re: Matt Hoffman on Nokia (A Downgrade)
I strongly suggest that wireless investors read the complete report. It is quite well documented.
Liberal (Nokia related) excerpts from:
>> Wireless Equipment Industry Update: Mobile Phones
Matt Hoffman
SoundView Technologies
May 6, 2002
research.soundview.com
Mobile Phones: ASPs Up, Share Shifting, Lowering Units
* The 1Q02 earnings season was riddled with conflicting information as early, positive indicators from component suppliers ultimately gave way to crushing forecast reductions by major handset OEMs.
* While we accept Nokia’s view of its revenue prospects in 2002, we believe Nokia is wrong on its overall market analysis. The data and our channel checks since the report do not support the company’s view that the replacement handset market is broadly under stress.
* Instead, we view Nokia’s pessimism toward the handset market – and the replacement market in particular – as a defensive response to newly competitive suppliers Sony Ericsson, Motorola and Samsung and the prospect of share loss to those OEMs.
* We now believe we will see Nokia’s share of mobile phone unit sales decline the rest of this year, from 37% down to 32%, mirroring the decline we are starting to see in its share of industry handset revenue.
* Buried deep within the miserable 1Q02 wireless equipment earnings season was good news on handset ASPs, which rose 3% sequentially (4% year over year), and industry revenue – up 19% year over year.
* The highlight in the quarter was the outstanding performance of the Sony Ericsson (SEMC) handset JV. SEMC, in its return to break-even status, drove handset ASPs up an unprecedented $50 sequentially to $171, showing that end users still desire innovation.
* Our net: Nokia is feeling the heat of competition and lowered the denominator (market) to protect its share calculation. Investors should look toward other names, including Motorola, to realize returns on the industry’s momentum.
Is This a Weak Market or Are Share Shifts Affecting the Varied Outlooks?
The 1Q02 earnings season was unusual and uneven. While almost every company in the mobile phone space reported results in-line with investor expectations, the handset outlook provided by market leader Nokia spooked and disappointed investors. The disconnect occurred after the first week of reports detailed surprisingly upbeat forecasts on the part of industry players like RFMD, PWAV, MOT and TXN – only to be followed by slashed Nokia forecasts the following week.
[See Report Figure 1 which provides a brief snapshot of how the mobile phone manufacturers reported and the market reaction.]
After placing a round of calls to our industry contacts and performing an examination of the 1Q02 data, we believe the explanation for the Nokia guidance change lies in the changing competitive landscape, not unexpected market weakness.
Since companies often have a difficult time believing, much less projecting, market share losses, Nokia’s behavior is consistent with leaders in other industries whose grasp on the top rung of the ladder is slipping.
Our new projections for Nokia Mobile Phones show them losing sequential unit market share for the remainder of 2002. We believe their upcoming product lineup fails to excite both operators and end users at the same level it has over the past three years. In short, we believe Nokia’s lowered outlook is more likely the by-product of a tired handset lineup and keener competition than end-user weakness.
Results From the 1Q02 Handset Market: ASPs Up, Revenue Up, but Not for Nokia
After sifting through the results of market leaders Nokia, Ericsson, Motorola, Siemens, and Samsung, we believe there were three main storylines in the 1Q02 quarter:
* Handset ASPs overall were up 3% sequentially and 4% year over year.
* Total worldwide handset revenue was up 19% year over year while market leader Nokia saw revenue decline 6% year over year.
* Handset inventory leaving 4Q01 was much lower than we saw leaving 4Q00.
We believe the most important trend for investors to notice is that we are seeing steadily rising handset ASPs. We think the rising ASP story has largely been missed by investors because industry standard–bearer Nokia has not yet participated in this trend.
However, over the past three quarters we have seen steady, and sometimes dramatic, ASP increases by each of the industry’s next three largest players – Motorola, SEMC (Sony Ericsson), and Samsung.
[See Figure 2 for handset ASPs and revenue results and Soundview look ahead.]
Motorola started the rising ASP trend last summer, reporting 2Q01 to 3Q01 selling price increases of $21 ($140 to $161) as its new GPRS phones got traction at key European operators.
We have also seen Samsung’s handset prices rise an average of 5% sequentially each of the last three quarters, leaping from $178 to $209 over that period as 1XRTT CDMA took off in Korea.
However, the truly shocking performance of the quarter was the increase in ASPs at Sony Ericsson Mobile Communications (SEMC). After a nice increase of $15 from 3Q01 to 4Q01, the JV tacked on another $50 increase this quarter and can now brag of ASPs of $171 per phone. The SEMC performance is the result of the nearly complete overhaul of its phone lineup, and especially the arrival of the color-display T68 and T68i GSM phones.
We have written extensively and enthusiastically about the T68 since it was launched last summer and we are starting to see the impact of that phone on Sony Ericsson’s financial performance. SEMC reported that it is now breakeven after suffering massive losses over the past few quarters as stand-alone and combined entities. This quarter the JV had an 11% sequential top-line increase in a normally seasonally weak 1Q02. We feel that the most important part of the company’s results is the fact that the results from SEMC show that there is a replacement market and that end users will pay for innovative new products.
It has been gospel in the industry that until Nokia shows up with a new product a segment will not take off. That may still be the case for the mass-market consumer Nokia still effectively targets, but we have seen signs that high-end users will buy innovative new products.
Nokia’S Share Of Industry Revenue Was Down Markedly In 1Q02
While the industry saw overall handset revenue increase 19% year over year, Nokia’s revenue was down 6% year over year. Our data in Figure 3 shows that Nokia actually increased its unit market share this quarter, jumping to nearly 37% in our model, while Motorola declined and Ericsson was flat.
However, with the rest of the industry seeing strong ASP development (and Nokia having a relatively tough year-over-year compare) Nokia under-performed on revenue generation during the quarter. The decline in ASPs at Nokia would seem to be a reflection of how uncompetitive the Nokia product lineup has gotten.
We had long assumed that 1Q02 would be tough for Nokia’s product lineup but that the company would see relief with the 13 new products it is launching this quarter. Orders for the new products, however, do not seem to be living up to the company’s expectations. Nokia is late with high-end color GSM phones, is losing share to SEMC (Sony Ericsson) and Motorola in the TDMA market it dominated for the last three years with greater than 65% share, and is late with 1X CDMA phones.
The major surprise for us this earnings season was the fact that Nokia did not think the new products they have coming in all three technologies would not markedly change the company’s fortunes and start the next cycle of growth. Instead, we are seeing signs that Sony Ericsson, Motorola, Kyocera and Samsung’s new products are having an effect on Nokia’s fortunes.
[See Figure 3 for an analysis of Sell-In - Units]
We are downgrading Nokia today because we believe the company is at risk of seeing unit market share losses mirroring those it is now seeing in its share of industry revenue. Primarily, we believe the company is at risk in the TDMA market, and to a lesser extent the CDMA market. We had assumed that Nokia would simply ride the technology into the sunset, as most TDMA operators are now switching over to GSM technology, and that Nokia’s competitors would not actively target this dying technology with new products.
TDMA – It does not appear that the competition is going to abandon the TDMA segment as we thought they would. In fact, the competition appears to be vigorously targeting the technology with new products coming out now and into the summer. Sources are telling us that Ericsson, with its T60, and Motorola with its new product, are poised to knock Nokia well under the greater than 65% share it has maintained in this technology the last three years. TDMA, long less competitive than GSM for Nokia, has been a source of huge margins and fat sales. But tough times at customers like Cingular and AWE have led those operators to look at new suppliers.
CDMA – We are adjusting our global forecast to account for the 3 million units we trimmed two weeks ago from our worldwide CDMA forecast. Nokia’s position in the CDMA market continues to deteriorate this spring as 1X gains traction in the key Verizon channel. We believe there was a substantial amount of Nokia CDMA units in inventory at year-end and that it has taken time to burn those units off this quarter. Nokia’s share of sell-through at Verizon is in the mid-teens, but its share of sell-in was likely in single digits. Moving forward we have some concern around whether Nokia will be building BREW, being used at Verizon, into its CDMA 1X units. As for other CDMA vendors, we have heard that Samsung is having quality problems with one of its CDMA units, the T300. We have additional concerns that the weaker Korean market, where illegal subsidies are being eliminated, are likely to hurt Samsung even further. LG’s 510 CDMA phone continues to be a very hot seller at Verizon and Kyocera’s 1X lead is hurting Samsung at Sprint PCS as that operator goes through its technology migration.
GSM – We believe that Nokia is still showing decent momentum in GSM, but that is largely the result of cutting prices.
<Big Snip of lots of good stuff on Sub Growth and Replacement Sales>
Subscriber growth for next-generation services continues to be pushed out across the globe. The second half will begin to see the ramp of 2.5G subs across Asia, Western Europe and North America with the growth in GPRS subs outpacing that of the 1X ramp. We estimate only minimal impact from 3G services in 2002 (1.6 million subs by end of 2002), mainly coming from Japan and very isolated initial rollouts in Western Europe.
Market Net
In terms of the global wireless market, we see basically in-line growth in the mobile subscriber market, but that the handset replacement market should turn back up with the continued rollout and end-user adoption of new technologies like color-displays, Bluetooth, camera phones and MMS. Unfortunately, Nokia appears to have lost its edge in rolling out products that end users will buy this year. We are shifting our bias toward Motorola as that company appears to have the best chance of taking market share the rest of 2002 as the company’s new products ramp later this year. <<
- Eric - |
