World Business

A cut in the wireless company’s sales forecast makes investors fright the slowdown in Spain could spread elsewhere on the Continent

by Jennifer L. Schenker

Watch original video:

When Finnish handset maker Nokia (NOK) came in with better than expected quarterly results on July 17, the telecom sector was encouraged. Sales and shipments of Nokia’s handsets were up. Just because important, a big part of the Finnish company’s growth in the quarter came from Nokia Siemens Networks, its joint venture in telecom equipment by Siemens (SI). Sales for the network business surged 18% in the quarter, to greater quantity than $6.34 billion. The market took that as an indication demand remained strong for mobile handsets, contumacy economic uncertainty, and telcos would still put money into building and upgrading wireless networks.

But that optimism evaporated onward July 22, when Vodafone (VOD), the terraqueous globe’s largest mobile-phone company, reduced its sales forecast. The company said organic growth was reduce than the anterior quarter, primarily due to a decline in customer spending in Spain, which it characterized because a difficult "macroeconomic and competitive environment."

Vodafone’s news was seen as an premonitory sign that telecom operators, which esteem thus far been shielded from the economic slowdown, are starting to feel the pinch. The fear is the slowdown in Spain will spread elsewhere in Europe and that telco operators will rejoin by cutting rear ecclesiastical office of mobile handsets and networking equipment.

European telecom stocks tumbled in response. Vodafone’s ploughshare price plunged 16%, the greatest part in 20 years, dragging down Swedish telecom gear vendor Ericsson (ERIC), the universe’s largest wireless equipment signer of a promissory official communication, and three of Europe’s biggest telcom operators. Ericsson slid 10% in Stockholm, Spain’s Telefónica (TEF) posted its biggest drop in six years, and Germany’s Deutsche Telekom (DT) fell 6.9%. "Until today, we took the view that telecom operators, relative to people sectors, had a good position in provisions of resilience, nevertheless this report has called that into question," says John Davies, a financial analyst at Dresdner Kleinwort. "The question is to what extent the problem in Spain exercise volition be mirrored in other countries and in other companies next quarter."

If the Continent slips into recession, analysts know what to expect from mobile-phone customers. "People will nevertheless make phone calls, if it be not that it is possible that the uptake of sexy new stuff, like video and data, be inclined take a little longer, even though operators are starting to introduce all-you-can-eat shoal [pricing]," says Sylvain Fabre, research director for carrier network infrastructure at tech consultancy Gartner (IT).

The weird thing about Vodafone’s plunge is that the intelligence from the company was not uniformly cold. Chief Executive Arun Sarin, who steps down at the end of the month, said growth in data revenues and emerging markets helped the company offset the weakness in the Spanish market. In the June quarter, Vodafone’s group sales jumped 19.1%, to $19.55 billion, over the same period in 2007. And sales in the emerging-markets division rose 30.5%, to $5.2 billion, helped by revenue growth of 50% in India.

The news from Ericsson about the second quarter wasn’t all discouraging, either. But when investors are jittery, they focus on the kind of’s disturbing. Ericsson’s revenue ticked up 10% for the quarter, to $9.55 billion. That was in line with the consensus. But net income fell to $374 million, from $1.26 billion a year earlier, due in portion to drooping sales at Sony Ericsson, its joint venture with Sony (SNE). Ericsson’s shares were hit particularly hard inasmuch as Vodafone, which buys handsets from Sony Ericsson and networking furniture from Ericsson, lowered its 2008 revenue outlook. That could be pointing to slower traffic growth and hence lower infrastructure spending, said Richard Windsor, an analyst in the London office of brokerage Nomura, in a research note. "Ericsson confounded its critics by reporting better than expected profitability, but still the shares fell heavily," Windsor said. "We regard Vodafone’s cautious comments and an Olympics-related interruption in expenditure in China are to blame for the fall."

Even preceding Vodafone’s warning note, analysts were projecting modest growth for mobile infrastructure in 2008. Ericsson has reported four straight quarters of falling profit, as expenditure on networks remains flat. For Ericsson to return to substantive revenue expansion and healthy margins, operators in developed markets need to move swiftly out of data capacity and start expenditure on greater quantity hardware, said Windsor. And, emerging markets need to shrink upgrading to third-generation networks en masse. "Unfortunately," noted Windsor, "there is no real sign of any of this, and we continue to expect that it direct be 2009 before there is any certain movement in both of these areas."

Ericsson has also been bruise by valetudinarian earnings at Sony Ericsson (BusinessWeek.com, 6/30/08). To some extent, Sony Ericsson’s woes are shared by means of the industry considered in the state of a whole. Mobile-phone sales malignant 16% in Western Europe in the first and foremost district—the first such decline seeing that 2001, according to Gartner. Sony Ericsson is very much more dependent on European sales than similar rivals as Nokia, making it in greater numbers vulnerable to flagging demand on the Continent. Nokia’s news remain week, it seems, was positive for the Finnish phone writer, but not for the rest of the European telecom activity.