Updated from July 21

The wireless industry's hot streak continued Wednesday with a strong quarter out of Qualcomm ( QCOM).

For its third quarter ended June 30, Qualcomm reported a profit of $486 million, or 58 cents a share. That's up from the year-ago continuing operations profit of $241 million, or 30 cents a share. Revenue rose to $1.34 billion from $891 million a year earlier.

Analysts had expected third-quarter earnings of 53 cents a share on sales of $1.3 billion.

The company also raised 2004 earnings and revenue guidance, citing stronger-than-expected demand for its wideband-CDMA wireless chipsets and software. In early trading Thursday, Qualcomm rose 2%.

The San Diego-based digital wireless company boasts a firm claim on technology patents, and therefore a dominant position in the code division multiple access, or CDMA, market. The company collects royalties on all CDMA phone sales and additional fees from licensing of patents.

"The CDMA market continues to exhibit impressive growth as more subscribers are enjoying the benefits of third generation CDMA networks throughout the world," said CEO Irwin Jacobs. "Record demand for our chipsets and stronger than expected WCDMA sales are driving higher revenues and earnings."

Qualcomm rose $1.28 Thursday to $68.96. The stock has retreated modestly since last week's stock split and dividend boost, which came just two weeks after the stock hit a 52-week high of $73.50.

Qualcomm forecast earnings of $2.12-$2.15 for 2004, up from $1.01 last year. The company expects revenue to rise 34%. Qualcomm also sees 2004 industrywide CDMA market handset sales of around 165 million units, with average selling prices rising some 8% to $209.

For the year, Wall Street analysts expect earnings of $2.06 a share on revenue of almost $5 billion.

The CDMA standard is the fastest-growing one in the market today, favored as it is by big players such as Verizon Wireless and Sprint ( FON). The growth in the CDMA market has enabled Qualcomm to raise financial guidance and boost its dividend repeatedly in the last year.

Surprise

Some industry observers were pleasantly surprised that Qualcomm boosted guidance for average phone selling prices, to $209 from the previous $195. Typical industry trends call for a slow and steady 10% annual decline in average selling prices.

"This is amazing, especially considering they were weak in Korea," where handset prices are the highest, says one Wall Street analyst who asked not to be named.

Fueling Qualcomm's sunnier outlook was the fact that the company benefited from increased demand for phones with advanced chips. With more telcos moving to so-called third generation (or 3G) wireless networks, Qualcomm saw 3G sales reach a quarter of its total revenue, according to one analyst.

Qualcomm collects royalties off all CDMA phone sales and with more advanced phones coming to the market, investors and analysts expect those high-margin royalties to grow significantly.

"Average phone prices are about $200, but the 3G phones sell for about $400. If Qualcomm takes the same royalties that's going to be a big jump and it goes right to the bottom line," says another analyst who asked not to be named.

Questions

Still, in recent quarters the downside of the CDMA adoption trend has come to light, unavoidable though it may be: Qualcomm has had to deal with shortages of popular chips.

In May, the company addressed growing concerns among analysts thatin order to compensate for a shortage of older, cheaper 5000-series chips, Qualcomm had been filling orders with newer, more expensive 6000-series chips.

The substitution showed up when the company reported March quarter earnings in April. One of the few weaknesses in an otherwise solid tally sheet was a 5% drop in the average price of chips, both sequentially and year over year. Analysts say the dip was a function of selling 6000-series chips at 5000-series prices.

The shortages started to crop up just as Qualcomm was facing serious competition for the first time. Rivals such as Sony Ericsson, Samsung and Texas Instruments ( TXN) have fashioned independent versions of CDMA chips and have been building them into their own phones and those of Nokia ( NOK) and LG.

Of course, as the last week has made clear, supplying chips for Nokia handsets isn't the surefire winner it once was. And even strong quarters haven't always been applauded by investors, as Nextel ( NXTL) fans can attest after Wednesday's 5% selloff.

In any case, investors will again be keeping an eye on pricing issues Wednesday to make sure Qualcomm has the situation in hand.

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