Once overall environment improves earning potential is good (page 3 of 3)

The 12 months rolling ARPU (average revenue per user) rose in all major European markets and data as a percentage of service revenues increased in December to 16% from 12.7% (CSFB expected 14.5%) driven by premium SMS. It looks like Vodafone is benefiting from its recently launched Vodafone Live! and is gaining market share.

On top of the good KPI's, Verizon reported 02 figures with Verizon Wireless having a strong 4Q (ARPU rose 6% yoy, net adds rose 18.4% yoy). Vodafone has a 44% stake in Verizon Wireless and it accounts for 16% of Vodafone's proportionate mobile EBITDA. This suggests that there is potential for raising forecasts and also strengthens the investment story relative to the sector. Besides showing positive earning momentum, the telecom sector is also less exposed than many others to a weaker dollar. Whereas for the European market as a whole close to 30% of revenues come from the US only 8% of sales of the telecom sector come from that region. We consider an entry level of around GBP 1.10 as attractive.

SAP (SAP GY, EUR 86.60) reported 4Q and full year sales figures above analysts' expectations. As headline results have already been given in the pre-announcement of 9th January it did not surprise the market to a big extent. SAP rose 2.75% over the week.

4Q license revenue came in at EUR 958m (CSFB expected EUR 950m), which represents a fall of 7% from a year ago. Please recall that US rival PeopleSoft and Siebel reported a 20 and 38% decline of 4Q license revenue, which shows that SAP continues to gain market share based on license revenue. In fact, in 2002 the company reached a market share of 50% based on license revenue. Net income for the full year came in at EUR 509m or EPS of EUR 1.63 per share, excluding extraordinary items, EPS would have reached EUR 3.29 per share (CSFB expected 2.93).

The American business, which does not yet show material improvement, continues to disappoint. Although SAP produced better than expected 4Q license results we do not believe that this is indicative of any improvement in the underlying demand environment but think the result reflects the company's better control of its cost base. In fact, guidance for 2003 implies conservative revenue growth. Operating margin guidance for 2003 is for an increase of 1% and EPS excluding extraordinary items in a range of EUR 3.45 - 3.60.

We believe the results show the earnings potential of SAP. With the conservative revenue guidance we would expect that any improvement in corporate free cash flow would result in upgrades to revenues and more than proportional upgrades to earnings. It is worth noting that SAP in the past has traded very closely in line with consensus up and downgrades in EPS.

We would also like to point out that CSFB upgraded the software sector as their preferred play for an expected corporate spending turning point further to 20% overweight after raising to 10% overweight in late November from underweight.

Stora Enso (STERV FH, EUR 8.78) 4Q result came in below expectations with a pre tax profit of EUR 143m (CSFB expected EUR 178m). Weak newsprint and packaging board explains part of the shortfall. On the positive side are signs of strength in the US and the confirmation of the unchanged dividend of EUR 0.45 which gives a dividend yield of almost 5%.

It has to be noted that the 4Q was expected to be a weak quarter. Recently the sector showed some positive signs such as strong order inflow to coated fine paper mills and a price hike announced by newsprint producers. As such we expect the sector to benefit from improved seasonal newsflow on fundamentals in the near-term.