Slowdown Talk Knocks Nokia

Nokia's ( NOK) downbeat update Tuesday set a sour tone on two big wireless industry issues, growth and prices.

The Finnish phone maker took its handset sales growth forecast down to 4% or lower for the year, a far cry from its original 8% projection. But even more disconcerting to Wall Street, Nokia said the average unit sales price will fall nearly 4%.

While Nokia says it will continue to increase its overall handset market share from the 35% level last quarter, some investors are concerned that slack demand, SARS and competition from the likes of Samsung and Sanyo will cut into the company's lush 24% profit margins.

Still, fans note that Nokia has a history of managing costs, i.e. pressuring suppliers, that plays to its advantage. "Nokia has always been able to squeeze margins out of the phones they make," says Friedman Billings Ramsey analyst Chris Versace, who has a neutral rating on the stock. FBR has no underwriting ties to Nokia. Nokia dropped 50 cents to $17.46.

High Hopes

Nokia's downward guidance comes a day after Motorola ( MOT) pointed to weak sales in Asia and lowered its financial targets. The Schaumburg, Ill., wireless-equipment giant blamed SARS and its outdated cell phones for most of its problems.

Investors have high hopes for a robust cell-phone buying cycle this year as users trade in their old black-and-white screen phones for snazzy color screen models with cameras and Net access. The massive phone upsell is supposed to be triggered by wireless network upgrades that can accommodate text and picture traffic.

But cash-starved phone companies across Europe and the U.S. have slashed their network expansion budgets, which has slowed the advent of the mobile Internet and put a crimp on infrastructure sales.

Notably, Nokia said second-quarter sales in its network-equipment unit will likely be as low as 5% below from last year's levels. Though that's not a helpful trend, it is far less of a decline than the 10% to 20% drop observers had expected. That little surprise plus a bit of short-covering helped propel Ericsson ( ERICY) to a 7% rise Tuesday.

Dropsy?

Observers now await Nokia's second-quarter earnings call in July, when some expect to hear the company bring down its projections for the industry's worldwide handset sales. Given the evidence so far from Motorola and wireless chipmakers like TriQuint ( TQNT), it appears likely Nokia will drop its 442 million-handset forecast.

Though a shortfall probably won't come as a major surprise to the pessimists, the bulls may be disappointed.

"We think they will reduce their forecast for the rest of the year to 425 million to 435 million," says FRB's Versace.

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