Guessing game

Nokia's surprise earnings warning earlier this month highlights the telecom industry's predicament in forecasting the future.

Investors have become accustomed to using Nokia as the safe haven for their wireless investments, as the leading mobile phone maker appeared poised to successfully ride out the massive slowdown in the handset market.

“There is a lot of frustration among investors,” said Mark Roberts, managing director of wireless equipment with First Union Securities' telecommunications infrastructure practice. “They are throwing up their hands because Nokia is telling them one thing one week and another thing another week.”

While competitors slashed expectations about handset growth, Nokia had continued to predict industry handset sales of about 450 million to 500 million throughout the spring. It now expects around 405 million in sales.

The warning was a sharp contrast to the company's stance during a well-attended investor conference in Barcelona, Spain, on May 21, when Nokia management exuded confidence about its business.

“The timing of this announcement relative to the May road show and the confidence there [sent] confusing signals,” said Jeffrey Schlesinger, wireless equipment analyst with UBS Warburg.

Roberts believes the handset market is so rocky that it is impossible — even for Nokia — to predict how the market will move. Nokia said it failed to predict the poor economic conditions in the U.S. would move so quickly into Europe. The company expects its sales growth year-on-year in the quarter to slip to less than 10% — a far cry from its forecast of 20% growth.

“Carriers were ordering phones, retailers were ordering phones,” Roberts said. “They were all building up inventories, anticipating that customers would replace their phones at a fast rate. The economy killed that.

Despite the frustration, Nokia remains a top pick among investors because competitors Motorola and Ericsson have more fundamental problems. Motorola's first-quarter sales were down 29% compared with the same period last year. Ericsson's handset sales fell 52% in the first quarter, while overall profits fell 90%.

“Nokia is not immune to a softer market,” said Bryan Prohm, senior analyst with Gartner/Dataquest. “With the exception of CDMA, Nokia still has monopolistic control over handsets for the rest of the year. They can really dictate price points and take share where they need it. In general, the market remains Nokia's to lose.”

And there could be a lot at stake during the next year. Today, Nokia's sentiments reflect what other vendors are saying — that a technology transition has caused a lot of people to hold off purchasing phones until more advanced ones are ready.

If new, data-intensive general packet radio service (GPRS) and CDMA 1XRTT handsets aren't adopted quickly, Nokia, which plans to release GPRS devices in the third quarter, and other handset makers are in for a painful ride. Adoption will depend on how well carriers create useful applications.

“The whole industry is tied to GPRS to drive growth,” said Schlesinger, who doesn't expect GPRS to be sold in volume until closer to the end of 2002. “Otherwise, the industry is out of gas.”