Skip to main content

Wireless stocks have been on the ropes since market leader



delivered an unexpected blow in July when it announced third-quarter earnings would fall short of expectations.

Now investors are anxiously awaiting final word, with Nokia's results due tomorrow, on just how bad the damage will be. (Nokia was scheduled to report results on Thursday, Oct. 26, but announced Wednesday afternoon it was accelerating the release.)

Nokia is expected to post third-quarter earnings of 15 cents per share, based on a

First Call/Thomson Financial

survey of 24 analysts, and third-quarter revenue of $6.29 billion ($7.15 billion euros), according to

Credit Suisse First Boston

. That will be below second-quarter earnings of 19 cents a share.

Nokia's results will be followed by figures from the industry's second-largest player,



, which is scheduled to announce its results Friday.

Ericsson is expected to post third-quarter earnings of 4 cents per share based on a First Call/Thomson Financial survey of 25 analysts.

Both Nokia and Ericsson are expected to have soft third quarters, although the fear is greater for Nokia, because its revenue is far more dependent on handset sales. The question is whether the bad news will be within expectations and if the two companies can resist springing any more surprises on the sector. Already, several unexpected announcements have rocked investors.



last week announced earnings of 26 cents per share that were in line with expectations. Then it turned around and gave negative guidance for the fourth quarter and 2001, saying revenue, operating margins and handset unit sales all would be lower than expected.

This bad news was followed this week with the announcement that






have postponed plans to float

Verizon Wireless

due to the weakness in the sector. So far, analysts don't expect Nokia or Ericsson to deliver up any big surprises. Then again, they weren't expecting Motorola to serve up so much bad news, either. The worry is that if they do go the Motorola route, depressed wireless shares will get pummeled further.

"If Nokia pulls a Motorola, there will be a big downturn, says

Chase H&Q

analyst Ed Snyder. But I expect Nokia's performance and guidance to

both be fairly bullish.

A big downturn would be crushing, considering the beating some wireless shares have taken. Motorola is down 57% on a year-to-date basis, Nokia is off 35% and Ericsson is down 16%. Vodafone, which is the world's largest wireless company, is down 26% for the year.

While Nokia and Ericsson each are expected to post third-quarter declines in operating margins, analysts say the market shouldn't panic if those declines are confined to management estimates. The companies have both indicated that the fourth quarter will be better than this quarter, notes Mirva Antilla of

Josephthal & Co.

"Everyone knows the third quarter is going to be pretty bad," she says, adding that summer is a typically quiet season for handset sales.

Nokia spent last quarter drastically cutting prices on older, less-than-snazzy mobile-phone models, which means investors can expect the world's largest handset manufacturer to report a temporary dip in quarterly profits. Analysts expect operating profit margins to have dropped to about 18% in the third quarter, but forecast that they will rebound to at least 20% next quarter with the introduction of sleeker, higher-priced products.

If Nokia's profit margin dropped to 17% in the third quarter or fails to bounce back by year-end, then there will be cause for concern, says Snyder of Chase H&Q, who adds that he sees no reason to believe that this will be the case. The company should post unit volume sales of about 31 million this quarter. "Anything more would be gravy; anything less will have people wondering," he says.

Chase hasn't performed underwriting for the company.

While Nokia prepared investors in July for a dip in profits, it also promised to boost market share, which is increasingly important as Asia-based competitors gear up for a stronger presence via products sporting next-generation technologies, explains Pete Peterson of

Prudential Securities


"We're in a significant period of flux, where the old world is being turned on its ear," he says. "If Nokia doesn't take

the market share now, the Asians will." Nokia is expected to own 32% of the market by year-end, up from 28% last year, he says.

Prudential hasn't performed underwriting for the company.

Handset sales account for only about 20% of revenue at Ericsson, which is primarily a wireless infrastructure-equipment manufacturer and the industry leader in upgrading current networks. But that division's performance will be closely watched.

"If you're losing money for many quarters, it tends to pose a question about the validity of that business and whether you can make it effective and profitable," says Josephtal's Antilla. Ericsson's handset unit has been suffering for nearly two years due to an outdated product line.

Analysts predict operating losses in its handset division to worsen in the third quarter, possibly hitting (-37%). The division, however, could see a turnaround next year, due in part to an outsourcing agreement with Taiwanese-based


, which will manufacture Ericsson's low-end handsets, Antilla explains.

Sixty percent of global handset sales are entry-level products, according to Bo Albertson, marketing director with Ericsson's mobile-communications division. There have long been rumors that Ericsson might sell its handset unit, but Antilla says the company recognizes it as a strategic asset and is actively working to turn it around.

Josephthal hasn't performed underwriting for the company.