital or operating expenditures; reduce, suspend or
eliminate our dividend payments and/or our stock repurchase program; or sell
selected assets. Such measures might not be sufficient to enable us to service
our debt. In addition, any such refinancing, restructuring or sale of assets
might not be available on economically favorable terms or at all, and if
prevailing interest rates at the time of any such refinancing or restructuring
are higher than our current rates,
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interest expense related to such refinancing or restructuring would increase.
Further, if there are adverse changes in the ratings assigned to our debt
securities by credit rating agencies, our borrowing costs, our ability to access
debt financing in the future and the terms of such debt could be adversely
affected.
Tax liabilities could adversely affect our results of operations.
We are subject to income taxes in the United States and numerous foreign
jurisdictions. Significant judgment is required in determining our provision for
income taxes. We regularly are subject to examination of our tax returns and
reports by taxing authorities in the United States federal jurisdiction and
various state and foreign jurisdictions, most notably in countries where we earn
a routine return and the tax authorities believe substantial value-add
activities are performed, as well as countries where we own intellectual
property. The final determination of tax audits and any related legal
proceedings could materially differ from amounts reflected in our income tax
provisions and accruals. In such case, our income tax provision, results of
operations and cash flows in the period or periods in which that determination
is made could be negatively affected.
Tax rules may change in a manner that adversely affects our future reported
results of operations or the way we conduct our business. Most of our income is
taxable in the United States with a significant portion qualifying for
preferential treatment as FDII (foreign-derived intangible income). Beginning in
fiscal 2027, the effective tax rate for FDII increases from 13% to 16%. Further,
if U.S. tax rates increase and/or the FDII deduction is eliminated or reduced,
both of which have been proposed by the current U.S. presidential administration
and Congress, our provision for income taxes, results of operations and cash
flows would be adversely (potentially materially) affected. Also, if our
customers move manufacturing operations to the United States, our FDII deduction
may be reduced.
We have tax incentives in Singapore that require we meet specified employment
and other criteria. Although our profit in Singapore has declined as a result of
our 2018 restructuring and such tax incentives were not significant beginning in
fiscal 2019, failure to meet these incentive requirements through March 2022
could require us to refund previously realized material tax benefits for 2017
and 2018.
Further changes in the tax laws of foreign jurisdictions could arise as a result
of the base erosion and profit shifting (BEPS) project that was undertaken by
the Organization for Economic Co-operation and Development (OECD). The OECD,
which represents a coalition of member countries, recommended changes to
numerous long-standing tax principles related to transfer pricing and continues
to develop new proposals including allocating greater taxing rights to countries
where customers are located and establishing a minimum tax on global income.
These changes, as adopted by countries, may increase tax uncertainty and may
adversely affect our provision for income taxes, results of operations and cash
flows.

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