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Technology Stocks : Nokia (NOK) -- Ignore unavailable to you. Want to Upgrade?

To: Eric L who wrote (19564)	4/15/2002 11:11:05 AM
From: Eric L	Read Replies (1) \| Respond to of 34857

re: Analysts on Telecom & Wireless >> Gambling On Handset Sales Margo McCall April 15, 2002 Wireless Week Industry Pins Rebound Hopes On Success Of 3G Devices Sales of handsets slowed for several quarters before equipment makers were hit by the global slump in carrier spending at the beginning of last year. But just as they signaled the start of the malaise, so are handset sales expected to serve as a leading indicator of the long-awaited rebound. As such, analysts and the entire industry are looking to the manufacturers to produce a winning set of devices that will bring consumers to the table. The rebound in handset sales likely won't come until year's end, however. In addition, down-on-their-luck equipment makers may continue to feel the effects of a sharp slowdown in wireline spending even after consumers increase their purchasing. Phone makers are lining up to do their part, though, offering flashy portfolios of 2.5-generation phones with glitzy features such as built-in cameras and color screens. Motorola and Nokia, the two biggest manufacturers, are racing to introduce 3G devices in the third quarter. Now the million-dollar question remains: When will consumers start buying new phones in large enough quantities to drive data adoption and usher in the beginning of a new product cycle? 'I don't care if it's color screens or phones with keyboards or cameras or MP3 players. You need to get the handsets out there first and hit critical mass before we'll see significant adoption,' says Mark McKechnie, an analyst with Banc of America Securities. Although indications are that handset sales were relatively robust in the first three months of this year, McKechnie foresees two more quarters of flat growth before a resurgence of activity occurs in time for the holiday season. A strong economic recovery or widespread consumer appetite for features such as color screens could improve the picture, while the spread of handset subsidy cuts from European to U.S. carriers could blunt the recovery. In the meantime, as network equipment companies line up to report their first-quarter results, analysts aren't expecting much good news on the wireless infrastructure front. As Nokia indicated during its mid-quarter update last month, carriers have stopped spending on 2G networks and haven't yet started investing heavily in 3G networks. In the United States, AT&T Wireless and Cingular Wireless are fueling spending as they change over their networks from TDMA to GSM in preparation for upgrades to GPRS. Ric Prentiss, an analyst with Raymond James and Associates, calculates that together the three-dozen or so carriers in this country will spend $26.9 billion this year, only slightly less than last year's peak capital expenditures of $27.1 billion. Although U.S. carrier spending could decline the following year, Prentiss predicts 'there will still be a two in the first digit.' Rather than a decrease in wireless spending, it's the continuing sharp drop in wireline spending that is hurting the equipment makers most, Prentiss says. Most big phone companies have pared this year's capital spending by 15 percent to 20 percent. Lucent already has said revenue in the first quarter–projected to be its worst–will come in below expectations, prompting the wireless and wireline gear maker to put off its profitability hopes until next year. Motorola also has hinted it may not reach its goal to be profitable this year, either. Ericsson expects equipment sales this quarter to be flat at best. And Nortel last week warned of first-quarter revenue of $2.9 billion and a loss of 26 cents per share, below its guidance of $3.1 billion in sales and a loss of 13 cents per share. Furthermore, there are hints of more wireline capex cuts to come. Whether the companies will be forced to make additional cuts remains to be seen. Some analysts foresee Lucent and Ericsson further whittling their head counts and Motorola has talked about further cost-cutting in some units. Nortel late last year said it was through with reducing staff. Together, the four companies have laid off nearly 200,000 workers. While Nokia, Motorola and Ericsson will get a boost from expected strength in handsets, Lucent and Nortel have no such cushion. And the infrastructure market–despite high hopes for a second-half rebound–is so sluggish that consolidation is expected between major players. Whether you were a market share leader like Ericsson or a small player, observes McKechnie, it was easy to make money during the eight-year stretch when there were 'five carriers in every country rushing to build out their networks.' Now, equipment makers merely 'want to be standing so they're ready when the next leg of growth hits,' he says. 'Clearly, spending is very slow,' says Mark Roberts, an analyst with Wachovia Securities. 'What's going to drive a rebound in infrastructure is when carriers get to the point where they can afford to build out third-generation networks.' And for that to happen, carriers need to feel confident that revenue from wireless data will materialize and that consumer demand will be there. Any rebound that materializes will start with handset sales, then applications, then carrier revenue growth and finally carrier spending on infrastructure. The wireless industry has been hit with a double whammy because the economy came crashing down during a lull in the technology cycle. But Roberts believes economics are more of a driver than technology cycles. 'We don't think it's technology driving handset demand. It's purely economics. When consumers are feeling good about the economy, it's not surprising that they'll want to go out and buy a phone.' And although there are some indications the economy is improving amid continuing pessimism, the industry might have to wait several more quarters for consumers to pick up their wallets and put their chips on the table. << - Eric -