Nokia Puts Its Chips in the Third-Generation Basket
Nokia (NOK) - Get Report is sticking with its happy face.
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Today a press release hit the wires about all the good work being done by Nokia and
AT&T Wireless
(AWE)
to bring fast, data-capable third-generation wireless networks to the United States. It was one of those press releases that brings to mind an elementary schooler running into the living room proclaiming, "I didn't do anything."
We already knew AT&T Wireless wanted to roll out the more futuristic cell phone applications. We know Nokia is a 3G leader interested in empowering teens across the globe to swap superlatives about Top-40 bands at lightning quick speeds. We understand that with 3G networks comes the long-advertised promise of wireless data. What we're less sure of is whether 3G will actually begin a three-year scale-up of rollouts starting this October, and when we'll see 3G revenues start rolling in, to convince us Nokia's ambitions will generate big money.
Investors need reassuring when it comes to 3G and the timing of its benefits to vendors. On the carrier side, undisputed carrier champion
NTT DoCoMo
pushed back its rollouts until October, as
British Telecom's
(BT)
wireless unit delayed 3G trials by three months. On the equipment side,
Ericsson
(ERICY)
and
Motorola
(MOT)
are distracted pyromaniacs, watching the lapping flames of their balance sheets. Nokia is healthy enough to shoulder $3 billion in financing of its customers for the added bonus of selling its market-leading handsets to the new 3G users. First, however, 3G has to be deployed in a meaningful way.
While
cutting his forecast for wireless handset shipments a week ago,
Deutsche Banc Alex. Brown's
Brian Modoff expressed skepticism about the rollout of intermediate-stage equipment as well as 2001 revenue for 3G purchases. "We believe the magnitude of the initial rollouts will be significantly less than previously forecasted, with major 3G shipments not occurring until 2003," Modoff explained. For Nokia specifically, Modoff added, "With 3G revenues not being booked until the networks are accepted, upcoming 3G rollouts will not have any discernible impact on the current or subsequent quarters." (Deutsche Banc hasn't done recent banking for Nokia.)
SG Cowen
estimates that 25% of Nokia's equipment revenue in 2002 could come from 3G sales. Nokia CEO Jorma Ollila comfortably describes the beginning of rollouts this fall, limited deployment in 2002 and widespread 3G builds in 2003. "Timing caveats remain regarding network operator deliveries and the ultimate ability to recognize revenue related to these contracts," notes SG Cowen analyst Scott Searle.
When it reported its first-quarter results in late April, Ericsson tipped off investors to a major slowdown in North American carriers' spending on older time-division multiple access (TDMA) networks once popular in North America. Since then, both Ericsson and Nokia have hinted that European favorite global system for mobile communications (GSM) technology sales have also been cramped. On its road show stop in San Francisco, Nokia talked about weaker profit margins on new technology deployments, as well. The company is doing whatever it can to get 3G rolling.
Wall Street is as in love with Nokia as ever, what with troubled communications chip makers saying Nokia is the only company still buying chips for wireless handsets. But it will take some pushing for Nokia to hit its goal of 35% market share on its weaker wireless equipment side -- it currently has captured 30% of the GSM market, has suffered technological challenges in the CDMA market and has hit the 35% target in the up-and-coming, faster 2.5G general packet radio service (GPRS) market. Nokia's best bet is to beat Ericsson and other rivals in the newer 3G space.
At the same time Nokia is selling carriers on the idea of 3G systems and all the expensive new services wireless customers will want, it's got to sell Wall Street on the giant revenue to be had. The Street would like to believe.