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Nokia Sobers Up, Lays Low With Handset Projections

While analysts and investors are wary about high market projections for handsets, they're praising dominant Finnish handset manufacturer Nokia's cautious sales forecasts for future sales.

"I think they're being appropriately cautious," Morgan Stanley Dean Witter Analyst Arindam Basu told Wireless Today. "It sounds like things are back-hand loaded for the industry. It probably makes sense for them to take a more measured approach, making sure the next handsets are getting developed and getting out there."

On Tuesday, Nokia reported that net profits in 2000 grew 48 percent to $5.37 billion (5.77 billion euro). Nokia also revised its handset forecast. It expects the market to grow at a rate of 25 percent to 30 percent, totaling between 500 million and 550 million units. The initial forecast had been 550 million handsets.

"The handset business achieved margins broadly in line with consensus, " stated Lehman Bros. Telecom Equity Analyst Tim Luke in a research note. "We view this as a positive, given that all other players have failed to match expectations in recent earnings announcements."

This is a particularly hot issue at the moment given Ericsson's surprise recent decision to outsource its handset business to Flextronics.

"Nokia only outsources 10 percent of its handset business," said Hendrik Zonnenberg, a telecom equity analyst at ING Barings. "It indicated that it has made some calculations about the costs of producing handsets themselves as compared to someone else doing the production, like Ericsson.

Nokia could not find any company [that] could produce handsets at a cheaper cost, so [it is] quite optimistic about ... production costs. They think they are going to increase their outsourcing business to perhaps 20 percent throughout 2001, but not as drastically as Ericsson. But I think that shows that Nokia is clearly the top company in the handset business. They do a much better job than Ericsson. I think that in a fast-moving market, if you have got the economies of scale, you should keep it in-house, particularly if you are the lowest cost per unit manufacturer," Zonnenberg said.

But don't expect Nokia to lose its market share crown to Swedish nemesis Ericsson, which said this week it would launch its first general packet radio service handset, the R520, as planned in the first quarter of 2001. Ericsson recently said it would outsource its handset business to Flextronics.

"There's a difference between introduction and volume production and leveraging it into market gains," Morgan Stanley Dean Witter's Basu said. "Ericsson is being cautious on its own, on its ability to gain market share - I think it's important from their perspective to come out with a handset, but I don't think we can transition that to them getting a dominant position in the market. In other words, they have a lot of problems to work through."

Nokia's plan to play it safe hasn't yet affected its stock price - shares were $35 each on the Nasdaq at 11:15 a.m. Wednesday. Except for a few days