The outlook is good for the sector to continue to perform well overall, as the "smart mobility" movement is still young.

Strong growth in smart mobile devices — primarily smartphones, tablets and e-readers — continued to drive the communications equipment sector in 1Q 2011. The sector includes a broad spectrum of "winners" and "losers" because the market has been unforgiving to those companies that have been slow to react to innovation by sector leaders.

Sales, income and spending all increase

The accompanying chart shows that for the trailing 12 months ending in 1Q 2011, the sector had the largest median value of any sector for operating income ($1.9 billion) and the second-highest YOY growth rates in median operating income (70%), sales (34%) and operating margin (21%).

Also notable are increases in capital expenditures (capex) and R&D spending. Capex spending in 1Q 2011 grew 23%, while R&D spending rose 44%. Free cash flow, meanwhile, dropped 72%. These changes are likely the result of intense investment in tablets, smartphones and other mobile devices as companies try to catch up with the market's leading innovators.

Key performance indicators for communications equipment (median value), 1Q11

Outlook for communications equipment

The outlook is good for the sector to continue to perform well overall, as the "smart mobility" movement is still young. Unfortunately, the declining companies remain challenged for the short term, at least, until the market validates or rejects their responses to the leading innovators.

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