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

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

in December, its numbers
have stabilized in the $30s and $40s.

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