Wireless leaders Sprint PCS ( PCS) and Nokia ( NOK), despite having reduced guidance for the second half, still may have higher expectations than their businesses warrant. The guidance for Nokia and Sprint PCS is built on somehopeful projections: Sprint hopes that customers will flock to its third-generation network; Nokia is betting that many consumers will wantto replace the handsets they bought in 2000. Based on those outlooks, the companies have penciled in very goodfourth quarters to meet their own expectations. But anecdotal evidencesuggests the optimism might be misguided. "We believe investors will start to reduce second-half expectations,after digesting
second-quarter results," J.P. Morgan U.S. wireless services analyst Thomas Lee wrote last week. "Despite rock-bottom valuations, investors are cautious." who is not identical to the Europeancustomer who is not identical to the American customer," he told TheStreet.com in an interview Thursday. "People claim that Europe isway ahead on data. What Europe has done with data is a ton of SMS shortmessage service messaging. "That's sort of the Pong of data, relative to whatwe've got which is sort of the Tomb Raider 3 of data," he said, using a video-game analogy to compare European usage patterns to first generation games. Levine expects new subscribers will spend more than the current $63average revenue per user to download games, new ring tones, Web pages andemail. On Sprint's 2G networks, data revenues contributed less than 2%, or about $1 per user, according to company estimates, but should move higher in the coming months. One particular concern about Sprint PCS on Wall Street is ambivalenceover its admittedly aggressive growth targets, even after it lowered expectations. It currently expects to add 2.5 million to 2.7 millionnet additional subscribers for the year, down from a prior target of 2.7million to 2.9 million. Considering the company has logged netadds of about 1 million for the first half, it's hard to see how the second-half growth will be 150% to 170% of the first half's, especially in adistressed economic environment. "PCS is ... front and center of what'sgoing to disappoint," said Morningstar analyst Todd Bernier. "Where's thecatalyst?" "The target is assuming we're going to have a fair amount of success atPCS Vision the company's marketing moniker for its 3G network," Levine said, when asked about the company's forecast. "This launch is absolutely critical to our success in thefuture." Ned Zachar, the Thomas Wiesel wireless services analyst, downgraded thecompany's ratings to market perform from buy, based on its aggressive net add projections. He also noted that based on the firm's estimates, Sprint PCS trades at a higher multiple than its peers, at around 6.1 times the firm's 2002 estimated earnings before interest, taxes, depreciation and amortization. By comparison, AT&T Wireless ( AWE) currently tradesthe lowest at four times 2002 EBITDA estimates, Zachar said. Adding to concerns at Sprint PCS and for the carrier sector as a whole,J.P. Morgan analyst Lee reduced the firm'sprojection on industry subscriber net-add figures to 14 million, from 15million. In January, the industry expected 20 million net adds for theyear. Lee also expects Sprint PCS to achieve about 2.2 million net adds forthe year, below PCS' own estimates. they might evolve," Ollila said at a U.S. Bancorp PiperJaffray conference last week. "Working in Nokia's favor are pressures toreplace dated phones dating from the industry boom year of 2000, when 405million phones were sold worldwide." But recent checks with distributors raise questions about such projections, analysts said this week. One Wall Street observer scoffed at the guidance, saying it was ambitious at best. "Last two years, we've exited fourth quarter with toomuch in inventory, and carriers are clearly trying to manage their workingcapital more effectively," said the observer, who requested anonymity. "Thatmeans lower inventories and inventories are at an all-time low. Carrierswill try to avoid exiting with too many handsets." For Nokia and other handset manufacturers including Motorola ( MOT), that means, "We're not likely to see as high of a jump sequential aswe've seen historically. It adds to the challenge to their backend-loadedforecast," the observer said. In a recent Deutsche Bank research note, the firm's own checks withwireless handset distributors indicated flat third-quarter sales, whichfurther adds pressure for a miraculous boost in the fourth quarter. At worst, said analysts, Nokia will guide downward again in an upcomingquarter, a practice the company has become notorious for.