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 (NYSE:BB) with its new Z10 and Q10 offerings, could really feel the pain.
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.
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.
Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple and owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.