Nokia Must Nail Revised Estimates or
Wireless Shares Could Get Hurt
By Tally Goldstein
Staff Reporter
10/18/00 4:49 PM ET
Wireless stocks have been on the ropes since market
leader Nokia (NOK:NYSE ADR - news) delivered an
unexpected blow in July when it announced third-quarter
earnings would fall short of expectations.
Now investors are anxiously awaiting final word, with
Nokia's results due Thursday, Oct. 26, on just how bad
the damage will be.
Nokia is expected to post third-quarter earnings of 15
cents per share, based on a First Call/Thomson
Financial survey of 24 analysts, and third-quarter
revenue of $6.29 billion ($7.15 billion euros), according
to Credit Suisse First Boston. That will be below
second-quarter earnings of 19 cents a share.
Before they hear from Nokia, though, wireless investors
will get a possible taste of what might be in store when
the industry's second-largest player, Ericsson
(ERICY:Nasdaq ADR - news), announces its results
Friday.
Ericsson is expected to post third-quarter earnings of 4
cents per share based on a First Call/Thomson
Financial survey of 25 analysts.
Both Nokia and Ericsson are expected to have soft third
quarters, although the fear is greater for Nokia, because
its revenue is far more dependent on handset sales. The
question is whether the bad news will be within
expectations and if the two companies can resist
springing any more surprises on the sector. Already,
several unexpected announcements have rocked
investors.
Motorola (MOT:NYSE - news) last week announced
earnings of 26 cents per share that were in line with
expectations. Then it turned around and gave negative
guidance for the fourth quarter and 2001, saying
revenue, operating margins and handset unit sales all
would be lower than expected.
This bad news was followed this week with the
announcement that Verizon (VZ:NYSE - news) and
Vodafone (VOD:NYSE ADR - news) have postponed
plans to float Verizon Wireless due to the weakness in
the sector. So far, analysts don't expect Nokia or
Ericsson to deliver up any big surprises. Then again,
they weren't expecting Motorola to serve up so much
bad news, either. The worry is that if they do go the
Motorola route, depressed wireless shares will get
pummeled further.
"If Nokia pulls a Motorola, there will be a big downturn,
says Chase H&Q analyst Ed Snyder. But I expect
Nokia's performance and guidance to [both] be fairly
bullish.
A big downturn would be crushing, considering the
beating some wireless shares have taken. Motorola is
down 57% on a year-to-date basis, Nokia is off 35% and
Ericsson is down 16%. Vodafone, which is the world's
largest wireless company, is down 26% for the year.
While Nokia and Ericsson each are expected to post
third-quarter declines in operating margins, analysts say
the market shouldn't panic if those declines are confined
to management estimates. The companies have both
indicated that the fourth quarter will be better than this
quarter, notes Mirva Antilla of Josephtal & Co.
"Everyone knows the third quarter is going to be pretty
bad," she says, adding that summer is a typically quiet
season for handset sales.
Nokia spent last quarter drastically cutting prices on
older, less-than-snazzy mobile-phone models, which
means investors can expect the world's largest handset
manufacturer to report a temporary dip in quarterly
profits. Analysts expect operating profit margins to have
dropped to about 18% in the third quarter, but forecast
that they will rebound to at least 20% next quarter with
the introduction of sleeker, higher-priced products.
If Nokia's profit margin dropped to 17% in the third
quarter or fails to bounce back by year-end, then there
will be cause for concern, says Snyder of Chase H&Q,
who adds that he sees no reason to believe that this will
be the case. The company should post unit volume
sales of about 31 million this quarter. "Anything more
would be gravy; anything less will have people
wondering," he says. [Chase hasn't performed
underwriting for the company.]
While Nokia prepared investors in July for a dip in
profits, it also promised to boost market share, which is
increasingly important as Asia-based competitors gear
up for a stronger presence via products sporting
next-generation technologies, explains Pete Peterson of
Prudential Securities.
"We're in a significant period of flux, where the old world
is being turned on its ear," he says. "If Nokia doesn't
take [the market share] now, the Asians will." Nokia is
expected to own 32% of the market by year-end, up
from 28% last year, he says. [Prudential hasn't
performed underwriting for the company.]
Handset sales account for only about 20% of revenue at
Ericsson, which is primarily a wireless
infrastructure-equipment manufacturer and the industry
leader in upgrading current networks. But that division's
performance will be closely watched.
"If you're losing money for many quarters, it tends to
pose a question about the validity of that business and
whether you can make it effective and profitable," says
Josephtal's Antilla. Ericsson's handset unit has been
suffering for nearly two years due to an outdated product
line.
Analysts predict operating losses in its handset division
to worsen in the third quarter, possibly hitting (-37%).
The division, however, could see a turnaround next year,
due in part to an outsourcing agreement with
Taiwanese-based Arima, which will manufacture
Ericsson's low-end handsets, Antilla explains.
Sixty percent of global handset sales are entry-level
products, according to Bo Albertson, marketing director
with Ericsson's mobile-communications division. There
have long been rumors that Ericsson might sell its
handset unit, but Antilla says the company recognizes it
as a strategic asset and is actively working to turn it
around. [Josephtal hasn't performed underwriting for the
company.]
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