Lehman Brothers on MOT and NOK handsets (Excerpts):
On Nokia before Q1 03 (April 14):
Trends in Europe combined with some incremental share gains, perhaps offsetting somewhat more sluggish 1Q03 trends in the U.S. and Asia/China where lingering excess inventories in the period may have made the market choppy for vendors.
With respect to Europe, we highlight initial March handset data from GfK, released Friday, which suggests continued solid market trends in Europe of 9% YoY (+/-2%). This brings 1Q03 YoY growth to 11%, in line with our full year estimate for 10% growth in Europe. Friday’s GfK data also provides a broader picture around share dynamics at the major vendors in the region. February data indicated that Nokia continues to extend its share in its core European market and reached 49% share in the region during February, up from under 46% in 4Q02.
With respect to Asia, GfK data thru the end of February, estimates Chinese handset market may have risen 10%, well ahead of our flattish estimates, on a 14% rise in unit sales offset by a 4% ASP reduction. CDMA shipments were estimated to have declined 15% sequentially in February after the Chinese New Year Vs a 6% decline for GSM reflecting the lower subsidies at China Unicom. Overall GfK estimates local vendors have now climbed to around 35% of the market, suggesting that while market growth may remain decent in China, market conditions are increasingly competitive and could potentially have impacted leading vendors this period. We also note GfK’s retail point of sale data does not reflect inventory levels in the region, and we continue to remain a bit cautious around near-term inventory trends.
Tim Luke, Stuart Jeffrey, and team on Motorola after Q1 03 (April 16):
In the handset area, MOT lowered its expectation for the market to 430 million vs 430 to 440 previously. MOT estimated the 1Q03 sell in market at 86 to 88 million phones and the sell through of 90 to 93 million. Our sell through estimate had been 96 million. MOT confirmed it lost 2 to 3 points of market share in China to local vendors given the fierce competitive environment in China. Some excess inventory persists in China. Motorola estimates Asian inventories at 11 to 12 weeks – we believe China is likely higher than that. MOT believes its own inventories remain at 6 to 8 weeks, including China. MOT's ASPs remain under pressure, dropping 5% sequentially to $148. We believe that management's expectation of only 5% declines for the full year could prove elusive. In general, our estimates for MOT's handset revenues are now lowered with the slightly weaker ASPs and unit shipments and our prior operating margin targets for MOT of around 8.2% are now being trimmed slightly to 7-8%.
HANDSETS: Revenues & Margins Slightly Weaker Than Anticipated on Tough Pricing Environment -- Revenues in the PCS division of $2.4B (-27.4% QoQ) were slightly lower than our $2.5B (-25% QoQ) estimate on a weaker than expected pricing decline. ASPs in the period fell to $148 (-3% QoQ) from $152 in 4Q02 and $169 in 1Q02 largely reflective of what seems to be an increasingly competitive environment, particularly in China as local vendors look to gain market share, as well as a broader mix shift in the period to the low end. Units in the period, however, remained broadly on track at 16.7M Vs our 17M estimate, tracking broadly in line with 1Q03 seasonality of -20 to -25% QoQ. Margins in the period were 4.4%, below our expectations of around 6% on more subdued revenue levels in the period. Book to Bill however in the division trended above 1, for the first time since Motorola introduced its JIT inventory management system last year.
MOT Maintains Market Share Intact; Some Concerns May Linger Around Momentum Moving Into 2Q: Motorola suggests that in light of a difficult environment, the vendor has maintained its leading position in China and has increasingly secured a leading position in the U.S. In 1Q03, Motorola maintains global market share at 19%, flat with 4Q02 and up from 16% in 1Q02. MOT maintains 12% market share in broader Asia in 1Q, down from 1Q02 and 4Q02 on a 2-3% share decline in China to local vendors. In general, MOT expects the competitive environment in China to remain fierce.
In Europe, MOT estimates its 1Q03 share positioning at 11%. We believe Motorola may be including Turkey and Russia in its estimates as our data from GfK suggests that Motorola has 8-9% share in Europe excluding these regions. MOT believes it has captured a #1 position in both the U.S. and Canada in the period. More specifically in China, while Motorola acknowledges some share loss during the quarter to local vendors, MOT maintains its position in the region by at least 5% points above the nearest competitor, Nokia. In the GSM arena, Motorola highlighted the C350 (color, low-tier) and A388c (color, Chinese handwriting recognition, mid-tier) platforms which are currently shipping to Asia and Europe, and are expected in North America in 2Q. Given increasingly more aggressive pressure from local vendors, Motorola is now accelerating the release of several new products in China. Three new products were introduced in 1Q, two additional phones will be introduced in 2Q and up to nine new phones are to be introduced in 3Q. Motorola is also boosting R&D in the region and placing increased focus on its distribution channels as it moves to continue to maximize efficiency and expand into tier 3 and tier 4 provinces. In the U.S., Motorola now claims to hold the leading market share position. Management anticipates good momentum in 2H03 with new CDMA platforms. MOT highlights the new V810 (CDMA 1X, color, camera, BREW) as well as the new E310 (CDMA 1X, color, camera attachment, BREW) platforms, in particular.
Competitive Dynamics In China, Inventories In Asia & Few New Products In 2Q May Weigh On June Outlook In general, we consider Motorola's 1Q performance to be fairly modest, although perhaps better than some investor expectations. We remain cautious moving into 2Q03 as Nokia and Samsung are set to launch new GSM, TDMA and CDMA platforms and local vendors in China remain focused on gaining market share. Many of Motorola’s suite of new platforms are set for launch in 2H03. We also believe the inventory situation in Asia, particularly China, may continue to weigh on near-term upside for MOT in 2Q. On the conference call this am, MOT suggested inventories in Asia are currently trending at 11-12 weeks and slightly higher than inventory levels in China. MOT maintains its inventory across broader APAC, while trending at broadly normalized levels of around 6-8 weeks is trending a bit higher than this average in China. Motorola suggested that the improvement in inventory balances in China was modest in 1Q03. Inventories in the China region, seem to be trending above more normalized levels in both GSM and CDMA. Outside of the APAC region, inventories seem to be at more normalized levels.
ASP Guidance Formally Moves To Lower End of Down 0-5% in 2003; Volumes Remain Key To Margin Upside Largely reflective of a mix shift to lower end platforms, combined with a tough pricing environment in China, and perhaps a new product portfolio largely leveraged to 2H, Motorola officially lowered ASP guidance to the lower end of its down 0-5% range for 2003. ASPs in 2Q are expected to trend flattish QoQ before ticking up in 2H03. Management suggested that a soon to be completed new inventory management process with Nextel, should help volumes in this higher margin, higher ASP phone group to improve to a more normalized 2.1-2.2M quarterly run rate. In the past 2 quarters, as MOT has worked with Nextel in this new inventory management process, shipments to Nextel have fallen to levels of around 1.8-1.9M units. We currently estimate PCS margins to trend slightly higher in 2Q QoQ on better volumes & growing incorporation of new, more efficient i250 GSM/GPRS core platforms. We estimate margins at 7% in 2Q. For 2003, our margins move to 7.8% Vs 7.2% in 2002.
Motorola Suggests 1Q03 Handset Market Sell-Thru 90-93M Units, At Low End of Expectations; 2003 Outlook Lowered In the handset area MOT lowered its expectation for the market to 430 million in 2003 Vs 430 to 440 M previously. Motorola suggested the 1Q03 handset market (sell-through) reached 90-93M units, at the low end or slightly below its expectation of 90-95M units and our expectation of 96M units. Nokia has previously suggested a market size of 92-96M units. In terms of sell-in, Motorola estimates the market at 86-88M, as the industry worked through some lingering excess inventories largely in Asia. While Motorola does not officially break out unit shipments by technology in PCS, they do provide some directional color. In general, we estimate unit shipments by technology tracked broadly in line with expectations. On a sequential basis, GSM/GPRS shipments seem to have fallen around 25-30% QoQ broadly in line to slightly lower than the broader group declines of -25% largely on weak China and some share loss in Europe. TDMA shipments fell slightly more than the group average following a strong 4Q sequential uptick, perhaps around 40% QoQ, but nearly tripled YoY on the availability of new low-end products for L.A. (absent in 1Q02). We estimate CDMA shipments fell 16% QoQ, perhaps reflecting a near-term slowdown in the CDMA market in China offset by seemingly good trends in the U.S. at Verizon. iDEN unit shipments rose modestly (+3% QoQ) off of a lower 4Q02 base, as MOT works with Nextel under a new inventory management process.
Tim Luke, Stuart Jeffrey, and team, on Motorola after Q1 03 (April 17):
Nokia Mobile Phone sales of EUR 5.5B were slightly below our estimate given a slight shortfall in both units (37.6M vs. 38M) and ASPs (EUR 146 vs. EUR 147). Phone margins were strong at 23.9%. European shipments were strong in the quarter, balanced as previewed by weaker sales in the US and Asia. We now believe Nokia’s new phone portfolio may help its outlook for 2Q03 and 2H03 in both the US and China, with Europe likely to see ongoing share gains. Nokia’s new 2Q03 revenue guidance is for the phone unit to post a 4-11% year over year increase, slightly below our prior estimate of an 11% increase. Nokia expects company revenues to increase somewhat less than this. Nokia’s 2Q03 EPS guidance is for EUR 0.18-0.22, excluding a EUR 0.05-0.06 charge for restructuring in its handset business. Our prior estimate was EUR 0.18. Following these results, we are trimming our 2003 sales estimate to reflect lower infrastructure sales and lower ASPs, but raising our 2003 EPS estimate on the strength of Nokia’s phone margins. Our new estimates are EUR 30.4B (up 1% YoY) in sales and EPS of EUR 0.82/$0.88. We were previously looking for sales of EUR 31.3B and EPS EUR 0.79/$0.88. We have lowered our 2004 sales estimate to EUR 31.9 billion from EUR 32.9 billion. Our 2004 EPS estimates increase, in part on the strength of restructuring in the Networks unit. We now expect Nokia to deliver EPS of EUR 0.89/$0.95, up from EUR 0.88/$0.91. Fluctuating exchange rates have helped our US dollar estimates. Our price target remains $17, or 20x our 2003 EPS estimate of $0.88. Our rating remains 2 EW.
HANDSETS 1Q03 Revenues Slightly Below Our Estimate on Impact of Currency on ASPs: Margins Above Expectations Nokia's Mobile Phones unit performed modestly below revenue expectations in the quarter. Sales were EUR 5.48 billion, versus our estimate of EUR 5.54 billion. Nokia's unit shipments of approximately 37.6 million were slightly below with our estimate. Nokia appears to have seen solid share gains and decent volumes in Europe, balanced by slower trends in Asia and a challenging US market. The company's ASPs declined slightly to EUR 146 from EUR 147. We had expected flat ASPs following Nokia's mid quarter update. Nokia noted that ASPs were flat in its core European market, down in the APAC region, and flat in North America. However, North American ASPs would have increased in the quarter if not for the decline in the dollar as Nokia's product mix shifted higher. Nokia's operating margin in the quarter, however, performed above our expectations. Nokia posted a 23.9% margin in its phones unit, better than our 23.5% estimate. We believe that strong price declines in components and new model launches are likely to have driven this strong performance. We now expect Nokia’s phone margins to be 23.4% this year, up from our prior estimate of 23.2. Outlook for Stable ASPs Off Lower Base Through 2003 on Color, MMS; Our ASP Estimates Move Lower Nokia expects ASPs to remain stable at this lower level of EUR 146 in 2Q03 and through 2003 as color and MMS models increase as a percent of their portfolio. Management noted the 3510i, launched late in 4Q02, is now the company's second best selling model behind the 3310i. Now that the 3650 is shipping globally, we expect the company to advertise the model aggressively during 2Q03. Nokia expects to ship 50-100 million color MMS models this year. We expect them to ship 169 million units in total this year, with an average ASP of EUR 146. We had previously modeled a slight uptick in ASPs in 2H03.
Management Provides 98M 1Q Market Figure, Suggests Market On Track for 440M Units: Nokia provided a global market sell through figure of 98 million units, up approximately 10% from 1Q03. Our estimate had been 96 million. We note that Motorola yesterday provided a sell through estimate of 90-93 million units. Both companies agreed that the sell in figure was slightly lower as inventory balances corrected, particularly in the US and in China. Nokia now believes the inventory position in the US and Europe is healthy, although the company does recognize lingering excess inventories in China. Market Share of 38% May Increase in 2Q03 and 2003, Helped by Gains in North America and CDMA Progress. Nokia claimed 38% market share in the quarter, down from 39% in 4Q02. We had anticipated some decline in share given that 4Q is traditionally a heavy promotional quarter from Nokia.
While Nokia noted that it has taken steps to solidify its market position in China, we believe Nokia's share may have eased slightly in the quarter. Motorola suggested that its share slipped 2-3%, citing domestic vendors as the primary driver behind the loss. We expect Nokia's market share to recover beginning in 2Q03.
We believe that the company is planning to launch a series of new products to the US market to refresh what has been a fairly uninspiring product portfolio in recent quarters. We believe Nokia has lost share in the TDMA market, likely to the popular V60 model from Motorola. Nokia is introducing several new TDMA models, including a color screen version. The increasing focus by TDMA carriers AT&T Wireless and Cingular on GSM may allow Nokia to bring its impressive portfolio of color GSM models to the US market.
Outside the US, we believe Nokia may be able to gain share in 2H03 with its renewed emphasis on CDMA, although we recognize that Nokia has traditionally underperformed in this market. We believe Nokia is close to shipping to both China Unicom and Reliance. It is currently shipping to Tata in India. Nokia's new platforms may help its efforts in Latin America. We do not believe Nokia is likely to benefit too much from CDMA in the US this year.
###
- Eric - |
