It's time to get down to some serious earnings business with wireless-technology and fables-semiconductor supplier Qualcomm (NASDAQ:QCOM). The company will report its fiscal second-quarter earnings on Wednesday.

What analysts say:

  • Buy, sell, or waffle? Of the 35 analysts who follow and give an investment opinion on Qualcomm, 27 rate the company a buy, seven say sit tight and hold, and one lone analyst calls for a sell. Qualcomm also holds a three-star stock rating (out of a possible five) and sports more than 700 investor opinions in the Motley Fool CAPS community.
  • Revenues. On average, analysts predict 19.7% quarterly sales growth to $2.19 billion.
  • Earnings. Profits are predicted to rise 17% to $0.48 per share.

What management says:
In March, Qualcomm bumped up its guidance because of an increase in sales of cell-phone chips. It now expects to sell 60 million to 61 million chips, versus the 55 million to 57 million it previously anticipated. "We are expecting a particularly successful quarter, reflecting strong growth in chipsets, handsets, and applications and services, enabled by mobile broadband capabilities deployed around the world," says CEO Paul Jacobs.

Bolstering the good news is that its licensees, which include the likes of Motorola (NYSE:MOT), Palm (NASDAQ:PALM), and Sony (NYSE:SNE), are now reporting the sale of 91 million units that use Qualcomm's technology. According to Jacobs, those units came in "at an average selling price of approximately $214, compared to our prior estimate of approximately 82 [million] to 86 million units at an average selling price of approximately $217."

What management does:
While the increased guidance is great, the margin picture for Qualcomm doesn't look so good. The company has historically been an earnings powerhouse, with margins in the mid-30% range, but this number has been on a downward spiral over the past 18 months. While gross margins have remained very healthy at more than 71%, the company's ability to transition revenues into profits has been declining at a pretty steady rate.

Margins %

 9/05

   12/05

  3/05

  6/06

   9/06

  12/06

Gross

 71.0

   71.4

  71.6

  71.7

   71.6

   71.0

Operating

 41.6

   41.8

  42.5

  42.8

   42.2

   40.2

Net

 37.8

   37.4

  35.6

  33.8 

   32.8

   32.0
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
So what's the deal? Why does Qualcomm's business appear to be deteriorating? Well, this is where numbers don't tell the whole story. The fundamental business is not deteriorating, but expenses are going up. Innovation and development are a core part of any company that licenses intellectual property, and research-and-development costs will continue to increase as a result of the need for additional engineering resources. In fiscal 2006, Qualcomm devoted more than 20% of its revenue to R&D -- a massive increase over fiscal 2005. That 20% figure is huge, even for a technology company.

The other factor is that Qualcomm has been under increasing pressure from lawsuits and unfair-competition complaints in the U.S. and the European Union. In addition, recent debates have heated up between Nokia (NYSE:NOK) and Qualcomm concerning the legal terms in a license agreement. Qualcomm has been laying out serious money to fund legal teams and anticipates that costs in this area will reach $200 million in 2007. This situation has contributed to a dramatic rise in sales, general, and administrative expenses -- up a dramatic 76.9% in fiscal 2006 -- and with the Nokia legal battle still not resolved, these costs are expected to persist, so we will probably still see pressure on Qualcomm's net margins this quarter.

For more on Foolish telecom fun:

Palm is a Stock Advisor pick. Looking for recommendations to help you beat the market? Sign up for a 30-day free trial.

How does Qualcomm stack up in Motley Fool CAPS, our new investor-intelligence community? Find out for yourself, and add your opinion for free!

Fool contributor Dave Mock has crossed "kiss a llama" off his list of things to do before he dies. He owns shares of Qualcomm and Motorola. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.