By Stephen Nellis and Chavi Mehta
(Reuters) -Qualcomm Inc on Wednesday forecast current-quarter sales and adjusted profits above Wall Street estimates, with executives saying they see supply constraints easing as smartphone buyers upgrade to 5G and former Huawei Technologies Co Ltd customers migrate to Qualcomm-chip phones.
Qualcomm (NASDAQ:QCOM) shares rose 5.4% to $144 in extended trading.
Qualcomm is the world's biggest supplier of smartphone chips, providing key components for 5G connectivity. The San Diego, California-based company has resolved protracted legal fights with regulators and regained iPhone maker Apple Inc (NASDAQ:AAPL) as a customer.
That has helped its shares rise 83% over the past year, beating the Nasdaq Composite Index's 64% gain, as investors bet Qualcomm will be a big winner in the global shift toward 5G telecommunications networks.
"Qualcomm is clearly benefiting from its 5G design win with Apple's iPhone12 and other Asian smartphones' OEMs," said Kinngai Chan, analyst at Summit Insights Group. Honor, Huawei's spin-off brand, has also contributed to this, he added.
Qualcomm forecast adjusted profits with a midpoint of $1.65 per share on revenue with a midpoint of $7.5 billion for its fiscal third quarter ending in June, compared with analysts' expectations of $1.52 per share on $7.11 billion, according to Refinitiv data.
For the fiscal second quarter ended March 28, Qualcomm had adjusted earnings of $1.90 per share on sales of $7.93 billion, compared with analysts' estimates of $1.67 per share on $7.62 billion, Refinitiv data showed. Wall Street estimates had been only slightly above the midpoints of Qualcomm's own guidance of $1.65 per share on $7.6 billion.
Qualcomm designs chips but relies on partners to manufacture them, such as Taiwan Semiconductor Manufacturing Co Ltd, Samsung Electronics (KS:005930) Co Ltd and China's Semiconductor Manufacturing International Corp.
Qualcomm executives said the company is investing with its manufacturing partners to secure capacity, "one of the key drivers of growth of expenses between the second and third fiscal quarter," Qualcomm Chief Financial Officer Akash Palkhiwala told Reuters.
"Supply remains tight within the chip industry but key chipmakers like Qualcomm (and Apple) have been able to navigate well as they are preferred customers" of chip contract manufacturers, noted Angelo Zino, senior equity analyst at CFRA Research.
Qualcomm has been aiming to gain smartphone chip market share after U.S. sanctions on Huawei Technologies Co Ltd last year all but cut off the Chinese company's chip supplies, rendering it unable to keep making smartphones. Qualcomm executives have said they expect much of Huawei's previous market share to migrate to other Android phone makers which use Qualcomm's chips.
Analysts believe the U.S. ban on Huawei has benefited Qualcomm's customers including iPhone maker Apple and other Asian phone makers.
Qualcomm sees the vacuum left by Huawei as "a tremendous opportunity in gaining market share, not just for the short term into fiscal 2022, but also for the longer term and beyond that," added Palkhiwala.
On a call with analysts, Qualcomm said sales of its mobile phone chips could grow by $10 billion as Huawei exits the market.
Those gains hinge on Qualcomm's ability to secure enough chips during a global supply crunch. Cristiano Amon, who will take over as chief executive in the coming months, told Reuters that Qualcomm can source its most profitable chips, the flagship Snapdragon 800 series of smartphone processors, from both Samsung and TSMC.
"We expect supply chain to improve significantly as we get to the end of the calendar year," Amon said in an interview.
Qualcomm has aimed to grow its chip business and improve margins as its once-lucrative patent licensing business shrinks after some changes to its licensing practices.
For the fiscal third quarter, Qualcomm forecast chip and licensing revenue with a midpoint of $6.05 billion and $1.45 billion, respectively, compared to analysts' estimates of $5.64 billion and $1.36 billion, according to FactSet data.
For the fiscal second quarter, chip and licensing sales were $6.28 billion and $1.61 billion respectively, versus FactSet expectations of $6.26 billion and $1.35 billion.
Qualcomm said handset chips sales were $4.07 billion, up 53% from a year ago, compared with a 79% gain in the previous fiscal first quarter. Sales of radio frequency chips, which Qualcomm has said will power revenue growth, were up 39% at $903 million, compared to a 157% year-on-year increase.