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Handset market evaluation: Analysts to focus on Nokia’s outlook on Thursday: Third-quarter earnings moot, due to meltdown

Financial analysts typically gauge companies on their future prospects, not past performance.
That is acutely so for the current moment in history, a couple weeks into the critical fourth quarter.
The collapse of the financial sector, tightened credit markets and global repercussions that began in mid-September had little impact on third-quarter numbers, analysts said. But those forces have yet to wreak their full havoc and thus the focus has shifted to current and future impacts across the patchwork quilt of global economies.
Many believe that wireless handsets and service, though widely perceived as indispensable to modern life, are hardly immune to the growing financial malaise.
“I don’t care what’s happened,” said Mark McKechnie, analyst at American Technology Research. “I’m looking ahead.”
Analyst Matt Thornton at Avian Securities, L.L.C. agreed.
“Third-quarter results suddenly are less important,” Thornton said. “Things were fairly normal until mid-September. It’s all about fourth quarter now.”
Since Nokia reaffirmed its 10% annual growth projection for the industry in early September, “the whole world has come unglued,” McKechnie said. “So, how has the scare affected the fourth quarter and the outlook for 2009?”
Nokia reports this Thursday and, not surprisingly, anything it has to say about future prospects for the industry will be given the most weight – as befits a company that sells four out of every 10 handsets around the globe.
“Most people expect that Nokia will reiterate its 10% annual growth projection for the industry,” Thornton said. “But if they come off that, that’s important.”
In fact, 10% growth for the year is not particularly strong, given the robust first half, said McKechnie.
“That’s a ‘layup,’ ” McKechnie said, referring to the simplest basketball shot. “Ten percent for the year is only 15% quarter-on-quarter growth, which is below the typical, seasonal uptick.”
Between near-mature markets throughout much of the world and the economic slowdown, McKechnie has surprised some by projecting flat growth – that’s 0% growth – for 2009. (UBS analyst Gareth Jenkins just cut his view for 2009 to 3% growth, down from 6%.)
“2009 could be down,” McKechnie said. “If so, that’ll be the first year since 2001, which was our only down year in history.”
If the industry scales for 10% growth next year – say, 1.4 billion units – and it’s flat at this year’s expected 1.25 billion units, that is likely to create inventory and pricing issues, McKechnie added.
Another angle, Thornton said, is that a handset market under pressure might favor both the high-end and the low-end at the expense of the middle.
If consumers are hurting, they probably will trim their monthly service outlay and, perhaps, take the free phone offer, the Avian Securities analyst said. But aggressive carrier subsidies aimed at seductive smartphone offerings may also bolster smartphone growth, if a bit more slowly than expected. The negative impact may well fall on high-tier feature phone offerings – already projected to fade for this very reason. And that could possibly hurt Motorola Inc., LG Electronics Co. and Sony Ericsson Mobile Communications L.P., all of which have an emphasis there and fewer smartphone offerings than Nokia, Research In Motion, Ltd., Apple Inc., HTC Corp. and others, Thornton said.
And which vendor’s results and outlook, after Nokia’s, is most interesting in coming weeks?
“Motorola is the other one to watch,” Thornton said, “because it’s in the middle of a difficult turnaround.”
Rather than the typical earnings metrics, however, Thornton is most interested to hear from new co-CEO Sanjay Jha on the company’s product roadmap, software strategy and cost-management efforts.
“We should be getting Jha’s plan pretty soon,” Thornton added. “Whether that’s during the earnings call or separately, I’d like some visibility into next year.”
McKechnie chose Samsung Electronics Co. Ltd.
Whether Samsung is able to hit its projected 50 million units for the third quarter and 200 million for the year will reflect whether the vendor is on track with its own forecasts, McKechnie said. Operating margins also will be critical.
“They’re stepping up their marketing spend to gain share,” McKechnie said. “That illustrates the increasing competition. There’s less market opportunity than there are players right now.”


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