Goldman excerpt on Nortel
As we highlight in our note out today ("Traffic Jam! Wireless traffic growth/coverage
builds mostly offset China 3G delay"), our recent meetings in China reveal that 3G builds
will be delayed until '06, a year later than we had expected. Further, we now expect the
size of the builds to be smaller than originally forecasted as we now expect 3 licenses to
be granted (vs. our prev. est. of 4). We size NT's '05 China 3G exposure at approx.
$350M, or just over 5% of NT's est. '05 wireless revs. The question now is can other
regions compensate for 3G weakness? We believe yes. We base our view on 1) cont'd
strength in 2G equip. in India, China and E. Europe, and 2) our expectation that NT will
be a share gainer in wireless. Further, NT's diversified rev. base, which also includes
wireline, enterprise and optical should help to pick up the slack from any weakness in
wireless. No change to ests; reiterate OP rating. This is a higher risk recommendation
compared to our other OP rated stocks and requires a LT view.
2G IN DEVELOPING MARKETS TO COMPENSATE FOR DELAYS IN CHINA 3G.
We believe that strong subscriber and network traffic growth in developing markets will
continue to drive robust spending on 2G equipment in 2004 and 2005. In India, for
example, we understand that Nortel is close to winning a several hundred million dollar contract
with BSNL as part of the carriers expected 12 million line GSM expansion. This contract alone
should offset the negative impact to Nortel in 2005 from a delay in China 3G builds. Further,
Nortel remains well positioned in the CDMA market which we believe will generate incremental
CDMA 450 wins, in particular in Eastern Europe in 2H04 and early 2005.
EUROPE: 3G ROLLOUTS SPEEDING AHEAD, TRAFFIC SET TO BOOM.
We expect growth in W. Europe infrastructure market to continue into 2005 as operators expand commercial launches
of 3G networks and the potential for an acceleration in the number of EDGE deployments
increases. Further, we believe it is likely that carriers will introduce 'bucket plan' tariffs in order to
offset increased competition, thereby further driving network traffic growth.
U.S.: VERIZON'S LAUNCH OF EV-DO TO INCREASE THE PRESSURE FOR CARRIERS TO
OFFER COMPETITING DATA SERVICES.
We forecast that GSM spending in the US will decline by 5% in 2004 largely due to a slowdown in spend from the expected Cingular/AWE
merger. However, given the increased competitive pressure from Verizon's expected launch of
EV-DO service by the end of 2004, we do not believe that AWE/Cingular will be able to sustain
capex reductions beyond 2004. Looking ahead to 2005, we believe that AWE/Cingular will be
forced to play a game of 'catch up' in order to improve network quality and offer competitive data
services to high-end customers. In 2006, spend on WCDMA should drive a 15% increase in
infrastructure spend. |
