Qualcomm Shares Drop on Lower Forecast

Qualcomm Sales, Profit Predictions Fall Short of Some Estimates
Attendees mingle in the Qualcomm Inc. booth at the 2012 International Consumer Electronics Show (CES) in Las Vegas. Photographer: Daniel Acker/Bloomberg

Qualcomm Inc., the largest maker of mobile-phone semiconductors, declined the most in eight months after its third-quarter forecasts fell short of some analysts’ estimates on increased spending to bolster chip output.

Sales for the period ending in June will be $4.45 billion to $4.85 billion, the San Diego-based company said in a statement yesterday. Analysts on average estimated $4.81 billion, according to data compiled by Bloomberg. Net income will be 67 cents to 73 cents a share, Qualcomm said, compared with the average prediction of 77 cents.

Qualcomm’s operating expenses surged 41 percent to $3.43 billion in the second quarter, outpacing sales gains, as the company spent more on production to meet demand for new types of advanced chips. Qualcomm can’t get enough supply from its existing manufacturer and is seeking additional output, Chief Executive Officer Paul Jacobs said in an interview.

“Qualcomm has some of the best designs on the planet, but they don’t have control of their manufacturing,” said Gus Richard, an analyst at Piper Jaffray Inc. “These guys killed it in design wins and they need a lot of volume. They can’t get that volume.”

The stock dropped 6.6 percent to $62.57 at the close in New York for the biggest decrease since Aug. 8. The shares had advanced 14.4 percent this year before today.

Before today, the stock’s 22 percent increase this year was more than double the gain in the Standard & Poor’s 500 Index, and outpaced the 15 percent rise in the Philadelphia Semiconductor Index, which investors use to track the performance of chip-industry stocks.

Second Quarter

Net income in the second quarter, which ended March 25, was $2.23 billion, or $1.28 a share, compared with $999 million, or 59 cents, a year earlier. Sales rose 28 percent to $4.94 billion. Analysts on average had predicted earnings of $1.10 a share and sales of $4.84 billion.

Mobile-phone shipments are estimated to reach 1.7 billion in 2012, a gain of 8.2 percent from 2011, according to IDC. Smartphone shipments, a subset of the mobile-phone market, will surge 33.5 percent, the market researcher predicts.

Qualcomm, like other chipmakers, relies on so-called foundries in Taiwan such as Taiwan Semiconductor Manufacturing Co. to build its chips.

The company is spending to get its latest chips made by new suppliers, Jacobs said yesterday. Extending production to new manufacturers requires Qualcomm to invest in adapting its designs to their production, increasing operating expenses, he said.

Strong Demand

The shortfall reflects heavy demand and hasn’t been caused by manufacturing glitches, Jacobs said. Output should be able to meet demand by the calendar fourth quarter, he said.

“It’s painful not to be able to supply all of the chips your customers ask for,” Jacobs said.

Qualcomm sells baseband chips, which connect phones to cellular networks, to wireless device makers, including Samsung Electronics Co., Apple Inc. and HTC Corp. Those companies account for more than 30 percent of Qualcomm’s sales, according to a Bloomberg supply-chain analysis.

Even with the supply constraints, Qualcomm maintained its forecast that revenue will be $18.7 billion to $19.7 billion for the fiscal year ending in September.

“The rest of this year would have been a lot stronger if not for our inability to get the product to some of our customers,” Chief Financial Officer Bill Keitel said in an interview. “You’ve got to make your customers happy every day. It worries me when we don’t.”

The company is also expanding into the market for application processors, the chips that run programs in phones and tablet computers, and will be supplying its Snapdragon processors to computer makers using the new version of Microsoft Corp.’s Windows software.

Qualcomm’s licensing revenue, which provides more than 70 percent of its profit, is calculated as a percentage of the average selling price of phones. That income accrues regardless of whether device makers use the company’s chips.


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