April 23 (Bloomberg) -- Qualcomm Inc., the biggest maker of mobile-phone chips, reported a 5.5 percent rise in second-quarter profit and increased its annual forecast as its customers expanded their market share.

Net income climbed to $766 million, or 47 cents a share, from $726 million, or 43 cents, a year earlier, San Diego-based Qualcomm said today in a statement. Sales advanced 17 percent to $2.61 billion in the period ended March 30.

Qualcomm, which gets most of its profit from licensing phone technology, is benefiting from gains by customers such as LG Electronics Inc. and Samsung Electronics Co. Still, the company didn't announce any progress in a technology-licensing dispute with Nokia Oyj, the biggest mobile-phone maker. Qualcomm isn't reporting license revenue from Nokia while the sides negotiate.

``They indicated that there hasn't been any progress and that will disappoint some people,'' said John Lau, an analyst for Jefferies & Co. in New York. He recommends buying Qualcomm shares, which he doesn't own. ``They raised the guidance and the numbers were excellent.''

Qualcomm dropped 90 cents, or 2.2 percent, to $40.99 in extended trading after the report. The shares, up 6.5 percent this year, had risen 34 cents to $41.89 on the Nasdaq Stock Market.

Company Forecast

Profit this quarter will be 41 cents to 43 cents a share, Qualcomm said. The company projected sales of $2.5 billion to $2.7 billion. Analysts had predicted a profit of 46 cents and sales of $2.47 billion, the average of estimates in a Bloomberg survey.

Qualcomm forecast annual revenue of $10 billion to $10.4 billion, up from an earlier prediction of as little as $9.6 billion. Profit will be $1.71 to $1.76 a share, compared with an earlier forecast of at least $1.67.

South Korea's LG Electronics, one of Qualcomm's largest customers, beat first-quarter earnings estimates last week by posting a 54 percent increase in phone shipments. It forecast an additional rise of 20 percent this quarter from the last period.

That outlook contrasted with earnings reports from Nokia and its main chip supplier, Texas Instruments Inc., which fell short of some estimates. Texas Instruments cited weaker-than-expected European demand for third-generation, or 3G, phones.

``There's a market share shift in 3G away from Nokia,'' said Jefferies's Lau.

Higher Prices

At Qualcomm, increasing demand for 3G phones is boosting royalty fees, Chief Operating Officer Steve Altman said in an interview. The phones are more expensive than older models, which translates into higher commissions for Qualcomm.

``Some handset companies are seeing declines in growth, whereas others, including our customers, are seeing increased demand,'' Altman said. ``In an economy that's somewhat in question, we're out here raising our guidance.''

In January, Qualcomm had forecast second-quarter profit of 42 cents to 44 cents a share on sales of $2.4 billion to $2.5 billion. That compared with an average analyst estimate of 47 cents in profit and $2.49 billion in sales.

Qualcomm gets the majority of its revenue from semiconductor sales and the bulk of profit from licensing its code division multiple access, or CDMA, technology. Handset makers, phone service providers and producers of system equipment use CDMA.

Nokia has refused to pay for some Qualcomm technology, calling the licensing fees unfair. The disagreement has led to patent-infringement lawsuits on both sides.

The companies decided to put most of those suits on hold in February while a Delaware judge resolves some of their licensing issues. Qualcomm executives also have said they would consider a spinoff of the company's chipmaking division if that would help resolve the legal challenges.

``We've had a number of settlement talks with them, and I am not optimistic we've made any progress,'' Altman said.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

Last Updated: April 23, 2008 20:15 EDT