Market Woes Drag Vendors Down
What price to be a fly on the wall in some of the telecom vendor community's most influential boardrooms today after a brutal end to the first quarter of 2015?
It's not alone. The share price of Alcatel-Lucent (NYSE: ALU), the company Nokia hopes to subsume, lost 9.7% of its value on the Paris exchange. (See Nokia's Suri Defends AlcaLu Deal Against Critics and Nokia & Alcatel-Lucent: What's Going On?)
There's more. Sweden's Ericsson, which had suffered a similar drop after reporting declining profits last week, has continued to flounder. Its stock lost 2.9% of its value in Stockholm on the day of Nokia's earnings update. (See Ericsson Sinks on North American Slowdown.)
These are indisputably tough times for the equipment titans of the Western world, but is the market overreacting?
At least one analyst thinks the punishment meted out to Nokia was unwarranted. In a research note sent late Thursday, Michael Genovese of MKM Partners described the negative reaction to Nokia's earnings update as "overdone," lauding growth in revenues and the performance of the company's mapping and licensing businesses during the first three months of the year.
"GMs [gross margins] missed … due to … lower software and systems integration sales, upfront costs for LTE builds in China and increasing competition in the market," added Genovese. "Mix and Chinese LTE profitability should improve later in the year. Additionally, the merger with ALU [Alcatel-Lucent] should help address some of the competitive environment-related issues over time."
It is worth noting that Ericsson AB (Nasdaq: ERIC) also reported sales growth in the January-to-March quarter but struggled to maintain profitability because of restructuring costs. Flattered by foreign exchange movements, Ericsson's sales fell in constant-currency terms, unlike Nokia's. Yet the Swedish player blamed its setback on a slowdown in North America, where Nokia flourished (albeit due partly to its takeover of SAC Wireless last year). By contrast, Ericsson's Asia business was a high flyer. "It's a long time since we've seen that level of growth in any region," said CEO Hans Vestberg about the improvement in India. (See Ericsson Sinks on North American Slowdown.)
Investors might also take heart from comments made by Nokia's senior executives during yesterday's earnings call. The January-to-March quarter in 2014 was an unusually strong one for software sales, said CFO Timo Ihamuotila, making a year-on-year comparison look unfavorable. Nokia won a major systems integration deal in the first quarter that should bolster results over the rest of the year, according to CEO Rajeev Suri.
Moreover, as Genovese has intimated, the margin impact of entry deals in China's 4G market may be a short-term one, as deployments gather pace. "The situation will ease in the second half of the year," said Suri.
On the other hand, some analysts seemed perplexed about the sudden intensification of "competitive dynamics" that Suri held partly responsible for Nokia's margin squeeze. Was there an insinuation that Suri had been remiss in not alerting the investment community to this development at an earlier stage? "You have to give it a period of observation to know it's a trend," insisted Nokia's boss. "Based on what I see, I now think it's worth pointing out that competitive intensity has increased."
Next page: Merger misgivings