Cell Phone Market Strong Despite Blips
(08/01/00, 9:00 a.m. ET) By Rhonda Cornell, Electronic Buyers' News
Despite recent hiccups at two of the industry's top three handset makers, the cell phone market continues to hum along with high-growth projections intact, according to analysts.
Set against a backdrop of widespread component shortages, profitwarnings last week from cell phone leader Nokia (stock: NOK) and recent losses reported by the handset business of Ericsson (stock: ERICY) are at least in part company-specific issues, observers said.
No. 2 handset manufacturer Motorola (stock: MOT), meanwhile, successfully skirted allocation issues earlier this month, reporting "significant" growth in its wireless handset business as the company as a whole doubled quarterly earnings, to $515 million on revenue of $9.3 billion.
"The industry is booming," said Will Strauss, an analyst at Forward Concepts, Tempe, Ariz. "There may be some shortfall in profits due to designs, shortages, things of that ilk, but it's still a healthy industry."
Worldwide wireless phone sales should continue to build, from $55.1 billion this year to $80.4 billion in 2003, Strauss said.
Nokia reported third quarter earnings would at least match those of the same period last year, but warned they would drop sequentially because of the timing of product launches and fluctuating demand associated with seasonal issues. Ericsson had earlier reported that component shortages cost its handset business $168 million in its second fiscal quarter, blaming a small portion of the shortfall on a fire at an Albuquerque, N.M., fab owned by Philips Electronics (stock: PHG).
"Nokia's and Ericsson's problems are largely Nokia's and Ericsson's problems," said analyst David Heger of A.G. Edwards & Sons, St. Louis. "The problems they are suffering from are largely unrelated to Motorola and the rest of the industry."
While a scarcity of tantalum capacitor, flash memory, and LCD-driver ICs has threatened to slow growth, "the component shortage issue is one of management -- how well you predict in terms of what you're going to sell," said Nigel Dieghton, an analyst at Gartner Europe, Surrey, England.
Nokia, in particular, has a good chance of weathering the parts shortage because it manages its supply better than its rivals, said Johan Brostrom, a brokerage analyst at Hagstromer and Qviberg, Stockholm, Sweden.
A.G. Edwards' Heger attributed the lower than expected earnings forecast to the company's new focus on low-end products.
"Nokia is going to try to be competitive after pulling high-end, WAP products out of the market and targeting lower models," Heger said. "While short-term earnings may be negatively affected, Nokia is going to try to grab market share at the low end."
Nokia's focus on lower-end products also may have a negative effect on Motorola in the near term, according to Heger.
"It will be a challenge for Motorola to retain market share as Nokia focuses on the low-end market in the quarter," he said.
Dieghton agreed that Nokia will hold the lead position for at least the next 12 months, as Motorola continues to improve its handset designs and ergonomics, a problem that has plagued it for the past year or so.
"Nokia was the first to realize handsets were a fashion statement, a lifestyle issue, and Motorola's finally learned to define handsets that are fashionable," he said.
Nokia last week reported a 62 percent jump in second quarter net earnings with pretax profits of $1.34 billion, compared with market expectations of around $1.32 billion, according to a Reuters poll. Cell phone sales grew 67 percent year over year in the second quarter, with net sales totaling $6.5 billion, an increase of 55 percent compared with the year-ago period.
Strong sales in Ericsson's cell phone network-infrastructure business -- which led to a 300 percent year-over-year increase -- resulted in income before taxes for the first half of $2.08 billion.
Earnings, though, were offset by component shortages in Ericsson's consumer products business, which makes cell phones. In addition to the $168 million lost in the first half, Ericsson expects the group to lose $280 million to $392 million in the second half because of difficulty obtaining critical parts.
While acknowledging a paucity of components, Ericsson's cell phone business has suffered during the last 18 months from lackluster products and production capacity issues, said Phil Kendall, an analyst at Strategy Analytics, Bedfordshire, England. The pressure is on Ericsson to restructure its handset business, particularly to take advantage of the booming low-end market.
"Despite having considerable strengths in the development of wireless technologies, a quality confirmed by its current runaway lead in the wireless infrastructure market, Ericsson has been frequently criticized for failing to match its competitors in terms of product design and innovation," Kendall said.
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