The cellular industry’s major handset manufacturers reported lower growth figures in third quarter reports, a sign that the wireless phone industry could be slowing down in the United States.
Low cellular phone prices were one of the contributing factors that led to the slower growth figures, analysts said. Make no mistake-equipment manufacturers reported growth in cellular handset sales, but not at the peak rates experienced in recent years.
Nor did the results meet the predictions of analysts, hence the dip last month in the stocks of Motorola Inc., Nokia Group and L.M. Ericsson after Motorola’s third-quarter report was released. Stocks have climbed back only slightly, indicating Wall Street’s continuing nervousness.
Motorola said its cellular business was affected by a “moderating growth rate” in the cellular subscriber base in the United States. The Illinois-based manufacturer reported a 14 percent increase in general systems sector orders during this year’s third quarter; orders rose 61 percent in third quarter 1994.
Although Nokia’s mobile phone division experienced a 59 percent increase in net sales this year compared with the same period in 1994, U.S. growth was slower than in previous years, according to Nokia’s Chief Executive Officer Jorma Ollila.
Handset sales comprise about 65 percent of the business of Motorola and Nokia.
Ericsson said the slowing is in analog sales, and that prospects for digital handsets were significantly brighter. Ericsson has not released yet a third-quarter report.
Some price pressures on phones can be traced back to surplus inventories reported at the end of 1994. By spring, distributors were shipping at close-out prices to make room for new products.
“Phone prices normally decline 15 to 20 percent, but it went down a little more than 20 percent,” said Alex Sena, a telecom equipment analyst with Lehman Brothers Inc.
Hauppauge, N.Y.-based Audiovox Corp. reported a third-quarter loss that included the provision of $7.3 million to mark down cellular phone inventories to the current market price.
“While we experienced strong unit sales growth during the third quarter, the downward pressure on cellular telephone pricing which began last summer has continued,” said John J. Shalam, Audiovox president and chief executive officer. “As a result, we have negotiated reduced pricing on all current and future orders from our vendors. Additionally, we took a markdown on our existing cellular telephone inventory to accurately reflect the market value of those telephones,” Shalam said.
Sena said low phone prices primarily were a problem during the first and second quarters, and that the third quarter, which is traditionally weak, was more affected by tumbling subscriber growth, he said.
But the mid-year report by the Cellular Telecommunications Industry Association states that the industry had signed up 4 million new subscribers by mid-year, compared with 3.3 million new subscribers added during the first six months of 1994. Although more subscribers were added by mid-year 1995 than in mid-year 1994, the growth rate percentage is smaller because the customer base is larger. There are 28 million cellular subscribers in the United States, CTIA said.
Despite the recent reaction of Wall Street, industry growth remains strong, said Ivan Arteaga, telecom analyst with Gabelli & Co.
“Reality has been good but expectations have been better. There are some price pressures in the industry with new technologies, and competition is going deeper into the mass market,” Arteaga said.
Motorola’s Gary Tooker, vice chairman and chief executive officer, said the company expects to see slower economic expansion in some of its U.S. businesses in the near term.
“As new technologies enter our revenue base, their early life cycle levels of profitability are low until markets mature and manufacturing economies of scale develop to reduce unit costs,” Tooker said.
Motorola doesn’t expect a buildup of cellular phone inventories this fourth quarter, such as what happened in fourth quarter 1994. The differences will affect a comparison of fourth quarter 1995 sales and profits to those of 1994, Tooker said.
Sena said investors should turn their attention away from handsets and focus on infrastructure equipment. Motorola is one of at least three equipment manufacturers courting the Sprint Telecommunications Venture, which controls one of the nation’s largest footprints of personal communications services.
“Motorola does $2.5 to $3 billion a quarter in cellular (infrastructure). And they’re about to get $500 million to $2 billion in PCS,” Sena said.
The nation’s 28 million customers reflects a 10 percent penetration rate. Sena said although it took 10 years to get there, European operators discovered that once 10 percent is reached, it doesn’t take long to jump up to 20 percent penetration.
