Infrastructure sales stink, but we haven't seen the worst yet.
Ericsson (ERICY) predicted a zero-to-10% fall in 2002 from 2001's gloomy numbers as carriers pinch pennies. North America is the brightest hope for 2002 sales, while Nokia (NOK) - Get Report has the sunniest outlook and the best chance of increasing its share of the down market. For everyone else, it's shaping up to be a repeat of 2001.
Analyst estimates range from a 5%-to-10% decline in equipment sales in 2002 as carriers continue to clamp down on spending. Geographically, North America is expected to be the strongest region as U.S. carriers enlist healthy ranks of new mobile-phone users and
prepare their networks with next-generation equipment.
Vendors have to pounce on the opportunities -- as Nokia did in gaining some of Cingular's $3 billion Global System for Mobile communications (GSM) and general packet radio service (GPRS) business last week -- because they will be few and far between. Additionally, any resolution in the
spectrum controversy could lead to more network buildouts.
Europe is expected to remain sluggish in 2002, as debt-laden carriers either stagger along -- as is the case with European third-generation license bidders Xfera from Spain, Dolphin Telecom, and credit-poor Sonera in Finland -- despite the rollout of GPRS packages that will prep consumers for life with 3G data-inclined technology and speeds. Any help from governments, as France gave two weeks ago in lowering the prices paid for 3G licenses and extending the length of those licenses -- could spur base station buys.
Equipment providers will have to write off Latin America as its economies reel, to the extent that Ericsson attributed the drop-off from its $3.78 billion in second-quarter sales to $3.33 billion in the third to a retrenching of cash-conservative customers. Even China, a savior in the slumping 2001 market, is not expected to be a big driver in 2001.
finished its initial Code Division Multiple Access (CDMA) network build in 2001 and is expected to slow its spending on GSM equipment as it enters the second phase of CDMA construction in 2002. The Asia/Pacific region isn't going to save equipment vendors this time.
Not that there's as much room to fall in 2002. Sam May, of US Bancorp Piper Jaffray, estimates that the equipment market will sell 13.4% less in 2001 than in 2000, with another 5.1% drop next year. In 2001, Nokia's business slipped 9% from the first to the third quarter, leaving the company with a negative 35.3% operating margin in its base station business. Ericsson's internal troubles led to a poor first quarter, which was reversed with 11% sequential revenue growth in the second quarter.
In the third quarter, Ericsson fell prey to the market with sales falling right back down 12%. The company was able to maintain a slim 1% operating margin.
troubled equipment business has held steady this year with a disappointing two quarters of $1.7 billion in sales and a slight increase to $1.77 billion in the third quarter. All these data points, however, may help solidify investors' understanding of the equipment downturn. "In the perverse ways of Wall Street, expect this to be making people more positive on the infrastructure names over the next quarter or two," says May.
Infrastructure players still have hope. Ericsson expects a 10% year-over-year increase in fourth-quarter revenue from $3.88 billion last year to $4.26 billion this year. Nokia expects sequential growth in the fourth quarter -- though that will notch it a 20% year-over-year decline in network revenue. More positively, the handset leader looks forward to finally unveiling what it perceives to be 20% market share in third-generation systems in the second half of 2002, when it will finally begin recognizing 3G revenue. Motorola is the saddest case in the top three, hinging its plans on potential partnerships, if not with
, then potentially with
Finally, technology is the X factor that could save 2002 from the abyss. With several U.S. carriers rolling out next-generation services, Asian carriers working the kinks out of 3G and European carriers finally armed with Nokia phones with which to pitch 2.5G GPRS services, there's the potential to generate some excitement among mobile-phone users. The uptake in GPRS services in the jaded Western European market will be crucial to capital spending budgets.
"There's no need for 3G unless there's a need for more capacity," explains Tim Long, an analyst with Credit Suisse First Boston.