Deutsche Banc Alex Brown's view of Nokia's investor presentation in San Francisco last week:
-- A1: NOK: Nokia hits the road in San Francisco-Strong Buy-Part 1/2 --
06:05am EDT 17-May-01 Deutsche Bank - Europe (B. Modoff/M. Thelander) NOK QCOM
Modoff, Brian T. 415-477-4237 5/17/01
Thelander, Michael W. 415-617-3324
Deutsche Banc Alex. Brown Inc.
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NOKIA CORPORATION (NOK) "STRONG BUY"
Nokia hits the road in San Francisco -Part 1/2
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Date: 05/15/2001 EPS: 2000A 2001E 2002E
Price: 31.25 1Q 0.18 0.21A NE
52-Wk Range: 63 - 20 2Q 0.19 0.18 NE
Ann Dividend:0.25 3Q 0.16 0.21 NE
Ann Div Yld: 0.80% 4Q 0.22 0.22 NE
Mkt Cap (mm):149,813 FY(Dec.) 0.75 0.82 1.14
3-Yr Growth: FY P/EPS 41.7X 38.1X 27.4X
CY EPS 0.75 0.82 1.14
Est. Changed No CY P/EPS 41.7X 38.1X 27.4X
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Industry: TELECOMMUNICATIONS EQUIPMENT
Shares Outstanding(Mil.): 4794.0
Return On Equity (2000) : 25.0%
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HIGHLIGHTS:
Yesterday, Nokia CEO & Chairman Jorma Ollila gave a presentation on the outlook for the company and the wireless industry. In this note, we provide an overview of what was presented along with our thoughts on the topics covered.
In general, Nokia was very optimistic about 2.5G and 3G rollouts, as well as its ability to reach its target goal of 40% in the handset market and 35% in the mobile infrastructure market.
Nokia estimates 3G (W-CDMA) phones will ramp faster than we currently forecast. For 2002 and 2003, NOK believes that W-CDMA phones will represent 2% and 7% of total handset sales. For comparison, our current forecast has W-CDMA phones at 1% and 3.6% of total unit sales in 2002 and 2003.
Nokia remains focused on packaging its own CDMA technology. Nokia also stated that it is working to resolve the compatibility issues with its CDMA phone and hat a workable solution should be reached in the next 2 weeks.
In sticking with its go-it-alone CDMA strategy, NOK stated it is going to be introducing a 1xRTT handset that should to be on the market by the end of the year.
With respect to infrastructure margins in the coming quarters, the company admitted that it might witness a decline due to the lower margins associated with initial deployments of a new technology and a slow down of GSM deployments.
Nokia believes that meaningful W-CDMA deployments, beyond initial pilots, will begin occurring in October 2001, growing in 2002 and massive rollouts in 2003. As we discuss in this note, our view is noticeably more conservative.
Although we believe Nokia is capable of reaching its target goals within its handset and infrastructure businesses, we are less optimistic about the near-term growth of the overall market.
HANDSETS - MARKET SHARE TARGET OF 40% IS WITHIN REACH
In the last quarter, Nokia gained ground on its competitors to reach a 37% market share (at the expense primarily of Ericsson). Its stated goal is 40%, and although it may not reach it overnight, it appears to be on target of reaching that goal.
With respect to CDMA and Qualcomm, Mr. Ollila stated that Nokia is focused on packaging its own technology and that using QCOM's chip design would prevent them from incorporating the "look and feel" of the Nokia phone. Nokia also stated that it is working with Verizon, Verizon's vendors and QCOM to resolve the compatibility issues with its CDMA phone on the IS-95 network and that no recall is foreseen. NOK believes a workable solution should be reached in the next 2 weeks.
In sticking with its go-it-alone CDMA strategy, NOK stated it will be introducing a 1xRTT handset that is suppose to be on the market by the end of the year. Finally, NOK believe that in order to reach its 40% market share
goal, it will have to increase its penetration of the CDMA market, as well as Korea and Japan where it currently has limited presence.
Some optimistic assumptions behind 2002 growth. For 2002, Nokia believes that the demand for data enabled phones, combined with fashion, new applications, color displays and packet switching will drive handset sales (replacements).
To that extent, Nokia believes the overall replacement rate will be in the range of 38-40%, which is consistent with our view. However, Nokia sees a faster ramp for 2.5G and 3G (W-CDMA) phones. For 2002 and 2003, NOK believes that GPRS phones will represent 29% and 41% of sales, respectively, and that W-CDMA phones will represent 2% and 7% of total handset sales. For comparison, our current forecast has W-CDMA phones at 1% and 3.6% of total sales in 2002 and 2003.
Concerning ASPs, NOK sees little, if any decline over the next 12 months. Our current estimate is for a decline of 12% for the overall industry.
INFRASTRUCTURE - GAINING MARKET SHARE
Nokia noted that it currently has a 30% market share for GSM networks and that it is the leader in GPRS with a 35% share - 60 networks installed to date. With respect to W-CDMA, the company stated it is near its goal of a 35% share.
In fact, Mr. Ollila stated that if every single "very interested" customer who is considering Nokia's W-CDMA solution selected Nokia, the company could reach its limit in terms of capacity constraints. However, he later added that the company has plenty of capacity to reach its 35% goal for GSM/EDGE/W-CDMA and that it would be unlikely for every interested party to select NOK as its OEM.
Vendor financing issues appear to be less severe than with other OEMs, as Nokia management believes they have been very cautious in extending loans. Two vendors are financed at levels above 100%, including Orange (150%, deal value
Euro 1.5 bil) and Hutchinson (level not stated, deal value Euro 500 mil). Nokia also has limited exposure to Telsim Mobil (Turkish operator that recently missed a payment with Motorola), but Mr. Ollila state that it was not a
material amount.
With respect to margins in the coming quarters, the company admitted that it might witness a decline due to the lower margins associated with initial deployments of a new technology and a slow down of GSM deployments.
Pulling a rabbit from the hat. Nokia believes that meaningful deployments, beyond initial pilots, will begin occurring in October 2001, growing in 2002 and massive rollouts in 2003, with revenue recognition beginning in 2H/01. As we discuss in the next paragraph, our view is noticeably more conservative.
Nokia showed a chart that graphically provided its forecast for W-CDMA. For 2002 it forecasts total W-CDMA market revenues of roughly $9 bil versus our forecast of $6.2 bil. For 2003, it believes the W-CDMA infrastructure market
will be approximately $16 bil versus our lower estimate of $10.8 bil.
MOVE OVER CLUB MED - INTRODUCING CLUB NOKIA
Mr. Ollila spent a good portion of his presentation talking about Club Nokia and how the company is committed to developing a revenue stream from this service, as well as to expand its addressable market. In summary, Club Nokia
provides a means for subscribers to customize their handsets by downloading games, ring tunes, profiles, etc. that were developed by independent developers (1,500 potential developers to date) to a mobile handset through the carrier's network or directly from Nokia's website. Nokia believes that it will have reached agreements by the end of the year with 50 wireless operators and that
it will rollout this service in the U.S. and APAC by the end of the year.
Nokia did not provide any guidance regarding future revenue from the service (shared between the developer, the carrier and Nokia). However, they did state that revenues will not really be noticeable until 2002 and that guidance would
be forthcoming. In terms of the killer application, it should come as no surprise that Nokia believes rich messaging services will be the killer application, representing 70% of mobile service revenues by 2006.
CONCLUSION
Mr. Ollila gave a rather upbeat outlook for his company and its role in the future of the mobile industry. Although we share his view that Nokia is fully capable and on the path to reaching its target goals, we are more conservative
with respect to the overall mobile industry. In particular, we do not believe W-CDMA deployments and 3G handset sales will be as aggressive as Nokia currently forecasts.
Irrespective of the timing of deployments and 3G networks being turned on, Nokia has, and continues to, put in place a suite of products and solutions that could give them the dominance they desire. In our view, Nokia is in
position to become the dominant player in the mobile infrastructure market. We maintain our estimates and STRONG BUY rating. |
