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Handset horserace loses cachet: Margins and profits now the most critical metrics

Everyone loves a good horse race. But with macro-economic conditions reverberating throughout the wireless industry – handset vendors’ aggregate volume growth in the third quarter appeared to be stagnating – the situation calls into question the health of the horses.
No major competitors are likely to be put to sleep, but with consumer demand apparently tanking in September, the steeds have slowed their pace.
“Market share is not very important this quarter,” said Bonny Joy, analyst at Strategy Analytics. “We’re focused on operating profit.”
“Maintaining operating margins is the No. 1 priority now, over average selling prices and volumes,” said analyst Tero Kuittinen at Global Crown Capital L.L.C. “And in the first quarter of 2009, managing inventory will be the big challenge.”
The hitch: Vendors ramped up their fourth-quarter shipment plans before economic headlines struck fear of the future into corporations worldwide, and an inventory glut in the first quarter of the year could lead to price cutting, which would hurt ASPs, margins and profits.
“How much good can price-cutting really do, if consumers are holding out?” Kuittinen said. “If you look at the ASP declines at LG and Sony Ericsson, that did not translate to improved volumes. Samsung’s steep price cuts did not produce a volume explosion. With their price cuts, you’d expect to see more volume growth.”

Slowdown is real
“There’s no question, with four of five top-tier vendors reporting volumes below expectations, that there’s a slowdown in global shipments,” said Joy. “This means deep trouble for the overall industry.”
“‘Trouble’ means that the industry was growing 15% in the first half of the year and, in one quarter, we dropped to 6% or less,” Joy added.
The real question, according to Kuittinen, is “What happened in October?” The sharp slowdown in consumer demand began in late September and October marks the first full month by which to discern and assess a trend, the analyst said.
Qualcomm Inc.’s commentary on its fiscal year-end results, due Nov. 5, may provide some insights into trends, particularly if the semiconductor and IP vendor provides regional numbers, Kuittinen said.

Even Nokia vulnerable
Another reason that the horse-race analogy has lost luster: it masks nuances, such as the vulnerabilities of those in the lead.
Nokia Corp.’s most important metric in the current environment is the year-on-year decline in its share of the smartphone market, the fastest-growing and most profitable segment, according to Joy.
In 2007, Nokia held fully 50% of the smartphone market, the Strategy Analytics analyst said. In the third quarter of this year, that market share had dwindled to 30%.
“In the context of 40% annual growth in this area, Nokia had negative growth,” Joy said.
One key disconnect, according to the analyst: Nokia’s over-emphasis on its services, without corresponding attention to product refreshes that would compel consumers to patronize those services. Services-based revenue grew 37% between the first and third quarters of this year, while smartphone shipment growth declined.
“Services certainly are important to future profits,” Joy said. “But they must be tied to a refreshed portfolio. The transition between Nokia’s N95 and N96, and its launch of a touchscreen product, took too long.”
Samsung Electronics Co. Ltd., Motorola Inc. and LG Electronics Co. Ltd. have aggressive plans to expand their smartphone lines globally, while Apple Inc., Research In Motion Ltd. and HTC Corp. are “spreading their tentacles across Europe and Asia,” the analyst said.
“If Nokia had maintained its third-quarter 2008 smartphone market share at the same 50% level as the year-ago quarter, then Nokia would have shipped at least another six million devices and doubled its annual growth rate to over 10%,” Joy said.

Apple results ‘staggering’
Apple now qualifies as the world’s sixth largest handset vendor, based on the numbers the company just delivered, according to Joy. But whether that is sustainable remains to be seen.
“Apple’s results did not just reflect demand for the iPhone 3G,” Joy said. “We must take into account its rapid market expansion from six to more than 50 countries in the third quarter. But selling 6.9 million devices in one quarter is staggering, a real achievement.”
Joy estimated that about three million of Apple’s nearly seven million units sold were bought in the United States.
Apple CEO Steve Jobs told analysts on a conference call last week – a rare appearance for Jobs, who typically appears for product introductions – that in the third quarter his company had shipped more devices than RIM and ranked third to Nokia and Samsung in handset-related quarterly revenue.
Jobs acknowledged that his company’s surge was due, in part, to its rapid market expansion during the quarter and “there’s no guarantee that sustained sales will equal initial sales.”
“Who knows what future results will be, given the global economic slowdown,” Jobs acknowledged.
And the wizard from Cupertino, Calif., did not pretend to see into the future.
“First, let me say, we are not economists,” Jobs said. “Your next-door neighbor can probably predict what’ll happen as accurately as we can. . But if the economic downturn affects (our customers), they are likely to delay (their next purchase) rather than switch (to another brand).”

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