Qualcomm supply constraints to limit revenue

NEW YORK Wed Apr 18, 2012 7:49pm EDT

NEW YORK (Reuters) - Qualcomm Inc (QCOM.O) warned on Wednesday that it will have trouble meeting demand for some of its advance cellphone chips for the rest of the year due to manufacturing constraints and that will increase operating expenses faster than expected.

While the leading mobile phone chip maker maintained its previous revenue outlook for its fiscal year 2012, its shares fell 3 percent as investors had hoped it would be able to raise its targets.

"At this stage we cannot secure enough supply to meet the increasing demand we are experiencing," Chief Executive Paul Jacobs told analysts on a conference call, adding that the issue would limit revenue growth this year.

The San Diego-based company not see a significant improvement in supply until the December quarter as it will take a few quarters to get up and running with new suppliers for the cutting edge 28 nanometer chip manufacturing technology along with TSMC (2330.TW), the world's top contract chipmaker.

Chief Financial Officer Bill Keitel said he is now planning for a 23 percent increase in operating expenses this year, up from the 18 percent rise he forecast three months ago mostly because Qualcomm is looking to alternative suppliers. The shortage is costing "tens of millions" extra, he said.

"Demand went so far ahead of availability that we've decided to start spending more money to get more supply as soon as possible," he told Reuters. "Any time we can't make a customer totally happy I'm going to worry. You don't want to give a customer a reason to go elsewhere."

However, Keitel noted that rivals are also complaining about 28 nanometer shortages. Nvidia Corp (NVDA.O) last month warmed of delays in ramping up of the new manufacturing technology.

Bernstein analyst Stacy Rasgon said Qualcomm's forecast for third quarter chip shipments of 144 million to 152 million also fell below his expectation for 157 million.

But while investors were disappointed by the current quarter numbers, they were relieved that the problem is not related to any weakening in end-customer demand, analysts said.

"Given that it's supply related and not demand related the shares will rally back," said Canaccord Genuity analyst Michael Walkley, who expects a "nice recovery" for Qualcomm by the end of the calendar year 2012.

LTE IMPLICATIONS

However, since the chips that are in short supply are used for the latest high-speed cellphones based on Long Term Evolution (LTE) technology Bernstein's Rasgon said it could lead to a slowdown in the roll out of the most advanced LTE phones.

For example, analysts widely expect Apple Inc (AAPL.O) to come up with its first LTE phone later this year. Rasgon would not comment on Apple specifically but said the supply shortage could hurt LTE progress in general.

"There are implications here," the analyst said.

Qualcomm kept its target for full-year revenue even as it raised its earnings per share forecast to a range of $3.61 to 3.76 from its previous range of $3.55 to $3.75.

Keitel would not give an estimate as to how much extra revenue and earnings the company was missing out on because of the constraints.

The company posted a profit of $2.23 billion or $1.28 per diluted share for its second fiscal quarter ended March 25, compared with $999 million or 59 cents per share in the year-ago quarter.

Qualcomm said revenue rose 28 percent to $4.94 billion from $3.87 billion in the year ago quarter and handily beat Wall Street expectations for $4.84 billion, according to Thomson Reuters I/B/E/S.

Qualcomm shares fell to $64.74 in late trade after closing at $66.98 on Nasdaq.

(Reporting By Sinead Carew and Noel Randewich; editing by Carol Bishopric and David Gregorio)