NEW YORK (CNN/Money) -
Corporations have slowed down their tech spending. But what about consumers?
Sales of cell phones were expected to be steady in 2002 after falling in 2001. But, more than 423 million handsets were sold last year, an increase of 6 percent, research firm Dataquest said Monday.
So, when Nokia (NOK: Research, Estimates), the world's largest cell phone manufacturer, gave its eagerly anticipated mid-quarter update Tuesday, you'd think the company would have good news.
Hold the phone. The figures for 2002 were helped by a big surge in sales of lower-priced phones during the holiday season, according to Dataquest.
Nokia, like most other technology companies, continues to face a tough global economy. It cut both its revenue and profit guidance for the period, pointing to weak sales of networks and more expensive color-screen phones. The guidance came in even weaker than the hopes of analysts, who said they were prepared for a lower revenue target but hoped earnings guidance for the first quarter would stay level.
The Finnish company is expected to report first-quarter results April 17. Nokia's U.S. shares fell more than 2 percent at the start of trading Tuesday but rebounded following comments from Nokia's CFO that indicated the company's handset business was stabilizing in the first quarter. As of midday on the New York Stock Exchange, shares of Nokia (NOK: Research, Estimates) were up 1.8 percent to $12.90.
Phones selling, but they're cheaper models
Nokia said it now expects to earn between 0.15 and 0.17 a share in the quarter. That's at the lower end of its January EPS guidance of 0.15 to 0.19, or about 16 to 21 cents. According to First Call, analysts are predicting earnings of 18 cents.
The sales guidance took an even deeper hit as the company said it now expects sales to decline slightly from 7.01 billion a year ago. In January it said it expected mobile phone sales to be zero-to-9 percent higher than a year ago, with total sales growth (including contributions from the company's networking division) to be slightly lower.
There had been signs the weaker sales target was on the horizon. Last week, Intel (INTC: Research, Estimates) reported that sales of flash memory chips, a key component in cell phones, were disappointing due to unexpectedly low demand for high-end cell phones and other wireless devices.
In addition, even though higher-priced phones have some spiffy new features, such as color screens and built-in-cameras, analysts had said consumers still are flocking to cheaper models. That hurts average selling prices and overall revenue.
"The trend has been toward lower-end phones and that might continue for at least the next quarter," said Ari Bensinger, an equity analyst with Standard & Poor's. Bensinger does not own Nokia.
However, Nokia's CFO, Olli-Pekka Kallasvuo, said Tuesday that average selling prices for handsets appeared to have stabilized in the first quarter and that news did help lift the stock after the initial sell-off.
Still, Jeff Bray, an analyst with mutual fund firm D.L. Babson & Co., said investors are concerned about the type of phones that Nokia and other companies are selling.
"People are comfortable that handset volume can grow at high single-digit rates for the next few years," Bray said. "But what kind of phones are companies going to sell? Are people going to pay up for them?" Bray said that Babson owns Nokia in several of its growth funds.
A saturated market?
In a research note Friday, semiconductor analysts at Pacific Growth Equities pointed out three red flags about wireless companies.
First, Nokia rival Motorola (MOT: Research, Estimates) recently announced it was seeing a buildup in inventory by Chinese handset manufacturers.
Second, China Unicom, a telecom service provider, reported in January wireless subscriptions tumbled 23 percent from December. Finally, in February, Korean handset shipments fell 18 percent from January. These Asian markets are viewed as key growth areas for Nokia and other wireless companies.
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Philip Townsend, an analyst with Natexis Bleichroeder in London, said the wireless market appears to be saturated in Europe, Nokia's biggest market, and that the U.S. market is maturing as well. Plus, he's concerned about increased competition from Korea's Samsung and LG Electronics as well as Chinese firm TCL.
"The market is slowing overall and there is more competition," Townsend said. "Nokia is no longer the only game in town," he said. Townsend does not own Nokia and his firm has no investment banking relationship with the company.
But, is this negativity already reflected in the stock price? Nokia's stock was trading Monday at 14.5 times 2003 earnings estimates. By way of comparison, Motorola is trading at 22 times earnings estimates. Motorola makes semiconductors and cable set top boxes in addition to cell phones.
Still, Bray said that even though Nokia's stock appears attractive for the short term, there will continue to be skepticism about its longer-term prospects until there is more certainty about whether consumers will upgrade to more expensive phones.
"It is difficult to have a high level of confidence about where the cell phone market is going to be at the end of the year," Bray said. "You could make a case for Nokia's stock going to $7 and you could make a case for the stock going to $16."
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