Analysts say Alcatel Lucent has €500 million losses in WCDMA business
Several mobile companies face a tough first quarter to 2008, according to market analysts Credit Suisse, and the fundamentals of the mobile infrastructure market remain weak, with no significant revenue upturn till 2009 at the earliest.
Credit Suisse said that in 2007, the mobile infrastructure market experienced slow top-line growth, worsening revenue mix, disruption post mergers and continued signs of aggressive pricing.
And with little set to change in the first half year of 2008, the bank lowered growth estimates slightly for 2008E from 7% revenue growth to 5.4% for the GSM/WCDMA. However, although it did believe that in the long term, mobile data could spark a spending recovery within developed markets, this is unlikely to happen before 2009. Current margins in the mobile infrastructure market are a trough, the analysts Kulbinder Garcha, Walid Armaly and Achal Sultania believed.
Nokia
Of the vendors, Credit Suisse had the most confidence in Nokia, saying that near term handset demand is strong, and also that the company is due portfolio upgrades that will be beneficial to margins. “Our analysis shows that the company is currently involved in one of its broadest and most significant product upgrades across all price segments, which it embarked on in late Q307,” a note from Credit Suisse said. Although increased competition does lie ahead, Nokia has few concerns on that front till 2009, in Credit Suisse’s opinion.
Alcatel Lucent
There was less good news for Alcatel Lucent, in whom investor confidence “remains low”. Credit Suisse said that in its opinion WCDMA losses are unsustainably high, leading to a potential margin recovery, as the company consolidates its dual portfolio onto one platform.
“We believe losses in Alcatel Lucent’s WCDMA business are well over €500m. As normal revenue recognition resumes and with the company expected to integrate itself onto one product platform by Q308E, we argue that the losses in wireless and WCDMA should begin to shrink, thereby alleviating the pressure on group operating margins.” Credit Suisse also said that value in the company remains “compelling” as savings take hold, despite slow growth.
Ericsson
As for Ericsson, which has produced warnings recently to the markets, Credit Suisse believes that the combination of the continued rise in network rollout revenues (driven by Bharti Airtel and BSNL) and continued sluggish trends in developed markets (due to the network-sharing deals and low utilisation on 3G networks) means that Ericsson’s revenue mix is unlikely to improve materially in the near term. In fact, its concerns regarding the revenue mix for the next 6–12 months are causing Credit Suisse to lower its revenue growth, as shown below, as well as operating margin forecast for 2008E from 14.3% to 13.9%.
“We believe that with revenues growing only 1.4% organically in 2008E, combined with a continued worsening mix, Ericsson margins may not yet have troughed. In addition, what is particularly concerning is that management seems to be prepared to wait for an improvement in mix as industry conditions change and has yet to outline a strategy for improving long-term margins through restructuring,” Credit Suisse noted.
The analyst called for five changes at Ericsson, although it admitted these were unlikely to happen in the near time, despite the recent appointment of a new cfo.
“We believe Ericsson needs to take five key steps: 1) Improve financial disclosure and re-engage with investors. 2) Make the management board and non- executive board more international. 3) Align management compensation closer with shareholder return and cash generation. 4) Alter the voting structure of class A and B shares. 5) Execute on margin and cash-flow improvement.”
The Operators
Operators face a near term slow down and then a recovery later in the year, Garcha, Armaly Sultania said.
“Market by market, we expect the mobile markets in Germany and Italy to improve over the next few quarters, and Belgium and Austria to improve from Q2 2008. Equally we expect the mobile markets in Spain and Portugal to deteriorate over the coming 12 months, with medium term forecasts for France also potentially impacted by the award of a fourth licence.”
Operators are also at risk of increased spectrum costs, especially as 700MHz wavelengths go to the market in the UK, Sweden and then the rest of Europe. 700Mhz licences in Europe are likely to cost more than spectrum recently awarded at 2.5G and 3.5Ghz, the analysts warned, and potentially create the largest bills for European spectrum since the 2000 auction. It may also see new entrants, such as Google or others, in one or two markets.