re: Globe and Mail on Nokia Q2
>> Nokia Raises A Warning Flag
By Mathew Ingram
Globe and Mail
April 19, 2002
Great expectations. That's the wall, or hurdle, that confronts the market at the moment. Investors have more or less gotten accustomed to the fact that many companies are going to be reporting weaker sales and earnings this quarter — but they are filled with optimism about what will come after that, since fears of an economic meltdown have proven to be groundless. But are expectations still out of whack with reality? Perhaps.
In other words, there's still room for periodic jolts to the system, like the one Nokia handed the market on Thursday. Although IBM helped out by coming up with better-than-expected results for the first quarter, the Finnish cellphone giant served warning that there is still plenty of room for disappointment - like the helping Microsoft handed out after the market closed, revising its forecasts for the current quarter downward.
As usual, the issue is not so much whether a company makes its estimates for the most recent quarter, but what comes after that. By now, companies have guided analysts' expectations downward to the point where if they miss their latest quarter, something has gone seriously wrong. It's all about the next quarter, and the quarter after that — and that's where some estimates may be out of line with reality, as Nokia's were.
The company met Wall Street earnings forecasts for the quarter, with a profit of $767-million (U.S.) or 863 million euros, although that was down from a profit of $866-million in the same quarter of the previous year, and revenues fell by 12 per cent over the year-ago period. Still, the market had accepted all of that long before this quarterly report came out — the big issue was what Nokia said about the rest of this year.
A few months ago, the cellphone maker and networking equipment company said that it saw revenue rising by 15 per cent this year, with sales of about 430 million handsets. Now, the company said that it is hoping for revenue growth of between 4 per cent and 9 per cent for the year — in other words, it has cut its expectations more or less in half. It also cut its forecast for handset sales by about 20 million for the year. No wonder the stock tanked by more than 10 per cent after the news was released.
With the lower handset number, Nokia was effectively saying that it sees no growth in that market for the year. So how does it arrive at a sales forecast for its phone unit of 5 per cent to 10 per cent growth? Good question. Presumably, it's planning to increase market share — although that's more difficult than just growing with a growing market. Nokia already controls over 35 per cent of the world market for cellphone handsets.
Earlier this year, there were some analysts who thought Nokia was being too bullish on the phone sector. Morgan Stanley Dean Witter even downgraded the stock to "underperform," cutting its target to $13 when the shares were $22.50 (they're now $18.16). And yet, just last month Nokia stuck to its forecast of a revenue drop of 6 per cent to 10 per cent, and profit of 13 cents to 15 cents. It missed both of those by a fairly wide margin.
Nokia fans said Thursday the company was merely reducing its expectations so that it could outperform those forecasts later on — a view which borders on the Pollyanna department, particularly in a volatile industry such as telecom. Others said that the reduced targets were either evidence that the company's grip on the market is slipping, or a sign that it is misjudging its markets to the point where its forecasts simply couldn't be trusted any more. Neither of those is a particularly nice thought.
Admittedly, Nokia was probably more aggressive than most in its forecasts, since it is widely acknowledged as the market leader in cellphones, far ahead of Motorola or Ericsson, and it is also a tremendously efficient company — probably the only thing that allowed it to make its earnings forecasts. But how many other companies are there that have made similar mistakes, assuming a turnaround too quickly, and how many investors have decided to do the same, giving them the benefit of the doubt?
That's not to say there haven't been positive signs for some companies: Food behemoth McDonald's not only beat Wall Street earnings expectations, but boosted its estimates for the year at the same time. But then there was also Advanced Micro Devices, the microprocessor maker that competes with chip giant Intel. The company reported a smaller loss than most analysts had forecast, but said it still faces a tough market for the rest of the year. And even software titan Microsoft cut its forecasts for the current quarter, although it boosted them for the full year.
"The majority of companies are coming out with shaky news. One day they say they see signs of a turnaround, then they say, 'We were premature,'" strategist Al Mirman of V Finance in Florida told Associated Press. In other words, we're not quite out of the woods yet. <<
- Eric - |
