By: Moderatore on Martedì 10 Giugno 2003 16:50
David Sterman analyzes the Nokia earnings call at 8 a.m. EDT.
06/10/03 08:14 AM EDT
Nokia's management has spoken of how an aggressive revamp of the company's cell-phone lineup would enable the company to retain its premium pricing. The strong margins are a testament to that effort, but it does look as if Average Selling Prices, or ASPs, slipped in the quarter.
If the slump in global handset sales lasts for a few more quarters, then the company's margins may be at risk, as competitors play catch-up. Notably, Motorola said yesterday that a pair of Chinese competitors are now siphoning off growth in the fast-growing China market. Nokia attributed the weakness in Asia to SARS, but concerns of incipient competitive threats are likely to loom large among analysts.
Look for shares of Nokia (NOK:NYSE) to open slightly lower this morning. Strong margins helped to offset tepid sales growth, as the company maintained EPS guidance for its second quarter. But investors will likely bag profit after the stock's recent run. We'll have all the details on Nokia's outlook as the company's midquarter conference call gets underway at 8 a.m. EDT.
But there is good news coming from the Networks division, which has been a black hole for several years. Heavy cost cuts and a stabilization of revenues have helped to end the red ink. As competitors continue to exit this industry, the outlook could actually be reasonably positive for Networks. It's been a long time since that sentiment has been uttered.
Shares of Nokia have been risen nearly 50% since early March in anticipation of a brighter economy. But it's fair to wonder if the cell phone industry will ever return to its former glory. Low-cost Asian manufacturers keep gaining traction, and appear positioned to sop up any new demand that develops. Looking at the chart from the last few years, the stock looks to be a good trade in the low teens, and a sell in the upper teens. I don't see any reason why that should change.
That said, the company believes it has taken market share, which may now exceed 40%. The fact that handset sales grew just 4% indicates that the industry is flat. In recent months, analysts have been predicting an upturn in demand for cell phones. But that doesn't appear to be the case.
The Q&A has wrapped up. In sum, Nokia's sales results are disappointing. But the strong margins ensure that EPS forecasts will remain intact for the foreseeable future. Netting out those two factors, shares will likely trade in a tight range for the next several months.
As I mentioned earlier, I can't envision a time when the stock will break out of the $12-$20 trading range in which it is stuck. The company will be hard-pressed to grow as competitors play catch-up. Right now, Nokia retains a lead in terms of cell phone design and image. But that can change. And it's too soon to say if the Networks division is really out of the woods.
Q: In handsets, are you seeing the same -- or unchanged -- demand in the second quarter in Europe?
A: The market situation is well-reflected in what we are guiding for. The overall economic situation remains challenging.
Q: Can you discuss the Chinese market further?
A: On a relative basis, we think we've made headway, especially in terms of distribution. But inventories in China seem to be on the high side for the overall market. Our inventories are OK.
Q: ASPs are down once again, despite a higher proportion of higher-margin e-phones. What's happening there?
A: I mentioned the currency implications. Looking at the underlying picture, we still think we're seeing solid progress with our new products, as we have a number of products in the top ten.
: Can you comment on any traction in the CDMA market?
A: What I said a few moments ago is applicable to the CDMA market. There is a substantial gain there, driven by the product introductions we have made. We have invested a lot more in CDMA in the last few years, and we expect that investment to pay off in coming years.
Q: Regarding unit demand for mobile phones, can you give us more flavor?
A: The overall market is up year-on-year and sequentially. In that environment, we estimate we will take market share in the 2nd quarter (which implies that ASPs are falling, as evidenced by the tepid 4% growth). We're seeing the most strength in the U.S., where we see positive developments stemming from our competitive position.
Q: Could you expand upon the ASP trends you're seeing?
A: They are gravely impacted by currency fluctuations. We expect them to be down on a sequential basis compared to the first quarter. In the U.S., they are up on a dollar basis. And in Europe, they are flat. But in other dollar-based markets, we're seeing more demand on the low-end, which is hurting our mix.
Q: On infrastructure, sales are stronger than most expected. Has business there picked up? In other words, is this sustainable?
A: It's too soon to say. In the current quarter, sales will be flat to down 5%. But we haven't seen any signs of a recovery here yet.