re: Matt Hoffman of WitSoundview on Nokia Strategy Update
NOK: Year-end Strategy Review Dashes Inflated Expectations
research.soundview.com
A few Excerpts:
Year-end Strategy Review
Nokia held its Year-end Strategy Review meeting yesterday in Dallas. The company surprised the market with below-expectation guidance for both the infrastructure and handset markets in 2003. The company also chose not to issue 2003 financial guidance, reinforcing the perception that the market has not yet recovered enough to support extended visibility. Although the company did attempt some damage control on the handset guidance later in the session, expectations coming into the meeting still were not met.
In spite of the early surprises, Nokia used the bulk of the meeting constructively, updating the Street on its strategic initiatives, prospects by major business unit, and the company’s impressive product roadmaps.
We were surprised by the heavy focus on infrastructure in the general Q&A; usually those sessions are dominated by handset questions.
Nokia Mobile Phones - Product Momentum Continues
Nokia disputed the widely held notion that the company lowered its outlook for the worldwide 2003 handset market on Tuesday. The confusion probably arose from the fact that at a conference last month Nokia indicated the handset market was likely to see 10%-15% growth next year. Nokia has officially been on the record stating it sees long-term growth for the handset market at 10%-15%, but the company had not formally extended that to 2003 in print. Tuesday’s guidance of 10% growth in 2003 (or 440 million units) struck many investors as a fade because previous commentary had included the possibility of 15% growth in 2003. Without the higher number included for 2003, we see the company essentially keeping a lid on expectations for next year, not wanting to promise too much in the current environment. We would also point out that the 440 million number was actually the number we thought the company would issue, but there were higher hopes built into the stock after its latest run.
On ASPs, Nokia says it sees flat pricing for the oreseeable future. Nokia did point out that ASPs have slightly decreased over the past two years, while margins have improved.
We remain impressed with the overall strength of the Nokia handset roadmap. We are especially impressed with the Nokia 6800 GSM/GPRS phone that will carry the Blackberry software client. Most likely this phone will convince smaller PDA-centric vendors that they will have a difficult time profiting in the handset equipment market and should encourage their market exit. Nokia believes the entry tier is 70% of NOK unit volume (as well as the market volume), the mid-tier is about 20% and the high tier is about 10% - although the company did indicate that high-end volume is slightly higher this year than last year. The high end is responsible for a higher proportion of its profits this year than last year. The company has dedicated an entire business unit to attacking the low-end markets.
Nokia also remained characteristically feisty about the cdma2000 1X handset market, saying the company had learned its lesson over the past two years. The company took an indirect swipe at Qualcomm, saying the CDMA market is monopolistic. Attaining Nokia’s long-term share goals of 40% still hinges on success in CDMA where Nokia will be launching a low-end CDMA model, the 2100, in China next year in addition to the 1X models currently launching in North America. If all of Nokia’s new product introductions go smoothly, our handset estimates for 2003 could prove conservative.
Nokia Networks - Not Quite Seeing The Turn In Operator Investment
On infrastructure, Dr. J.T. Bergquist went through the company’s Nokia Networks business at some length. The company highlighted the stunning progress that MMS, or picture messaging, has made over the past six months. With the launch of 70 networks in 30 countries since the spring of 2002, the progress of MMS has been much faster than we saw GPRS networks rolled out. The company, at the same time it was promoting MMS, tried to tamp down expectations for mobile data as a contributor to operator revenue. Nokia says that instead of looking at an operator’s mobile data ARPU, investors should gauge the spread of platforms to assess the strength of mobile data. We will continue to track operator data ARPU for indications on the success of mobile data.
Nokia is still forecasting overall ARPU to trend down in 2003, even with a stronger proportion of revenue coming from data as voice ARPU slides further. Nokia cited statistics that showed network traffic has increased by 60% over the last two years while capital expenditure has decreased, and believes that sometime after 2003 that situation will reverse. The company sees 40 W-CDMA networks deployed by the end of 2003 and sees EDGE rolling out widely as EDGE-capable hardware is shipping to 23 operators not solely in the United States. The company echoed our belief that the compelling reason why these networks will be deployed is on the cost side, as EDGE and W-CDMA network exponentially lower the cost to deliver a megabyte of data. We concur with this assessment, believing a data call on a W-CDMA network will cost 80% less to deliver on a W-CDMA platform than a GSM/GPRS platform.
Nokia stressed it believes the mobile network will become an all-IP network by 2005. We found the most interesting part of the presentation to be the company’s introduction of the G-WCDMA standard. Nokia believes G-WCDMA will be the technology operators in the Americas adopt, regardless of whether they currently run a GSM or cdma2000 network, because it will be a wideband 5Mhz technology. G-WCDMA is to be deployed in the virgin 1700 and 2100 Mhz bands soon to be auctioned off here in the United States. Nokia called G-WCDMA a "beautiful" solution; one that will allow cdma2000 operators to move almost seamlessly to the 5Mhz technology from the narrower-band, and thus slower, cdma2000 standard. We view Nokia’s G-WCDMA initiative as the latest attempt by the GSM camp to try to lure cdma2000 operators like Verizon and Sprint PCS away from the Qualcomm-driven standards. Nokia stated the downlink transmission speeds of G-WCDMA will have peak data speed of 10mbps. G-WCDMA will also be available in both 1900 and 2500 Mhz spectrum.
Nokia briefly touched on the prospects for wireless local loop (WLL) services in countries like India. Nokia emphasized it is still trying to get operators there to put GSM 800 infrastructure into India and other markets in Southeast Asia for WLL. Nokia is not just conceding the market to the CDMA OEMs. Nokia’s central pitch will revolve around the operators’ need for guaranteed access to low-cost handsets. The CEO insists CDMA infrastructure is not a business Nokia wants to be in as U.S. investments are completed and the initial phases of the China Unicom contract are in process.
Company Guidance and Changes to Estimates
Nokia issued the following guidance yesterday:
• Reiterated 400 million units in 2002.
• Issued 2003 unit guidance of 10% year-over-year growth or slightly higher, or about 440 million units next year, about where we expected Nokia to size the market.
• Expects 1.1 billion subscribers by year-end 2002, growing to 1.5 billion subscribers in 2005. We estimate 1.13 billion in 2002 and 1.4 billion exiting 2004.
• Reiterated that the wireless infrastructure market is expected to be down 20% in 2002, though Nokia expects its addressable market will be down 15%.
• Issued 2003 wireless infrastructure guidance of down 10%, though the company’s addressable market will decline 5%-10%.
At a strategic level, the company offered no change to its prior comments on capital structure. Nokia will be assessing uses of its 7 billion euro stockpile including a stock buyback, though it sees the need to maintain adequate levels of liquidity so as not to risk downgrades from the rating agencies.
We remain unwilling to value the shares on 2004 earnings estimates given limited visibility the company continues to cite. We maintain our price target of $16 (Neutral).
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- Eric - |
