INVESTORS BEGIN TO WORRY AS WIRELESS MOVES INTO Q2

Wireless carriers paid the price last week as investors fled from the sector in anticipation of second-quarter results. While net subscriber additions are expected to follow the pattern set in the first quarter, wireless operators are not expected to deliver any serious surprises. However, most observers anticipate continued slow growth in net customer additions.

Sparking the market fear was Sprint PCS affiliate AirGate PCS, which cut its subscriber growth forecast earlier this month. AirGate is expected to add between 22,000 and 27,000 new subscribers, instead of the 35,000 to 40,000 it predicted earlier.

Although the carrier blamed a greater-than-expected decline in subscriber growth on a drop-off in prepaid customers, investors began worrying that the carrier was foreshadowing slow growth for the entire market.

That a carrier as small as AirGate — which is not an accurate measure of the entire sector — could cause such a stir is a good example of how distant investors are from wireless as a whole, said Craig Mallitz, wireless services analyst for Legg Mason.

“There's no real differentiation in this space at all, which is a shame because all carriers get lumped together,” he said. “This still is a space that is challenged by investors, who decidedly will not come back until there are material wireless data offerings or consolidation.”

Despite a positive outlook from the likes of Nextel Communications, which announced it might exceed its 2002 cash flow goal because of strong monthly revenue and subscriber additions, the industry is still reeling for overall lowered expectations.

“We are seeing a lot of growth in wireless voice, and we see data being primarily business-driven,” said Paul Saleh, executive vice president and chief financial officer for Nextel, during the CIBC World Markets annual investor conference last week. “We continue to grow our market share… contributing to our success is a strong brand, differentiated marketing and a focus on a strong market.”

Net subscriber addition estimates may have been cut going into the second quarter, but because absolute numbers continue to rise, there's no reason to anticipate that it will be a bad quarter, said Timothy O'Neil, wireless analyst for SoundView Technology Group. SoundView estimates U.S. carriers will add 14.5 million net new customers in 2002.

“Our estimate is lower than other folks on the Street, but that's still substantial growth. It just may not be as strong as in other parts of the world,” he said. That's because U.S. wireless carriers first penetrated the sophisticated wireless user market and now are trying to target the youth market. A lack of devices and applications necessary to grab that segment's attention, however, is hurting those efforts.

At the same time, carriers are cautious about their target audiences, O'Neil said.

“Carriers used to be focused on top-line subscriber growth,” he said. “But with the economy going soft and with the closure of the financial market for funding, coupled with the need to continue expanding network coverage, carriers now are balancing growth of subscribers with growth of cash flow.”

SoundView reduced 2002 net subscriber additions for Verizon Wireless from 1.4 million to 1.1 million; Cingular from 1.1 million to 864,000; and Sprint PCS from 3.03 million to 2.97 million. AT&T Wireless is expected to hit 2.7 million net additions. Both of the Cingular and Verizon reductions were the result of anticipated churn from WorldCom resale subscribers.

Vendors are also lowering their Q2 expectations. Nokia said last week during a mid-quarter conference call that it now sees second-quarter net sales declining by between 2% and 6%. The company had previously provided guidance of between 2% and 7% on year-over-year growth.

Nokia chief financial officer Olli-Pekka Kallasvuo attributed the revised Q2 update to a slowdown in infrastructure sales and lower handset sales in April and May.

Motorola, which slashed its expectations after the first quarter, said it would meet or beat its guidance of a 4¢ per-share loss for Q2. The company also said it would come close to its revenue estimate of at least $6.4 billion and remains on track to return to profitability in the third quarter and show a profit for the full year.