Qualcomm the Bearer of Bad News for Apple and BlackBerry

When do record revenues, beating analyst earnings estimates, and generating a 35% jump in operating income result in a 5% drop in share price? The mobile industry's chipmaking and licensing leader Qualcomm (NASDAQ: QCOM  ) can tell you firsthand: Follow up positive financials with a distressing outlook for the established mobile-device market. Not good news for Qualcomm, but its high-end manufacturers, such as Apple (NASDAQ: AAPL  ) and BlackBerry (NASDAQ: BBRY  ) with its new Z10 and Q10 offerings, could really feel the pain.

Quarterly recap
Qualcomm's fiscal Q1 was impressive by most measures, compared with last year's Q1 and sequentially, its own forecasts for the quarter, and analyst expectations. As CEO Dr. Paul Jacobs put it, "We are pleased to announce record quarterly revenues." Jacobs also let investors know Qualcomm was pleased to raise its guidance for the balance of its fiscal year.

On a non-GAAP basis (less one-time expenses and/or income), Qualcomm really hit it out of the park, generating $2.2 billion in net income -- a 32% improvement over the year-ago period -- on a 29% jump in revenues. Qualcomm's free cash flow for the quarter was also up significantly -- 24% versus 2012 to $1.85 billion.

Then, Qualcomm let the other shoe drop.

Did I say that?
For Qualcomm -- and ultimately Apple, BlackBerry, and Nokia (NYSE: NOK  ) -- what should have been a red-letter day turned bad, primarily because of its projected shipments of 3G and 4G devices in 2013, and the increasing pricing pressures this year will bring. Qualcomm expects a 15% increase in handset and data device deliveries this year compared with 2012, which sounds great for the industry as a whole. But upon further review, the estimates are good for some, not so good for others.

Qualcomm is not alone in projecting continued growth in the mobile industry in 2013, a recent study by research firm IHS came up with the same conclusion. Unfortunately for Apple and BlackBerry, nearly all the estimated growth in mobile devices is likely to come from emerging markets. Of the 15% growth Qualcomm projects this year, 13% of it will happen in emerging regions including China and Latin America. Japan, Europe, and North America -- the primary targets of high-end phone manufacturers -- will see a paltry 2% improvement in device shipments this year compared with 2012.

The impact
Assuming Qualcomm's device delivery projections are correct, companies offering inexpensive phones -- global sales volume leaders Nokia and Samsung, for example -- will have an edge in these crucial markets. Nokia's latest entry in the mobile-phone sweepstakes is its Asha 210, designed and priced for emerging markets, with built-in social media features, a keyboard, and an estimated $72 cost, without a contract.

Both Apple and BlackBerry have hinted at introducing lower-cost phones, though don't expect either to offer anything close to the Nokia and Samsung alternatives. BlackBerry CEO Thorsten Heins addressed the question last month, making it clear he has no intention of entering the low-cost phone market, saying, "This is not BlackBerry." Heins went on to say that he is open to addressing pricing concerns with lower-cost devices, recognizing that high-growth areas like India simply aren't going to drop $800 on a Z10, but don't expect a $72 Asha 210-like phone from BlackBerry.

If the rumors are true, and they abound, Apple is walking the same path as BlackBerry: shunning the $99 phone concept, and instead opting for a happy medium between affordable and remaining on the middle to high end of the market.

The concern with inexpensive phones and devices -- and Apple's felt this acutely of late -- is maintaining decent margins selling less expensive units. BlackBerry's 40% operating margin noted in its recent earnings release was a highlight of its quarter. Striking a balance between limiting market share growth and maintaining margins is a conundrum to be sure, but one that needs to be addressed.

Qualcomm's estimates for mobile device shipments in 2013 means Apple and BlackBerry have some serious decisions to make: decisions Nokia's already made, and acted upon.

Nokia's struggled in a world of Apple and Android smartphone dominance. However, Nokia continues to focus on emerging markets and has banked its high-end smartphone future on the next generation of Windows phones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.


Read/Post Comments (10) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2013, at 7:12 AM, unlockworldwide wrote:

    The article contains food for endless observation; let me address just one. In 1982 I saw our glass wall enclosed, air conditioned computer, cause of such endless reams of paper reports that the Amazon was decimated, replaced. The CFO had at his own expense, acquired an Apple. At the weekly management meeting he presented us with a single sheet of daisy wheel printed financial data.

    That revolution is about to die; at least in terms of what we refer to as the PC. Its demise is of course something of a misnomer; it lives on but inside our pocket. The device, even that $72 Nokia ASHA, is more powerful than that which took man to the moon. In the next decade, in South America (even Africa) it will revolutionise life, aspiration, income and the education of millions.

    Apple, as the tool of the games oriented nihilistic western youth, may well decline in global terms, but .......

  • Report this Comment On April 27, 2013, at 11:37 PM, PaulApp wrote:

    Western parents went bankrupt! What's that saying about their clueless children?

  • Report this Comment On April 27, 2013, at 11:39 PM, marv08 wrote:

    So, Apple and BB still keep smartphone margins around 40% without getting smaller, just growing slower.

    Nokia, whose last quarter operating margin for the entire "Devices and Services" segment was an abysmal 0.1%, is doing better, because they are adding even cheaper devices?

    Yeah, I agree, Nokia destroying itself is really bad news for Apple and BB... Not.

  • Report this Comment On April 28, 2013, at 12:13 AM, TIMNPAWC wrote:

    Blackberry has 6% of global smart phone market but only 2% of American market and upwards of >25% of some emerging markets.

    And the market, depending on who you ask will grow 4-7% this year.

    Blackberry is seeing a decrease in BB7 phones (lower margin) and an increase in BB10 phones(higher margin).

    Blackberry seems to be trending towards a recovery of users after releasing two phones in the first half of 2013 with another 3-4 devices due out in second half.

    There will be circa 200m smart phones sold this quarter. If BlackBerry sells only 4% of them, they will sell 8M phones, circa 3M BB7 phones and 5M BB10 phones. This would blow guidance out of the water and exceed analyst call and therefore push stock into short squeeze territory.

    I would think the Qualcomm data fits into the BlackBerry strategy, although possibly not Apples.

  • Report this Comment On April 28, 2013, at 12:53 AM, kenbestcali wrote:

    Apple fanboys are mostly unemployed. For such a great US corporation, Apple does not make anything here. But it does use Silicon Valley roads, airports, hospitals, schools ... without paying a penny.

    And keep the 140 billion it has oversea to avoid paying tax here.

  • Report this Comment On April 28, 2013, at 12:53 AM, yahoouser4529 wrote:

    BB and iphone both are outrageously overpriced with features that are no better than android phones. Both of them have small screens too. Thank God for Samsung that they started the innovation of large screen concept. It has changed the entire business model and all small screen sized phones that max out at 4 inches or close will see steady decline in business.

  • Report this Comment On April 28, 2013, at 1:06 AM, darthnatas wrote:

    ken, I am certainly no Apple fanboy, but let me educate you on something. Apple employs a huge number of people in America, all of whom pay taxes, and are not on the dole. Furthermore, tens of thousands of Apple shareholders pay taxes on their capital gains and dividends. Learn a little about how business works, and try not to focus too hard on how to get more "revenues" for the government to waste.

  • Report this Comment On April 28, 2013, at 1:06 AM, Snoopy2012 wrote:

    @kenbestcali - I am not wondering why you are worrying about apple paying the tax...you must be a free loader getting a SNAP card?

  • Report this Comment On April 28, 2013, at 1:22 AM, pwkrp wrote:

    @kenbestcali, you said does not make anything here. What about the computer they are building in the USA now. What about all the engineering and design work here in the USA, what about the 47K people they employ in the USA.

  • Report this Comment On April 28, 2013, at 9:48 AM, TIMNPAWC wrote:

    Infothathelp,

    I see you all over the Apple blogs saying how wonderful Apple is. Then you come over here to try to put down Blackberry. I assume you are young as your point of views are so outside reality, it is almost not worth replying. The problem is some people look to these blogs for information to support investing! Adults where investing is part of a plan to retire. You shouldn't mess with other people's lives.

    1.5M smart phones sold by BlackBerry for the quarter?

    Down from 6M the quarter before? After increasing production 3 times to MEET demand? If the next quarter shows not only not 1.5M but in fact at least 4x to 5x, will you please stop sending out such unhelpful blogs?

    Much appreciated

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