Qualcomm: What's Not to Like?

Not one to spoil a wireless party, Qualcomm (Nasdaq: QCOM) outshined recent positive earnings from the likes of Motorola (NYSE: MOT), SprintPCS (NYSE: FON), and Nextel Communications (Nasdaq: NXTL) with its fiscal third-quarter report after the bell yesterday. The company earned $486 million on $1.3 billion in revenue, yet again surpassing the most optimistic estimates from analysts.

The increase in sales helped generate $386 million in free cash flow for Qualcomm. On its way to Microsoft (Nasdaq: MSFT)-like largesse, Qualcomm now sits atop $7 billion in cash or equivalents, enough to easily fund a dividend of $0.14 per share.

The standout quarter continues a surge of strong growth that the wireless technology provider has enjoyed over the last year. And the party won't be ending anytime soon, according to the outlook of the company's management. With rosy predictions for the next quarter, Qualcomm estimates its fiscal 2004 revenue could be 35% ahead of last year's takings. Even better, profits should be up by a whopping 50%. Few other companies can claim this level of growth, save for many of Tom Gardner's Hidden Gems.

The fuel for Qualcomm's rapid growth? Its patented CDMA technology is spreading faster than California wildfires in summer. With many network operators around the world recently loosening purse strings to upgrade networks, Qualcomm is benefiting from the move to a new generation of wireless services.

In addition to Verizon Wireless' (NYSE: VZ) and SprintPCS' adoption of its high-speed 1xEV-DO technology, many European operators are also now moving quickly into third-generation (3G) services for which Qualcomm also earns royalties. This alternative flavor of 3G -- called WCDMA -- accounted for 25% of Qualcomm's $436 million in royalties this quarter. Going forward, management estimates that WCDMA will account for an increasing portion of its business.

Information in Qualcomm's earnings release also points to a new growth cycle in the budding stages -- the average selling price (ASP) of mobile phones using its technology is actually increasing. Normally, ASPs decline by roughly 10% per year as designs mature and competition increases. Growing ASPs indicate consumers are beginning to adopt a new generation of advanced phones in large numbers.

Classic "hockey stick" growth patterns tend to reach their critical growth phases soon after this early adoption phase gives way to adoption en masse. With a solid position in the most popular forms of 3G technology, Qualcomm is in a sweet spot.

Party on with Tom Gardner in a risk-free trial to his Hidden Gems .

Fool contributor Dave Mock wonders whether any company has ever counted a POG collection as cash equivalents. He owns shares of Motorola and has authored the corporate biography The Qualcomm Equation .