Handset vendors’ second-quarter earnings are expected to be ho-hum, based on a global lull in new product launches during the quarter.
As usual, however, analysts will carefully parse the language used by leading vendors – most prominently, Nokia Corp. – to describe their outlook for the third quarter and the full year.
Nokia is scheduled to deliver its earnings on July 17, Motorola Inc. is scheduled for July 31 and other top vendors are expected to report in between those dates. Nokia’s view of regional strengths and weaknesses will be avidly sought by analysts, while Motorola’s language has to pass a credibility test, according to two analysts based in the United States.
The two analysts addressed expectations for Nokia and Motorola, whose stocks trade on U.S. exchanges, as emblematic of the field.
In April, Nokia reiterated its forecast for global handset unit growth at 10% year-on-year, which several analysts said was likely “conservative.”
“Sentiment has probably swung a little dire,” said Matt Thornton, analyst at Avian Securities L.L.C. “I don’t expect Nokia to change its forecast. But the second quarter may be a bit tough for Nokia due to a low number of product launches. I don’t have high expectations. Its commentary on the second half of the year is more important.”
Analyst Mark McKechnie at American Technology Research largely concurred.
“The general understanding of the world economy was well-articulated recently by Cisco: weakness in developed markets buoyed by continued growth in emerging markets,” McKechnie said.
That may translate to an echo of the first quarter, in which vendors with a solid presence in emerging markets, such as Nokia, fared better overall than those more dependent on the high end, such as Sony Ericsson Mobile Communications. Where that leaves Apple Inc. and its 3G iPhone may well depend on the pattern of carrier subsidies that determine its retail price and whether macro-economic conditions continue to put pressure on high-end sales.
The outlook
American Technology Research’s own forecast mirrors Nokia’s at 10% annual handset unit growth, but “our industry contacts are now beginning to question 10% industry unit growth for the full year,” McKechnie said.
Nokia itself is due to launch 22 handsets globally in the second half of the year, according to Thornton, amid high expectations for several handset vendors’ high-tier offerings.
Smartphone interest vs. $$
As consumer interest in smartphones has increased, however, the second quarter also witnessed some reluctance to spend money on handset upgrades, probably based on a relative dearth of new products and macro-economic pressures from rising food and fuel costs. Will weak sales at the high-end continue through the year?
“I don’t see any systematic shift in the replacement cycle,” Thornton said.
Nokia’s expected launches in the year’s second half include the N96, N78, the E71 and a device code-named “Tube” – the Finnish vendor’s new touchscreen device set for a fourth-quarter debut. Meanwhile, Apple launches its 3G iPhone this Friday, Research In Motion Ltd.’s Bold is expected soon, as is HTC Corp.’s Touch Diamond and Sony Ericsson’s Xperia.
Refreshed portfolios typically boost gross margins, with positive implications for most vendors, Thornton said.
The U.S. market remains “low-hanging fruit” for Nokia in the company’s global picture, according to Thornton.
The next few quarters may be “fairly encouraging” for Nokia in the low- and mid-tier here, with added SKUs at Verizon Wireless and T-Mobile USA Inc. The analyst said he didn’t expect any “breakthroughs” this year for the vendor at leading operator AT&T Mobility.
Moto’s dilemma
Motorola’s handset business is in “tough shape,” and will likely continue to “bleed market share,” Thornton said, as its portfolio is no longer on par with the competition. As Moto’s global share has shrunk, it becomes increasingly dependent on the Americas for revenue: 44% of its handset revenue comes from North America and 25% from Latin America, according to Thornton.
“I’ll be looking at the health of the rest of Motorola’s businesses in cable and networks and enterprise mobility,” Thornton said. “Motorola needs to show healthy execution and revenue there. And it needs to show progress on its cost-reduction initiatives. How close are they sticking to expectations?”
“Credibility is an issue” after repeated reassurances about new products, Thornton said. “Any half-baked commentary will get blown off.”
As time passes, Motorola’s key assets – its brand, carrier partnerships and shelf space at carrier retail channels – are at risk, Thornton said. He will look for substantive news on a new handset CEO for the ailing Schaumburg, Ill.-based vendor.
Tough assessment
McKechnie’s view, if anything, is more dire.
“We have pretty much written off Motorola’s handset business,” McKechnie said. “The thinking is, if Nokia and SEMC are struggling with macro-economic and smartphone threats, then Motorola is really having trouble.”
