RealMoney Silver - High Expectations Put Nokia in Tough Spot

High Expectations Put Nokia in Tough Spot
By Tero Kuittinen
RealMoney.com Contributor
8/1/2007 1:59 PM EDT

Nokia (NOK) must not only be impeccable tomorrow to avoid reflexive selling -- it must be beyond suspicion.

The recent results from leading mobile-telecom names have resulted in immediate selloffs -- from Ericsson (ERIC) to Texas Instruments (TXN) , from CSR to Alcatel Lucent (ALU) . The list includes companies that people had high hopes for, as well as companies that people held in very low regard. Results of these selloffs have ranged from tiny revenue misses to tiny third-quarter guidance softness to major margin trouble.

Yes, in the background there are the widely discussed U.S. credit problems, but the mobile-telecom expectations had also just run too high. After all, we are in a period of slowing growth on both handset and network sectors.

Phone Volume Questions

Against this steady stream of small and large telecom disappointments, Nokia is set to report early Thursday morning. This company has been a pillar of strength, relatively speaking. On Tuesday, Nokia managed to stay green after the Alcatel Lucent selloff conspired with wider market turmoil to sink the telecom stocks.

The problem with this is that expectations are going to be high all around. EPS should be at 29 euro cents, revenue should hit 12.9 billion euros, and phone volume should top 102 million.

I believe the phone volume might come in at 100 million, and whether this will disappoint is one major question. Some have said that focusing on a single-quarter volume number is beside the point, and I agree. The context here is that Nokia's 91 million units in the 2007 first quarter were already 6 million units light compared with expectations. Markets are expecting a huge volume rebound, because that first-quarter lightness must be erased or it will start looking as though the global volume growth is still decelerating.

So Nokia's second-quarter volume number can't be evaluated in isolation -- it exists in the context of light first-quarter volumes and notably light combined volumes of Motorola (MOT) , Samsung, Sony-Ericsson and LG from the second quarter.

Pricing May Offer Surprise

The biggest possible positive surprise might come from handset pricing; the average selling price might actually tick up from the 2007 first-quarter level. If it hits 90 euros, we would actually have a sequential ASP increase -- back in 2006, Nokia's ASP declined from 103 euros in the first quarter to 102 euros in the second. The ASP erosion has been steep in recent years because of massive volume growth in China and India.

But in the 2007 second quarter, Nokia hit substantial volumes with several fresh multimedia models, most notably the $700-plus N-95. This influx of particularly well-received high-end models may trigger an unusually strong patch of ASP performance.

Nokia is gaining handset market share and is likely to announce hitting 38%-39% global share in the 2007 second quarter -- this is widely expected. The investor reaction to the overall report will hinge on how the solid ASP and market-share performance balances with volumes that may not quite hit the high end of expectations because of a lack of strong upgrade demand in affluent markets.

The wild card here is how Nokia guides the Nokia Siemens network performance for the second half of 2007. After Ericsson and Alcatel Lucent, there is concern about the mobile-infrastructure margins of Ericsson's smaller rivals suffering as Ericsson tries to squeeze out some growth from stalling global infrastructure spending.

With investors clearly growing jittery about the mobile-telecom sector, I am inclined to believe that the results/guidance can't be quite as snow-white as investors are likely to demand. Nokia's recent guidance policy has been conservative -- if it sees any softness in upgrade sales developing in July, it is likely to sound a note of caution about the third quarter. Ericsson's results were very good, but the tiny flaw in the regional-sales growth pattern was enough to unhinge the investors. This is a very tricky period.