At first glance, the September-quarter results announced last week by Nokia AB, Texas Instruments Inc., and Conexant Systems Inc. would seem to indicate a breakdown in commun- ication between wireless-equipment OEMs and their component suppliers. While Nokia is projecting solid growth for the foreseeable future in the handset market, other manufacturers are warning of a slowdown in consumer demand.
Bucking the trend, Nokia reported both stellar quarterly financial results and promises of an even better fourth quarter to come. Nokia insisted there is no evidence that the industry's double-digit growth pace is flagging.
However, the combination of results announced by TI and Conexant, along with Motorola Inc., is a potpourri of sweet and sour news. Their revenue rose in the last quarter, but a slowdown is inevitable in the current quarter because wireless-component sales will be lower, executives said. That potent mix casts doubts on suppliers' fortunes despite their attempts to reassure investors that business will pick up once OEMs work through inventories piled up earlier this year.
"We're entering the first quarter of fiscal 2001 with a clear market environment of weakening demand in digital cellular handsets and consumer PCs," said Dwight Decker, chairman and chief executive of Conexant, Newport Beach, Calif.
It's the same song at Dallas-based TI, the world's No. 1 supplier of chips for the wireless market. TI reported a 26% increase in third-quarter revenue, to $3.2 billion, but projects slower growth in the fourth quarter.
"We expect wireless revenues to be down sequentially [in the fourth quarter], but up from a year ago, as certain handset customers continue to absorb inventory," said Bill Aylesworth, TI's chief financial officer.
That's not exactly how Jorma Ollila sees it from his perch as chairman and chief executive of Nokia, the world's No. 1 mobile- phone manufacturer. The Helsinki, Finland, company rebounded in the third quarter-after slipping in the June quarter-by cutting prices and introducing new handsets. Nokia's operating margins fell, but it gained market share at the expense of competitors like LM Ericsson, which last week said it will post a fiscal loss of $1.6 billion in its consumer product sector due to component shortages, increased price competition, and restructuring charges.
"Our view of the market fundamentals remains unchanged, with more than 400 million mobile phones estimated to be sold in 2000," Ollila said. "For 2001, we expect the mobile-phone market to be in the region of 550 million units."
For those watching from the sidelines, the signals couldn't be more confusing. The perception among analysts is that forecasting the fortunes of the wireless market-the range of units likely to be sold this year and in 2001, and the optimal manufacturing capacity and inventory mix that OEMs, suppliers, distributors, and CEMs should carry-will continue to elude everyone involved.
Industry executives and observers alike want to know what's really going on in the wireless- and mobile-equipment markets. Are OEMs really facing lower-than-expected demand and, if so, will this continue into next year? And how can the industry untie the ugly knots of inaccurate forecasting and component shortages that have hurt results this year?
Those supply-chain issues first came up in June after some OEMs and CEMs reported high inventory loads, yet were unable to ship enough finished equipment due to shortages of certain components.
"Motorola's management has lowered its forecasts for fourth-quarter 2000 and for 2001 with regard to revenue, earnings per share, and its expectations for the growth of the handset market," said Michael Ching, an analyst at Merrill Lynch & Co. Inc., New York. "This was a surprise to us."
Motorola and its rivals are trying to shake off the nasty hangover that resulted from inflated wireless-equipment sales estimates at the beginning of the year. Those forecasts ranged from 440 million handsets to more than 500 million. By the middle of the year, it had become apparent that while handset shipments will rise handsomely from the prior year, they will not be as high as expected.
Every move since then by industry players to trim their estimates has only triggered more concerns. Vishay Intertechnology Inc. and its rivals in the capacitor market have been hammered by investors as a result of the lower projections. Vishay's stock price had risen to a high of $62.63, but now trades in the mid-$20s.
Motorola's stock has not been spared, either. It closed at $23 on Thursday, well below the 52-week high of $61.50. Two weeks ago, the company said it now expects global handset sales will be between 410 million and 425 million units this year and between 525 million and 575 million units in 2001.
"This will have a negative impact," Merrill Lynch's Ching said. "It'll reduce revenue contributions from handsets, ... and it'll also likely reduce contributions in the semiconductor business, as Motorola consumes a lot of its semiconductors internally."
Perhaps this explains the reluctance of TI's Aylesworth to estimate 2001 handset sales. TI will stay out of the forecasting business, he said. "We're not going to try to forecast the market for next year; our customers do a lot better job of that than we do."
In addition to the supply-chain difficulties the wireless-handset market has faced in the last year, the industry is also grappling with the introduction of several products and technologies. The implementation of some of these has been delayed while customer acceptance of others has so far been mixed, analysts said.
"A lot of people are taking a wait-and-see attitude as they keep hearing about these new whiz-bang phones," said Allen Nogee, an analyst at In-Stat Group, Scottsdale, Ariz.
The sentiment among some industry observers is that a number of component suppliers may be disappointed with the demand for high-end phones as 2.5 and 3G technologies begin to ramp, according to Jerry Worchel, an analyst at inSearch Research, Phoenix.
Difficulties in the cellular-handset market can be attributed to more than just lack of sales, however. Slowing margins at OEMs also have contributed, Worchel said.
"Eight out of 10 cell phones sold go to a consumer who doesn't care about GPS, or even e-mail, but simply wants to call Suzy from the mall, or make sure the wife doesn't get stranded with a flat tire," Worchel said.