Lehman Brothers: Gfk's Europe View; Nokia, Moto; Sony Ericsson
Selected excerpts below are from a 12/6 and a 12/7 Lehman Brothers Wireless Equipment Industry Update by Jeff Kvaal, Stuart Jeffrey and Tim Luke published after their 2006 Global Technology Conference. Lehman states ...
Global handset demand appears to be tracking in line to ~970M¹ phones in 2006 with little upside likely. Mgmts reiterated ~10% unit growth in 2007.
¹ Their recent forecast was 960 million units.
>> Gfk
European handset Growth Solid; Nokia, Motorola and Sony Ericsson stable to increased regional share: Market research firm Gfk highlighted a solid European market environment of up 14% YoY unit shipment growth and sequential improvement of approximately 27%. Regionally, growth is primarily being driven by strong unit shipments in Germany.
W-CDMA currently represents approximately 20% of the market, and while growth in unit shipments have tempered, W-CDMA units are growing approximately 50% sequentially while GSM based shipments are growing slightly north of 20%.
From a vendor perspective, Nokia continues to remain the leading regional share position with stable share in the mid 30% range. The RAZR continues to remain the best selling handset in the region, helping edge up Motorola’s sequential share, though pricing declines have continued comparatively faster than other products in the region. The RAZR XX and RAZR MAXX, in-line with Motorola handset chief Ron Garriques' commentary earlier in the day, seem to be at early stages in the market with carrier penetration and distribution currently limited. Potential upside for the vendor may be driven by late 4Q progress in the KRZR which carriers have recently begun to broadly subsidize across the region.
With respect to other vendors, Sony Ericsson continues to gain regional share, though dependent on two key products, the W800i and the W850i, which may be cresting ahead of 1Q07. Samsung has lost share during the quarter while LG Chocolate sales have recovered following price cuts and supply constraints at the end of 2Q which led to a lower than expected regional sales in 3Q. Other LG models in Europe appear to be ageing.
>> Nokia
In the near-term, 4Q seasonality may be led by Europe and Latin America as demand in North America is tepid. Asia remains strong though a region that does not traditionally benefit from a seasonal 4Q. For Nokia, strength in Europe and APAC (where Nokia is strong) and weaker trends in North America (where share remains comparatively modest) indicates that 4Q is tracking well. We forecast the market to grow 15% q/q in 4Q with Nokia maintaining global share around 37%. ²
² Strategy Analytics credits them with 34.5% of 256.2m units sell-in in Q3 and Gartner credits them with 35.1% of 251.3m units sell through.
We see Nokia as performing better in Europe (market growing in line with seasonality; for Nokia problems remain in the mid-range until the 6300 device is launched, offset somewhat by the 8800 fashion phones and 5200/5300 music phones providing some support to margins), APAC and LatAm growing strongly (APAC on strong sub growth and LatAm due to the high degree of seasonality) and the US weak (lack of product, although the recent launch of the E61 and N75 could help margins).
Nokia sees up to 10% handset market growth in 2007 from 2006 (supported by comments yesterday from Samsung and Skyworks), but acknowledged that prior forecasts have proven quite conservative, largely due to out performance in emerging markets. Looking to 2007, emerging markets, APAC and MEA in particular, are expected to continue to grow strongly, but growth in LatAm and North America is slowing noticeably.
While the product portfolio has only seen small changes in 4Q06, new products are anticipated in early 2007, both those that have been officially announced (e.g. 6300 - slim mid-range, to ship in 1Q06) and those that are anticipated (e.g. Barracuda - slim lowend phone, we were only provided a glimpse of at Capital Markets Days for competitive reasons). While the company is very positive about the future make-up of its portfolio, we remain cautiously optimistic as we have yet to see all of the new phones and due to the time it takes to refresh its full portfolio.
The company's Enterprise division is struggling to improve profitability (-25% operating margin in 3Q06), but Nokia is looking to ramp ESeries volumes to drive margins. While the timing of the next wave of adoption is uncertain (e.g. enterprise workers who do not have a mobile e-mail device, Prosumer), Nokia is confident that the E-series can help expand the market. While some market share gains is possible at existing mobile e-mail users, the company is more focused on growing the overall market and expanding into new subsegments. We also find it interesting to note that competition is high (e.g. Blackberry, Motorola Q, Samsung Blackjack, HTC, Nokia E61) for what is a relatively small space (~15m annual device unit shipments), especially when compared to the Big 3 - 5 mobile phone vendors fighting over a nearly 1B unit opportunity.
Nokia's European strength and relative under representation in NA suggests a solid 4Q. Our ests are €11.6B / €0.33. Share gains and better phone margins than thought may help 2007.
Motorola
Mixed Tone on 4Q as ASPs/Margin Pressure May Offset Solid Unit Volumes; 2007 May See Share Gains and Limited Margin Expansion
Ron Garriques, President of Mobile Devices for Motorola presented a keynote address yesterday at the Lehman Brothers Global Technology Conference. Overall, we believe that market demand expectations for 4Q are in line with expectations. Management anticipates end market demand of 265-285M vs. our estimates of 275M though highlighted that demand remains uneven on a carrier by carrier basis.
Regionally, management sees traditional demand in the Americas, a seasonally strong North Asia market (in particular sales of ROKR 2 and through its expanded retail presence), tempered European growth given its modest 3G positioning which is just beginning to ramp, and strong growth in the high growth markets.
Motorola continues to expect modest sequential share gain (22.3% in Q306³) even at the high end of the range suggesting 4Q unit shipments of 62-63M (+15-17% QoQ Growth). Our estimate remains 62M.
³ Strategy Analytics credits them with 21.0% of 256.2m units sell-in in Q3 and Gartner credits them with 20.6% of 251.3m units sell through.
All major product launches announced at the company's analyst day (XX, MAXX, KRZR, RIZR, MOTOFONE) have taken place though 3G shipments into Europe are at their early stages.
Motorola is also set to introduce a CDMA MOTOFONE by year end. Management highlighted that initial demand for the MOTOFONE is healthy and that it may extend the market into new segments vs. strictly cannibalizing Motorola’s existing C and W series product lines.
We believe KRZR unit volumes may be potentially at the lower end of expectations given elevated price point. 4Q ASPs are likely to be affected by competitive pressure and increased contribution from high growth/lower ASP markets. Nokia, for example, significantly reduced its prices in 3Q06 and lowered its handset operating margin targets. We believe this may prevent Motorola’s ASPs from returning to 2Q06 levels of $138 as management had suggested on its October conference call. Our ASP estimates are $133, modestly up (2%) from 3Q ASPs of $131. Pricing trends are likely to also affect handset operating margins during the quarter and into 2007. Our 4Q06 estimates call for 12.0%, a modest improvement from 11.9% in the September quarter. We believe that Motorola may struggle to reach its prior targets of sequential improvement in operating margin in the handset unit each quarter. A 50 bps swing in Motorola’s handset margin equates to a $0.01 per quarter change it its EPS.
Looking beyond 4Q, management expects a strong and competitive product portfolio in 2007, including the addition of a HSDPA SCPL phone which is currently undergoing testing. Other products that the company expects to launch which were not highlighted during the product introductions at the company's analyst day include a CDMA MOTOFONE which is expected to ship this quarter, an EVDO version of the MAXX which is expected to ship in Q107, and the MACAO, an update to the MING device.
The company continues to expect market share consolidation among leaders with potential share gains coming at the expense of tier 2 and tier 3 handset vendors. With respect to 3G, management also sees the potential for ongoing delays on China 3G license issuance with significant outstanding issues on technology, IPR and policy. More broadly on infrastructure, management expects CDMA infrastructure spending to remain solid in the near-term, declining GSM to partially benefit from the recent Telsim deal announcement, and iDEN to decline as expected.
Sony Ericsson
Broadening of portfolio to aid further gains. While Sony Ericsson has performed very well in 2006, Ericsson sees the potential for further improvement in 2007, as the product portfolio broadens and traction in the market improves. The Sony Ericsson portfolio will expand in the low end, although the company does not intend to enter the ultra low cost market. Through both a strong product and increased investment in branding and marketing, Sony Ericsson intends to remain an aspirational brand. At the high-end of the market, the company believes its WCDMA products are selling well not because they are 3G phones, but rather because they are attractive products with a strong feature set (e.g. Walkman W950, Cybershot K800i). ###
- Eric - |
