iPhone, Galaxy S3 Drive Chipmaker Qualcomm's Profits

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What's good for the iPhone 5 and other smartphones using 3G and 4G technology is good forQualcomm ( QCOM ), the San Diego-based chip powerhouse for the cellphone market.

The company's dominant position in new-generation cellphone technology gives it a wide lead over other chip rivals, at least for the next year, says Canaccord Genuity analyst Michael Walkley.

"Basically, Qualcomm has limited or no competition," he said.

The iPhone 5, launched in late September, isApple 's ( AAPL ) first smartphone using new 4G LTE technology, which wireless phone companies are starting to adopt for next-generation high-speed networks.

Qualcomm supplies Apple with the baseband processor to help in the regular blocking and tackling functions of a call.

These chips are lower priced than Qualcomm's integrated Snapdragon processors, which combine multiple functions in one chip.

But the average selling price is 70% to 80% higher than for iPhone 5's predecessor, the iPhone 4S, Walkley says. "From our checks, we've seen unbelievable demand," he said of the iPhone 5.

Fast LTE

He attributes strong demand to the faster, next-generation LTE technology and the bigger screen.

"With LTE, it has much faster downloads and uploads and activity speeds," he said.

Walkley, who covers both Apple and Qualcomm, thinks Apple will sell 50 million iPhones in the three months ending in December.

That would surpass the 37 million iPhones sold during the same period last year, when the iPhone 4S was in launch mode, he says.

Besides chip sales to the handset market, Qualcomm gets a cut on 3G and 4G handset sales, whether it has a chip in the phone or not. That's because of its work in developing the technology.

Licensing fees accounted for 36% of Qualcomm's revenue in the third fiscal quarter ended in June, but about two-thirds of operating profit.

Qualcomm will be selling chips into plenty of other high-end and low-end 3G and 4G handsets, including Android smartphones fromMotorola (MOT), South Korea's electronics and appliance firm LG and HTC, the Taiwanese manufacturer of smartphones and tablets.

HTC is a big player in China's low-priced, unbranded "white box" market.

Analysts also highlight Qualcomm's content sold into many, but not all, of the hot new Samsung Galaxy S3 smartphones.

Qualcomm is growing sales into 3G handsets in emerging markets, such as China as the market transitions from 2G to 3G technology.

China's 800-million 2G handset market is slowly moving to 3G. That's good for Qualcomm, since it doesn't get licensing revenue from 2G phones.

"Right now, the wireless market is bifurcated with the high end and low end doing well," said Mike Burton, analyst for Brean Murray Carret. He points to Apple and Samsung winning on the high end with their lineups "and the rest."

Sterne, Agee & Leach analyst Vjay Rakesh says the overall smartphone market is growing 25% to 30% annually.

"Qualcomm is the supplier to the guys that are really growing, which are Apple, Samsung and China," he said. "And there's a whole group of other OEMs (original equipment manufacturers) moving to 4G that will be attractive opportunities for Qualcomm. 4G is in the beginning stages."

Qualcomm got a leg up on rivals because it started investing heavily in next-generation technology in 2007, Walkley says.

But others will eventually narrow Qualcomm's lead, analysts say.

Qualcomm President Steven Mollenkopf told analysts in the Q3 conference call that while many companies are still commercializing their first LTE products, "we have already announced our third-generation LTE chip sets."

He said the company will continue investing to maintain its lead.

In the last quarter, Qualcomm spent $832 million on research and development, or 18% of revenue.

Chip rivalsBroadcom ( BRCM ),Intel ( INTC ) and MediaTek "are chasing the 3G market" but Qualcomm leads in 3G and 4G technology, Rakesh says.

Qualcomm's revenue in Q3 rose 28% over the year earlier to $4.63 billion but was down 6% from Q2. Earnings year-over-year rose 16% to 85 cents a share.

Supply constraints in 28-nanometer chip sets, which include high-end Snapdragon processors, have been easing as four foundries ramp production. Management expects sufficient-enough supply to enable a "strong December quarter."

The company's Q4 guidance calls for revenue of $4.45 billion to $4.85 billion vs. $4.12 billion last year.

Earnings Growth

Analysts polled by Thomson Reuters see Q4 profit rising 3% over last year to 82 cents, but see full-year earnings up 14% to $3.65.

Qualcomm will report Q4 and full-year results Nov. 7.

"Q3 and Q4 are generally the best time of the year for handset sales," Burton said.

Investors will be closely watching management's guidance for fiscal 2013. "This is always the big quarter because the focus is on next year," Walkley said.

Besides handsets, there's more growth seen ahead for Qualcomm in tablets, especially asMicrosoft ( MSFT ) launches its new Windows 8 operating system starting Oct. 25. Qualcomm has been named a qualified supplier on Windows 8.

"Qualcomm is very well positioned in the handset market, and the tablet market will definitely be an opportunity with Windows 8," Rakesh said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAPL , BRCM , INTC , MSFT , QCOM

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