QCOM--
Monday July 17, 12:15 pm Eastern Time
Individual Investor
Telecom: Will Nokia, Ericsson Pull a Motorola?
By: Eliot Walsh (07/17/00)
Motorola's (NYSE: MOT - news) strong second quarter results, released last Wednesday, portend more good news from other makers of wireless telephone equipment, particularly Nokia (NYSE: NOK - news) and Ericsson (NASDAQ: ERICY - news).
Motorola's performance was right in line with analyst expectations. Earnings jumped a powerful 91%, to $515 million, or $0.23 per share, from $269 million, or $0.13 per share earned during the same period in the prior year. Sales for the second quarter rose 22%, to $9.3 billion.
And in a Thursday morning conference call, Motorola forecasted that third-quarter earnings would match the consensus forecast of $0.26 per share. Management also said that third-quarter revenue should top $10 billion. For the full year, Motorola said it would earn $1.05 per share on revenue of $39.5 billion.
The company particularly impressed analysts with stronger handset margins than generally had been expected. At 4%, they moved closer to the company's goal of 10% by the fourth quarter.
Fears had abounded that a higher than expected mix of sales to new users (who generally buy lower-end phones) had caught Motorola and Ericsson by surprise. Both companies have not been as successful as Nokia in developing lines of phones at different price points.
In addition, component shortages had some observers fearing that the companies' (particularly Ericsson's) manufacturing capacity would suffer.
But Motorola's results helped shore up a general sense of optimism about both the future and the current state of the wireless sector. Last Wednesday, PaineWebber analyst Walt Piecyk issued a report in which he estimates that the number of phones sold worldwide in 2000 will grow 45%, while infrastructure equipment sales will increase 30%. At the end of 1999, he had increased his 2000 estimate of 288 million handsets sold to 410 million. Now he believes that number will be closer to 450 million.
Analysts Brian Modoff of Deutsche Banc Alex. Brown shares Piecyk's optimism. ``Overall my outlook for the sector is very healthy,'' he says. Like many analysts, he thinks Nokia in particular should post powerful results for the second quarter. Slated to report on July 27, analysts' consensus estimates call for earnings of $0.19 per American Depositary Receipt (ADR). Modoff thinks the company will at least meet that number, and probably show some upside, driven by strong handset demand.
Branch, Cabell & Co. analyst Terry O'Brien is even more bullish on Nokia. His official estimated EPS for the second quarter is $0.20 per share, although he says, ``I think Nokia's going to exceed analysts' estimates, and I would not be surprised to see them exceed my outlook by a penny.''
Like Modoff, he's looking for strong handset sales growth. ``I'm very concerned about supplier issues,'' he adds, noting that the company thus far has been very successful avoiding the supplier constraints that have threatened both Motorola and Ericsson's manufacturing capacity. O'Brien is looking for the company to announce additional capacity through new arrangements with contract manufacturers.
Furthermore, he expects to see evidence of a robust performance in the infrastructure division, and, although he thinks Nokia's semiconductor business is running near capacity, he's looking for management to boost its ability to keep up with demand.
Piecyk, Modoff and O'Brien all see component shortages hurting Ericsson more than the others, although they all believe the company will still meet expectations. ``Nokia beats, Ericsson meets,'' says Modoff.
O'Brien adds: ``I see Ericsson as about 60/30 infrastructure/handsets. I'm looking for them to add some infrastructure wins and show stronger handset growth. They have some very competitive products out there.''
In his report, Piecyk notes, ``As the wireless infrastructure market share leader, Ericsson is a primary beneficiary of the strong current spending cycles. However, upside to our wireless infrastructure revenue growth estimate of 40% could be limited and not as profitable due to component shortages.''
Like the others, he thinks the handset division could be a drag on earnings, and eagerly awaits the likely announcement of a new strategy for that segment during the quarterly conference call.
His estimate is for $0.06 per share, in line with consensus estimates. Skepticism aside, posting EPS of $0.06 would still represent 100% earnings growth year-over-year, and 20% growth sequentially--greater than Motorola's, Nokia's, or Qualcomm's (NASDAQ: QCOM - news) .
Company
(Ticker) July 14
Closing
Price Announcement
Date Estimated
EPS Year Ago
EPS Motorola (MOT)$38.81 7/12$0.23 $0.12 Qualcomm (QCOM)$63.06 7/19$0.27 $0.21 Ericsson (ERCICY)$22.88 7/21$0.06 $0.03 Nokia (NOK)$55.13 7/27$0.19 $0.13
Qualcomm, meanwhile has its own issues--particularly given the well publicized, rapidly changing market in Korea, the company's largest market. The Korean government recently banned subsidies on mobile handsets. And royalties from the chipsets that go into the handsets comprise the majority of Qualcomm's CDMA royalty revenue.
A number of analysts have lowered their full year estimates for the company, fearing the ban has had an impact on Qualcomm's recent sales. Indeed, according to analyst Kenneth Leon of ABN AMRO, June handset sales in Korea totaled 389,000 compared to an average of 1.7 million units for the first five months of 2000. He does, however, note that on two separate occasions, the Korean government has lifted similar subsidy bans.
The current analyst consensus estimate for Qualcomm's fiscal third quarter is for $0.27 a share, representing 29% EPS growth year-over-year, and 3.8% sequential growth. While Leon thinks the company could earn $0.28 a share, Piecyk calls for Qualcomm to meet estimates, and, like all observers, both are anxious to hear management discussion of the Korea developments, as well as details about the planned deployment of several new products, including a dual GSM/CDMA chip, which would enable mobile phones to operate within the two wireless standards considered most likely to dominate mobile communications in the future.
Bottom Line:
The wireless equipment industry looks very strong for both the near- and long-term. Exploding demand across the globe will continue to drive shares of the major players. Upcoming results for the June quarter should show a great performance by Nokia, solid results for Ericsson, and help give some clarity to Qualcomm's increasingly confusing outlook. |
