Smith Barney - 3:16pm - Buy QCOM
Salomon Smith Barney ~ June 26, 2000
Telecommunications Equipment
Worldwide Sub Growth and Handset Demand Tracking In-Line
June 26, 2000 SUMMARY
* This morning we hosted a call with several of our
Alex M. Cena tech team analysts to discuss the current global
wireless subscriber & handset markets.
* We continue to recommend co's in the wireless
Karen O. Nielsen equipment sector, such as NOK to exploit growth in
mobile phones in both near- & long-term as well as
upcoming 3G infrastructure contract awards in Europe,
Thomas Robillard JR while ERICY, NT & QCOM should be huge beneficiaries of
the migration to 3G technologies.
* There appears to be a rebalncing in supply/demand for
certain components. On the handset demand side, there
seems to be some pockets of weakness; however, there
also appears to be pockets of strength.
* We are making no changes to our ratings or estimates.
* In summary, we remain confident that the growth in
mobile phones should meet or exceed 425 million units
this year. In fact, we would use the turbulent summer
period to build positions in the wireless industry.
OPINION
This morning Salomon Smith Barney hosted a conference call with several of
our global technology analysts, including ourselves, to discuss the current
global subscriber and handset markets. Below is a summation of our prepared
remarks.
We continue to recommend companies in the wireless equipment sector
companies such as Nokia in order to exploit the growth in both mobile phones
on a near-term and long-term basis as well as the upcoming infrastructure
awards for 3G wireless networks in Europe while Ericsson, Nortel and
Qualcomm should be huge beneficiaries of the migration to 3G wireless
technologies by existing and new wireless carriers. In fact, we believe the
remainder of the year and the early part of next year will be characterized
by rapid acceleration in orders for the construction of 3G wireless networks
in Europe followed by the recognition of the associated revenues beginning in
2002.
While we remain upbeat on the group as a whole because of the robust growth
we see both in the near-term and over the next few years, we believe that
there are patches of concern as there are almost every year. Specifically,
there are some weakness in some markets and there are strengths in other
markets. In addition, there is some flex or easing if you will on the
component side indicating the component side has moved from a situation
characterized by shortages of many components to a more balanced situation.
We are not making any changes to our estimates nor our ratings. The current
rebalancing of the supply and demand situation experienced by the suppliers
matches comments made by the mobile phone manufacturers earlier this year
and late last year. For example, Motorola over the last 2-3 quarters has
been highlighting that the availability of components should ease during the
2n d half of this year. In the case of Nokia, they were not concerned about
components all last year nor this year since they were able to contract early
for their needs. Moreover, the component issue seems to be different during
different periods of time. For example, last year SAW filters became a
problem just as power amplifiers became more available. Now it seems LCD
drivers may become the bottleneck just as the availability tantalum
capacitors become more manageable.
On the demand side, there are pockets of weakness but there are also pockets
of strength. In fact, we cannot remember a year where there was strength in
every market around the world simultaneously. For example, Asia Pacific, ex
Japan, was weak in 1998 during the Asian financial crisis where markets such
as Thailand and Indonesia saw declines of over 80%, while Japan was flat to
down in 1999.
In summary, we remain confident that the growth in mobile phones should meet
or exceed 425 million units this year. In fact, we would use the turbulent
summer period to build positions in the wireless industry. Not all companies,
however, are equal in this environment. We believe Ericsson is having a
great quarter for wireless infrastructure sales and orders but continues to
have an extremely difficult time in mobile phones, as does Motorola, in our
view. We believe Nokia, on the other hand, is having a great quarter in
mobile phones and is getting its fair share of the mobile infrastructure
market. In fact, we believe the sentiment on Nokia should rebound as it
announces what should be strong June Quarterly results that are at or above
expectations.
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