The economy and your next mobile phone

On Wednesday, Qualcomm -- like every other company that can afford two sheets of paper for a quarterly earnings report -- said that though economic times are bad, the company is well-positioned to be even stronger when things look up.

But in an era of complicated supply chains and tricky R&D cycles, what does that even mean right now?

Here's the situation from where Qualcomm sits at the moment: The company reported Q1 GAAP revenues of $2.52 billion, up 3% year-over-year and down 25% sequentially. Net income was $341 million, down 56 percent year-over-year and 61 percent sequentially. Diluted earnings per share was 20 cents (pro forms EPS 31 cents), down 57% year-over-year and 62% sequentially. The company lowered 2009 revenue estimates to between $9.3 and $9.8 billion, down from $10.2 and $10.8 billion.

Now, let's look beneath those declining guidance numbers, which were not altogether unexpected.

The mobile phone in your pocket is, of course, not just something you bought from the service provider who owns or manages the network, or even from the handset manufacturer whose logo is above the screen. There's commerce represented there from all through the supply chain, from software developers to chipset creators to the miners of the raw materials that comprise the gear. So when, for instance, market leader Nokia announces that it did far worse during the crucial holiday season than expected, it's not just about Nokia's business, or just about the quarter at hand.

The first thing that comes to life in these situations is butterflies -- lots of them in the guts of the companies that form the supply chain that leads to the kiosk where you pick out your next phone. A number of companies are doing their very best to avoid quantifying their situations right now; Qualcomm, for instance, wouldn't even offer earnings-per-share guidance to analysts.

You've seen a lot of layoffs so far, but oddly enough that might begin to slow down for certain links along the chain. Most tech companies have by now announced and started staff reductions, canceled capital investment projects, carved off chunks of flabby-looking divisions and projects, and eschewed stock buybacks or other capital-investment projects. They've already done what they can do, in other words, to brace for a very bumpy ride.

They also, as Carmi Levy (senior vice president of strategic planning at AR Communications and Betanews' reliable analyst pal) notes, are reducing inventory -- Qualcomm, which contracts out the actual production on most of its chips, says it'll be down to 14 weeks' worth of inventory on hand by year's end. Some companies shutter entire plants; Sony announced as many as six closures on their call last week, and Nokia's put forth closures twice in as many phone calls.

But that can be dangerous too. "Smartphones are significantly less commodified than more basic feature phones. They use more customized parts, and are more likely than basic handsets to incorporate unique technologies," says Levy. "This places additional risk on smartphone vendors who rely on fewer, more specialized providers than handset makers that just churn out run-of-the-mill phones. What it means is that smartphones -- which represent the one remaining bright light in a handheld market that's increasingly awash with the blood of struggling vendors -- are even more vulnerable to supply-chain disruptions as a result of suppliers cutting back or, in a worst-case scenario, disappearing altogether."

One analyst on Qualcomm's call asked if channel inventories are ever going to rise up from recessionary levels -- if super-low inventories might just be the new way of life. Qualcomm execs said that was certainly possible, but (as one put it) "all participants would have to improve their efficiencies -- anticipating needs and cycling though [inventory] more efficiently than they have in the last several years."

It's tricky to mess with inventory levels, Levy concurs. "As bad as a protracted slowdown can be, a near-term turnaround poses risks of its own. Vendors that are overly reliant on suppliers that can't efficiently ramp up their production when the economy turns for the better will be left by the sidelines as their assembly lines stand idle, waiting for components that may never arrive."

He continues, "Agility is an increasingly critical skill set for any player anywhere along the supply chain. While it's a given that financial stability will allow most of them to survive the downturn, only those that can go from near-dormant to full-speed in the minimum amount of time will be able to capture the opportunity in a reawakened market. Vendors must redouble their due diligence now to identify who those vendors are, and align with them to ensure they're ready when the time comes."

Next: Steering clear of commodification...