As anyone who has seen the crazy Black Friday lines at a Best Buy can vouch, consumers want their electronics to be as cheap as possible. Convincing the average Joe or Jane to spend extra money on a sleeker and/or more powerful piece of hardware is often easier said than done. But for Qualcomm's (Nasdaq: QCOM) shares to break out of their recent slump, management has to hope that consumers around the world are willing to do just that when it comes to high-end smartphones -- and preferably while buying from manufacturers other than Apple (Nasdaq: AAPL).
After getting investors' hopes up in late March with a positive earnings preannouncement for the latest quarter, Qualcomm brought them back down yesterday with an earnings report that featured underwhelming guidance. While the company's fiscal Q2 sales and adjusted earnings both topped analyst estimates, the midpoint of its fiscal Q3 sales and adjusted earnings guidance -- $2.6 billion and $0.53 per share, respectively -- falls short of expectations. At a time when the market was hoping that the estimates would be revised upward, those numbers are especially tough to stomach.
Pricing pressure remains tough
Just as troubling as the broader guidance numbers are some of the specific factors that seem responsible. The pricing pressure experienced by Qualcomm's chipset business in the second quarter doesn't appear to be letting up, with management talking about a "tougher competitor environment" during its conference call. Roth Capital's Arnab Chanda estimated that the average selling price (ASP) for Qualcomm's chipsets fell nearly 5% compared with the first quarter, to $16.62. And if trends keep up, his forecast of ASPs hitting $15.88 in calendar 2010, and $14.59 in calendar 2011, won't be far off the mark.
The ASP forecast for the wireless devices on which Qualcomm collects royalties (typically as a percentage of the device's selling price) was also uninspiring. While the guidance range of $182 to $188 for fiscal 2010 reflects an improvement on the dismal $181 figure given during the company's previous earnings report, the market was likely hoping for something better -- especially considering the $200 ASP reported for fiscal 2009 and the $219 reported for fiscal 2008. As Research In Motion (Nasdaq: RIMM) and Nokia (NYSE: NOK) can attest, the pricing pressure seen on low-end smartphones, as well as less powerful "feature phones," remains pretty strong.
Can Qualcomm turn things around?
If Qualcomm's going to see a reversal of fortune with its chipset and device ASPs, it's going to come on account of strong shipments of more powerful smartphones. Not only do these devices carry higher price tags, they often use more costly Qualcomm processors such as its Snapdragon chips. For example, Google's (Nasdaq: GOOG) Nexus One phone not only costs $529 unsubsidized, but, according to iSuppli, contains a Snapdragon chip that costs $30.50.
But investors beware: From Qualcomm's standpoint, not all high-end smartphones carry equal weight. Nokia's and Samsung's smartphones, for example, are believed to carry lower royalty rates. And the same also seems to apply to Apple's iPhone. According to analysts at Sanford Bernstein, Qualcomm doesn't receive iPhone royalties based on Apple's selling price, which was around $600 last quarter, but based on the price charged by contract manufacturer Foxconn to make the phone, a relatively paltry $244. And thus far at least, Apple has steered clear of using Qualcomm's chips inside of its phones.
So not only does Qualcomm need high-end smartphone shipments to take off, they need to be the right high-end smartphones to really give the company a boost. Given all the headwinds that Qualcomm is facing, and how well the iPhone is selling, that might be asking for too much.
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Fool contributor Eric Jhonsa doesn't have a position in any of the companies mentioned. Best Buy and Nokia are Motley Fool Inside Value recommendations. Google is a Rule Breakers choice. Apple and Best Buy are Stock Advisor recommendations. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.