Friday, January 11, 2008

Nokia remains besieged by second-tier brands in Europe - Avian Securities

Tero Kuittinen from Avian Securities has some interesting comments on Nokia (NYSE:NOK):

Talks with operator and retail sources at this week’s CES conference indicate that Samsung, LG and Sony Ericsson continue their European market share gain surges. It is this combination of upgrade market share erosion in Nokia’s European heartland together with softening consumer spending in several markets that in firm's view has been underestimated by investors. Avian thinks Nokia’s share decline has been warranted and will continue later on. They see Ericsson as a more compelling rebound story in 2008 – partly because of the Sony Ericsson strength, partly because a severe network unit margin dip has been priced in.

Avian notes they don’t doubt that Nokia can do 43-44 euro cents in 4Q 2008, edging above the current EPS consensus. It’s the 1Q 2008 guidance that concerns them. Nokia has a tendency to avoid issuing mid-quarter warnings by issuing conservative guidance when it perceives a possible trend change. They think Nokia is currently evaluating the combination of its high-end market share erosion in Europe combined with possible overall softening of upgrade demand in Europe and Asia that may have emerged in December. How that shapes its 1Q 2008 guidance is the key issue here.

This morning’s RFMD warning is among the first signs of wobbles in the Asian telecom market. RFMD cut its F3Q earnings forecast by two cents from the former 7-9 cent range, citing both Asian handset customers and infrastructure market softness. Former RFMD warnings have been pinned on Motorola - this one seems wider in scope.

Thursday’s big phone announcement by Samsung highlighted the leadership position the Korean brands have taken in the European/Asian high-end camera phone market. The new Samsung F490 boasts a 5 megapixel camera and an expansive, 240x432 pixel display. Yet it weighs just 102 grams and is stunningly slim at 12 mm. The trade-off here is the lack of an operating system and GPS support. But as LG KU990 has demonstrated in the past month in Europe, a slim 5 megapixel camera phone with a huge display is exactly what many upgrade buyers want – even if the software support is meager.

Nokia has no slim or big-display high-end camera phones in the market. The company dominates the “Hummer” niche of big phones with GPS, 5 megapixel camera and HSDPA support, but is falling behind Samsung, LG and Sony Ericsson in the miniaturization race. The brand new Nokia N-82 is 5 mm thicker than the new Samsung. A size gap of this magnitude matters in the 5 megapixel camera phone category. Nimble Samsung is bringing the F490 out in Europe already in February. Nokia is likely gearing up for several announcements in February, but Avian does not expect it to announce a major new platform for sooner than 3Q 2008.

The European upgrade market share of Nokia is likely sliding, the US market share is not recovering and the Asian outlook hinges on the Chinese retail frenzy continuing unchecked. Nokia has been widely defended in recent days as a “recession proof” name. The firm could not disagree more. The company has sterling management and clearly superior manufacturing and distribution advantages. But they think Nokia has clearly missed the thin phone trend in the important 5 megapixel camera phone niche and is decisively behind Samsung and LG in the large-display race. The CES interviews they conducted support their theory that the new Nokia high-end platform featuring large touch displays is unlikely to arrive until September 2008 at the earliest. This gives Samsung and LG plenty of scope to deepen their already strong large-display portfolios. The strong CES launches of Sony Ericsson combined with the ongoing momentum of its 4Q models indicate that the powerful Walkman range will probably continue eclipsing Nokia’s bigger and heavier music models in Europe during the first half of 2008.

Notablecalls: While I usually don't post calls in their entirety, I'm going to make an exception here. For the past weeks Tero has been the lone wolf in an otherwise Nokia-optimistic world. A day doesn't go by without some positive chatter from firms covering the name. Yet, Tero's views differ from the crowd. He's looking at Europe while others are focused on US. Yet, Europe is Nokia's turf.

I continue to be cautious on Nokia here.

Thanks, Tero.

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