Revised earnings guidance by two firms that have traditionally served Nokia Corp.-delivered within four days of each other-may reflect a softening in Nokia’s Western European sales due to an invasion of light, slim phones by competitors, according to a market analyst who specializes in Scandinavian companies.
The weakened forecasts also might signal a broader softening of the mid- to high-end replacement market in Western Europe, affecting Nokia’s rivals as well. Third-quarter results and fourth-quarter guidance by various players may clarify the situation.
Elcoteq SE, a Finnish electronic manufacturing service that relies heavily on Nokia’s business, on Sept. 14 revised downward its forecast for third-quarter and full-year revenue and profit. Perlos Corp., a Finnish original design manufacturer, said last week that while its revenue was holding steady, its third-quarter profit would be significantly below the previous quarter.
Both firms saw their stock prices subsequently drop on the Helsinki Exchange, indicating that the news surprised investors, according to Tero Kuittenen, senior product specialist with New York-based Nordic Partners Inc., a brokerage firm specializing in Scandinavian businesses.
Nokia’s gradual shift from its traditional reliance on European-based EMSs and ODMs to counterparts in China has been well-known to its European partners for some time, Kuittenen said. Therefore, Elcoteq’s and Perlos’ revised guidance on third-quarter results this late in the quarter is more likely based on a near-term softening in sales by their clients, particularly Nokia, he said.
Neil Mawston, analyst with Strategy Analytics, said that Western Europe represented about 18 percent of Nokia’s global handset shipment volumes in the second quarter and that the Asia-Pacific region possessed far greater relevance to Nokia’s overall fortunes. Moreover, he said, Nokia’s fortunes have been up and down in Western Europe every quarter for the last couple years.
“So, to see some softness in this region during the third quarter-if it turns out so-would not be a major surprise,” Mawston said.
Nokia’s policy is to not comment on third-party forecasts or financial matters apart from its own reports and guidance, according to spokeswoman Laurie Armstrong.
Elcoteq’s reduced forecast is due to “weaker-than-expected manufacturing volumes in Europe and unsatisfactory profit growth in the Americas,” said Reeta Kaukiainen, the company’s director of communications and investor relations, in an e-mail interview from Espoo, Finland, headquarters to both Elcoteq and Nokia.
Kaukiainen’s remark would seem to fit Kuittenen’s point on Nokia’s possible fortunes in Europe, while also reflecting Nokia’s uphill struggle to regain its footing in the U.S. market.
Why doesn’t Nokia’s robust forecast for this year’s handset shipment volumes translate to solid revenue and earnings at Elcoteq-
“In our case, the product mix we are involved in does not reflect our customers’ total product portfolio,” Kaukiainen said. “We are not involved in all of their products.”
Elcoteq manufactures modules or complete phones for Nokia and other customers. It employs 23,000 people and operates in 16 countries on four continents. Its net revenue last year totaled $5.4 billion, but it does not disclose what portion of revenue is derived from dealings with Nokia, which is thought to be a substantial part of its operations. According to Kuittenen, Elcoteq’s work for Nokia is in assembling key modules for the handset vendor’s higher end, value-added mobile phones.
Perlos does design, manufacturing and logistics for its customers, including the injection molds, stamping tools and assembly lines used in production. It employs about 7,500 people and had about $900 million in net sales last year, according to the company’s Web site.
“We’ve known for several years that Nokia has accelerated its production move from Europe and Eastern Europe to China, said Kuittenen. “We’ve known that some of Nokia’s traditional partners have had trouble keeping up with that trend. Elcoteq and Perlos, when they gave their second-half guidance, should have known they would not be gaining market share. Nokia had already informed them of its plans to shift business to China. The timing of the warnings does make it look like more of an abrupt shift in demand (for Nokia’s products).”
Soft demand for Nokia’s W-CDMA-related handsets is “the most likely explanation,” the analyst said. “And we do have Bluetooth-related warnings in the background. We know there is some softness in Bluetooth chips and Bluetooth headsets. So that would indicate some softness in mid- to high-end phones, because Bluetooth sales are linked to more expensive handsets. So I think the fact that we received warnings from Elcoteq, Perlos and Bluetooth vendors within five calendar days of each other is suggestive.”
Suggestive of precisely what- That’s the question, Kuittenen said. He entertained two scenarios.
“Is Nokia losing market share in the high-end European market, or is the entire European high-end market a little soggy-” he asked rhetorically.
In Mawston’s view, Texas Instruments Inc.’s fortunes are one of the best indicators of Nokia’s health on a global scale and, so far, TI has not given an indication of slackening demand.
“Ultimately,” Mawston said, “with Nokia playing in so many countries, so many (price) tiers, so many technologies and so many (market) segments, there will always be one area where Nokia slips-or booms-from quarter to quarter.”
Should Nokia’s European fortunes take a dip a number of players are set to benefit.
Samsung Electronics Co. Ltd., despite a slump earlier this year, has a couple of hot, thin phones on the European market and has yet to begin pushing 3G phones, Kuittenen said. Sony Ericsson’s new products are “extremely appealing,” he said. LG Electronics Co. Ltd.’s Chocolate phone is also well-recognized by Europeans.
“These smaller players have a very appealing portfolio right now,” Kuittenen said. “Usually they don’t have much of an impact on Nokia. But we happen to be in a market where three or four competitors have entirely new product lines out there.”
As does Nokia, the analyst added. But the difference between Nokia’s portfolio and that of its competitors may be a crucial distinction to European consumers.
Nokia’s new phones offer great specifications and its W-CDMA phones offer “every feature you could ask for,” according to the analyst. However, they tend to be heavy in weight and consumers may be gravitating to phones that are very light and thin, even if they don’t pack every available feature.
“Nokia’s problem this winter is its lack of thin phones,” Kuittenen added. “Motorola [Inc.] introduced its Razr phones in the summer of 2004 and now, two years later, we have thin phones from LG and Samsung rolling out in Europe, but Nokia hasn’t joined that bandwagon. That looks to be a big trend in Europe now.”
