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To: DaveMG who wrote (28123)	4/22/1999 8:10:00 PM
From: DaveMG	Read Replies (1) \| Respond to of 152472

The view from Finland The second quarter of the Big Three - first impressions By Tero Kuittinen, Guest Columnist Last Update: 8:30 AM MT Apr 22, 1999 Motorola's come-back It's on track. And it rests almost completely on the successful new high-end digital mobile phones. That's both good and bad news. The new CDMA Startacs are the high-end hit of this spring in USA and have resulted in ground-breaking orders in Brazil and Korea. The V3688 is the luxury item of the moment in Europe. The dual-band GSM-900/1800 GSM model is the leader in the low-end GSM dual-band phone market. That's three digital phone models that can be legitimately called hits; and only a year after Motorola was badly foundering in the market for digital phones. Wall Street has responded highly positively. The bad news is that Motorola's gains have a narrow base. Low-end CDMA phones, tri-mode TDMA phones for USA, low-end GSM-900 phones, mid-range GSM-900 phones, high-end GSM-900/1800 phones - the list of markets where Motorola has not made much headway is long. The company is introducing models in these sectors during 1999. Somewhat worryingly the recent low-end GSM entries have been disappointing. And Motorola appears to be much slower to introduce new platforms in different standards than Nokia; so far the company has been unable to create the kind of flood of new products that has propelled Nokia's handset growth. This lack of breadth in Motorola's handset program is reflected by the sales growth numbers. Overall sales growth was just 5% while the personal-communications products division that includes the handsets grew by a worrying 8%. Considering the giddy heights Motorola's P/E ratio has reached these numbers do not exactly reflect the "strong rebound" that many analysts are talking about. By lumping together pager and mobile phone sales in the same division Motorola is preventing investors from assessing the handset sales situation in detail. The company can sidestep criticism by citing weak pager sales and hint at exploding sales of digital models. But how fast can the digital phone sales growth be if it can't lift the consumer product division to double digit growth? Motorola seems unwilling to face the death of paging - they keep trying to resuscitate pager sales by introducing new models. This could be a drag to the consumer division throughout 1999. And the consumer division matters a lot. Semiconductor and infrastructure sales growth seems to be stuck at below 10%. Motorola needs to leverage the phone sales growth for all it's worth. Spinning off either semiconductors or pagers would probably immediately boost the stock price. Tellingly, Motorola hinted at a strong second quarter, but refused to say that the full year will be ahead of current estimates. I wish they would just pull the plug on weaker divisions and concentrate more of the resources on mobile phones. Splitting the R&D and brainpower among half a dozen major projects won't do them any favors in the long run. The company faces some painful decisions about Iridium. They obviously need to introduce an entirely new satellite phone line-up if they want to stay committed to the project; the current models are too big and expensive and competition from Globalstar will further undermine already weak Iridium sales next winter. This would mean accepting that the first generation of satellite phones will never turn a profit and committing even more resources into Iridium. The worst decision they can make is to limp ahead with the current level of commitment -neither betting the company on Iridium nor pulling the plug. This is excatly what Motorola is doing with paging and they really don't need another chronic drag on earnings growth. Ericsson's disastrous handset problems and the wide-open competitive situation in the CDMA phone market is now giving Motorola a golden opportunity to reach a new level of growth. The first stage of the assault on the digital phone market is highly promising. If the company only could focus more on its strengths, notably in producing credible high-end phones with a sterling brand and good technological specs, they could be positioned to capitalize on the undergoing emergence of mobile telecom as an investment field superior to the PC industry. Nokia and Ericsson - valuation divergence in the cards? For most of the Nineties, Nokia and Ericsson have traded in tandem, regarded almost identical by many investors. Ericsson was seen as the stronger network equipment company and Nokia was regarded as a better handset manufacturer. This might be the year when this connection is tested to destruction. Ericsson's 1Q was an unmitigated disaster, while Nokia was able to extend the 1998 winning streak many analysts have been predicting to end. The number of "it's time to switch from Nokia to Ericsson" comments at the start of 1999 was mind-boggling. This stroke of genius was based purely on the fact that Ericsson has a historically higher P/E ratio and as soon as Nokia pulled ahead people started to expect the situation to switch around again. The 1Q numbers stand in stark contrast to the grand unified theory of "Ericsson equals Nokia". Ericsson's network sales are doing OK - they grew by 20%, lagging Nokia's growth rate by only 5 percentage points. But the -12% death spiral in the consumer product division sales and the staggering 51% fall in the operating profit tell the real story. Network division may be far bigger part of Ericsson than the handset manufacturing - but it's the latter that was supposed to turbo-charge Ericsson's profit growth sometime in the near future. The fact that Ericsson seems unable to pull ahead of Nokia even in the network sales is just an added insult. The first quarter was supposed to be the start of Nokia's rapid earnings and sales growth slow-down according to most Wall Street analysts. Instead, the handset sales growth reached 92% once again and has now hovered around 100% for three consecutive quarters. What is even more significant - the handset profit margins roared up to 23.9%. This surpassed expectations, because Nokia's big new phone platform was launched in February 1998. By 1Q of 1999 the 61xx series has started to age and the 51xx series is also losing its novelty value - most models age so rapidly that sales growth starts winding down almost as soon as the full volume sales begin. This was what happened to Ericsson's 6xx and 7xx model line-ups, which were red hot in 1997 before abruptly losing their appeal at the start of 1998. Nokia has shown a unique resiliency in introducing models sufficiently advanced in both technology and design to retain pricing power even a year after the launch. On handsets Ericsson has been forced to radical price-cuts to move the merchandise and that is now gutting the profitability of the company. Sales contraction of 12% in a market that is projected to grow by 40% in 1999 is about as bad as it gets. Even worse is the news that Nokia is launching brand new phones within a month or two: the low-end GSM model 3210, the high end GSM model 7110, the high-end CDMA model 6185 (which faces negligible competition in the tri-mode sweepstakes) and the low-end CDMA models in the 51xx family. Nokia has managed to bridge the gap between successive generations of phones without dropping the ball in managing sales growth - Ericsson has now clocked in three consecutive quarters without growth. Nokia's new "modular" product strategy aims to abolish the traditional product cycle. Instead of introducing an entirely new platform every two years and suffering from cyclical swings that come with this strategy, Nokia is now cranking out a steady stream of new models. Each shares some features with older models while introducing enough novelties to create interest in jaded consumers. The new 7110 has an augmented display that is 80% bigger than in 6110 and incorporates a scroll button to facilitate data access. Otherwise the model recycles many 6110 features, keeping costs down and increasing profit margins. The 3210 does to 5110 what the 7110 does to 6110 - offers an updated version just different enough to justify a higher price. The TDMA version of Nokia's 88xx, which will debut in USA during the ongoing quarter, gives Nokia the company's first luxury entry in the American market. The lead CDMA model is designed to take advantage of the lack of competition in the tri-mode CDMA phone market. Nokia's ability to post dizzy sales growth while relying almost purely on GSM and TDMA formats bodes well for the latter part of 1999 when the new CDMA models reach volume sales in USA. Motorola and Nokia are getting a substantial benefit from the high consumer awareness of their leading platforms when they introduce new CDMA variants. Ericsson's entries for this summer seem to consist of tentative regurgitations of the old platforms. The displays are still cramped and primitive, especially compared to the new level reached in Nokia 7110. The high-end Ericsson model does feature a very low weight and voice-dialing. But the stand-by time is lack-luster, design clunky and entirely novel ideas seem absent. The new Ericsson models should sell to the old customer base - but it seems unlikely to ignite much interest in new customers. In addition, Ericsson's timetable to mount a challenge in the fast-expanding American TDMA and CDMA markets seems very vague. The real fight of the second half of the year may be fought by Motorola and Nokia over the share Ericsson is losing in GSM and TDMA markets. It will be highly interesting to see how rapidly the two leaders can gain share in the CDMA market - last autumn Nokia and Motorola barely registered in this market, but by next autumn they could own most of the 200$-plus category and 20-30% chunk of the low-end market. Ericsson still has many advantages - the recent deal with Qualcomm has removed the threat of litigation and given Ericsson access to the CDMA market. However, it's getting a little late to start a CDMA phone project at this stage, especially if the tanking GSM and TDMA sales are costing Ericsson the brand value it will need in expanding its sales. Ericsson's impressive leadership in developing W-CDMA networks and augmenting existing GSM infrastructure with technologies like GPRS means that as a long term investment is looks a lot healthier than most of the PC companies. But they have to find a way to deal with the handset problems - either sell the unit or make sure the project development picks up a lot of steam very rapidly. Othwerwise the future earnigns growth will be jeopardized by the collapsing phone division. The unit may only make up 25% of Ericsson's sales, but that's enough to do plenty of damage to the future profit growth if it keeps heading south. The R&D expenses of new technologies like W-CDMA, color displays, voice-dialing, WAP, Bluetooth, Symbian, etc. are so staggering they have to be justified by a strong global presence in all leading digital standards and a brand that has the strength to draw consumers to the high-end models <TK>. debry.com

To: DaveMG who wrote (28123)	4/22/1999 10:15:00 PM
From: quidditch	Read Replies (1) \| Respond to of 152472

I think that the reason the 82 million (approx.) is being used rather than the 70 something million (I don't have any of the Q's Q's in front of me) is that: 1. Q reported a loss (reflecting infra.sale charge). When you report a loss, you don't fully dilute per SEC rules (by including outstanding but unexercised options, etc.) because that would tend to reduce the loss per share number. 2. In providing the pro forma numbers without infra. charge and infra revenues, Q would have reported a gain. To be consistent with gain presentation, Q calculated the shares outstanding on a fully diluted basis in coming up with the $1.20. That was my understanding of TT's comment. Regards. Liacos_samui