Unprecedented growth in high-speed mobile Internet traffic, in
particular for wireless data and video, has transformed the
telecommunications industry into the most evolving, inventive, and
keenly contested space. In addition, the emergence of wireless
broadband technology has created several new service areas, which
offer huge growth potential.
According to a report by Infonetics Research, telecom operators
globally generated approximately $2 trillion in revenues in 2013.
This is a slight improvement from $1.9 trillion revenues recorded
in 2012. Notably, the report also stated that telecom carriers are
increasingly spending on capital expenditures in order to update
their networks with the latest technologies. In 2013, carriers’
expenditures rose 6% year over year and are expected to rise at a
CAGR of 2% from 2012 to 2017, most likely to reach a significant
$355 billion by that time.
While the telecom growth momentum is expected to be maintained
in the U.S. over the near term, the major impetus is likely to come
from emerging markets of China, India, Brazil and Russia. Carrier
expenditures have increased in Japan and even major telecom
operators in Western Europe, the most vulnerable region
economically, have raised their budget.
Major Attributes
Currently, the U.S. Telecommunications Industry is evolving
around 5 broad factors. These include wireless gradually becoming
the future of the telecom industry and the consequent popularity of
spectrum. High-speed fiber-based network is projected to expand
more aggressively, especially for video/TV offerings.
In addition, consolidation within the industry will continue
mainly due to shortage of airwaves and attaining economies of
scale. Innovative products will be launched in areas of m-Commerce,
virtualization and cloud-based technology, high-speed metro
Ethernet, to name a few. Apart from these, there still remains
ample scope for expansion in the U.S. According to the
Federal Communications Commission (FCC), nearly a fifth of rural
American households lack broadband access.
Wireless is the Key
Despite the massive growth in fiber-to-the-home networks, we
believe that wireless networks will boost growth in the telecom
industry. Moreover, the sector is witnessing a fundamental change.
The focus of the operators has shifted from voice calls to data and
video. Any new network standard aims at faster data connectivity,
quick video streaming with high resolution and rich multimedia
applications.
The GSM Association’s research wing, GMSA Intelligence, recently
revealed its estimation that there will be more than 1 billion LTE
connections globally by 2017. Currently, there are approximately
176 million LTE connections worldwide. By 2017, the number is
likely to reach around 465 LTE networks across 128 countries.
GSMA Intelligence further reported that LTE users consume an
average of 1.5GB data per month, twofold of what is consumed by
non-LTE users. In the developing countries, LTE users can generate
20 times higher average revenue per user (ARPU) to carriers than
non-LTE users, whereas in the developed countries, ARPU can be
10-40% higher for LTE users instead of non-LTE users. Apart from
the terrestrial wireless network, the U.S. has an advanced
satellite broadband network, mobile satellite radio systems and
extensive WiFi networks.
Mergers and Acquisitions to Continue
We believe that the U.S. telecom industry will witness more
mergers and acquisitions in 2014. Owing to the rising popularity
and demand for the scarce and valuable wireless spectrum, mergers
and acquisitions have increased exponentially. While the strong
established players need more spectrums to gain competitiveness,
small players prefer to merge with strong rivals rather than trying
to establish a nationwide foothold which is extremely capital
intensive.
Verizon Communications Inc. (VZ) bought
spectrums from major cable MSOs including Comcast
Corp. (CMCSA), Time Warner Cable Inc.
(TWC) and Bright House Networks. Recently, Verizon announced the
largest acquisition proposal of the wireless industry. The company
has decided to acquire the remaining 45% stake of Verizon Wireless
Network from Vodafone Group plc. (VOD). Verizon
currently holds the majority 55% of this venture. Charter
Communications Inc. (CHTR) has offerd a bid to acquire
Time Warner Cable.
Pre-paid wireless operator MetroPCS has been acquired by
T-Mobile US Inc. (TMUS) and another pre-paid
operator Leap Wireless International Inc. (LEAP)
is awaiting regulatory approval to be acquired by AT&T
Inc. (T). Softbank of Japan recently acquired a 78% stake
in Sprint Corp. (S) for $21.6 billion. Satellite
TV operator DISH Network Corp. (DISH) currently
has a lucrative portfolio of spectrums (an estimated value of $10
billion) and is looking for a suitable merger option to develop a
nationwide wireless network.
Product Innovation
Severe spectrum crunch coupled with gradual smartphone adoption
is forcing the wireless operators to look for other options to
raise revenues. These include new pricing plans, a shift from
unlimited data usage to tier-based data usage, and higher upgrade
fees for smartphones and tablets in order to offset handset
subsidies. In fact, the average revenue per user for most of the
wireless carriers has been rising over the last two years. It is
also expected to grow in the long term primarily due to massive
growth in mobile data usage. Smartphone and tablet users are
progressively uploading video content and are becoming broadcasters
in their own right.
Another growth area for the telecom industry is the fiber-based
video service. According to Infonetics, video service revenues, in
the first half of 2013, were approximately $110 billion globally,
up 2% from the corresponding period of the previous year. The
global pay-TV market size may reach up to $270 billion by 2017.
Similarly, for the cable TV operators, a new growth area is the
small and medium sized business (SMB) segment. Currently, the
market size of the U.S. Business Services segment is approximately
$8 billion. Various industry researches estimate that the SMB
segment is expected to offer a market opportunity worth $20 billion
to $30 billion in the long term.
Moreover, growing demand for technically superior products has
been the silver lining for the telecommunication industry in an
otherwise tough environment. Metro Ethernet, IPTV, cloud computing,
managed IP services, m-commerce, m-banking, telematics services are
some of the major innovations in recent times. These developments
are also helping telecom equipment manufacturers, infrastructure
solutions providers, and mobile phone makers to consolidate
finances.
Zacks Industry Rank
Within the Zacks Industry classification, Telecommunications is
broadly grouped in the Computer and Technology sector (one of the
16 Zacks sectors) and are further sub-divided into seven industries
at the expanded level: Communications Infrastructure,
Communications Components, Satellite Communications, Communications
Semiconductor, Wireless Equipment Supplier, National Wireless
Service Provider and Non-U.S. Wireless Operator. The level of
sensitivity and exposure to different stages of the economic cycle
vary for each industry.
We rank all the 260 plus industries in the 16 Zacks sectors
based on the earnings outlook and fundamental strength of the
constituent companies in each industry. To learn more visit: About
Zacks Industry Rank. As a guideline, the outlook for industries
with a Zacks Industry Rank of #88 and lower is 'Positive,' between
#89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank for Communications Infrastructure is
#34, Communications Component is #110, Satellite Communications is
#110, Communications Semiconductor is #110, Wireless Equipment
Supplier is #67, National Wireless Service providers is #165 and
Non-U.S. Wireless Operators is #179. Looking at the Zacks Industry
Rank of the seven telecommunications industries, we derive that the
near-term outlook for the group is tending toward 'Neutral.'
Earnings Trend of the Sector
The broader Technology sector, of which the Telecommunications
industry is part, remains weak with respect to earnings. So far,
only 10.8% of the sector participants have reported fourth-quarter
2013 results, which have been strong in terms of beat ratios
(percentage of companies coming out with positive surprises) and
generated a positive growth.
Both earnings and revenues beat ratios were pretty robust at
71.4% and 85.7%, respectively. Additionally, total earnings for the
reported companies have shown a significant 23.2% year-over-year
increase on an 8.7% growth in revenues. This compares with a
substantially lower earnings growth of 5.9% on a much lower 3.2%
growth in revenues in the third quarter of 2013.
The consensus earnings expectations for full year 2014 also
depict a fairly strong trend. Earnings growth is expected to grow
at 1.8% in the first quarter and is expected to improve further to
11.2% in the second quarter. Overall, the sector is expected to
register full-year earnings growth of 9.4%.
For a detailed look at the earnings outlook for this sector and
others, please read our weekly Earnings Trends reports.
OPPORTUNITIES
The telecommunications industry as a whole offers a number of
attributes that are difficult to ignore from the standpoint of
investors.
- Telecommunications is a necessary utility: The need
for telecom in both rural and urban areas, and its role in the
infrastructure of both developed and developing markets, will
continue to grow. In addition, economic stimulus plans in the U.S.
and throughout the world should boost select service providers and
equipment manufacturers.
- Barriers to Entry: The lack of public airwaves
(spectrum) in the telecommunications industry creates a high
barrier to entry. The U.S. telecom market is controlled by just
four national players, as regional low-cost operators are not
eligible to compete with large carriers. Furthermore, it is not
easy to establish a new telecom carrier since it will require
government approval to transmit voice, data, and video on public
airwaves. Spectrum licenses are limited and therefore quite
expensive. Moreover, the deployment of network infrastructure
requires significant capital expenditure, which very few entities
can afford.
- Strong Demand: A recovering economy speeds up the
demand for real-time voice, data, and video manifold. The
escalation in demand has encouraged telecom service providers to
undertake large network extensions while upgrading plans. Moreover,
the FCC projects mobile data demand to grow 25-50 fold over the
next five years.
The companies that match well with the aforementioned
considerations include Arris Enterprises Inc.
(ARRS), China Unicom Ltd. (CHU), KT
Corp. (KT), Comcast Corp. (CMCSA) and
Liberty Global plc. (LBTYA). Arris currently
has a Zacks Rank #1 (Strong Buy) and the rest of these stocks
currently have a Zacks Rank #2 (Buy).
WEAKNESSES
In general, the telecommunications companies that are under
pressure have high debt levels and large financial leverage ratios
or are unable to cope with the recent market trends. Other risks
that remain are as follows:
- Potential Business Slowdown: Sales fluctuations of
carriers are expected to continue to weigh on capital spending
decisions -- a major problem faced by equipment vendors. The
companies are expected to remain focused on improving their balance
sheets, financial discipline and free cash-flow generation.
- Product Overlapping: We may see more product sharing
deals between telecom, cable TV and satellite TV operators as each
of these players are trying to gain a foothold in each other’s
territory. Even pay-TV services, offerings to business enterprises,
and mobile backhaul and metro-Ethernet segments may witness more
convergence. Mobile phone makers are now gradually offering tablets
(small laptops); chipset manufacturers who are offering chips for
personal computers and mobile phones are frequently interchanging
their areas of operations.
- Increased Competition: Technological upgrades and
breakthroughs have resulted in cutthroat price competition. Product
life-cycle and upgrade-cycle have been reduced drastically as
several firms are introducing new products and services within a
short span of time. Increasing competition is forcing every player
to offer heterogeneous and bundled services.
Signs of the above-mentioned weaknesses can be seen in
Rogers Communications Inc. (RCI), BCE
Inc. (BCE), NII Holdings Inc. (NIHD) and
Grupo Televisa S.A. (TV). All these stocks
currently have a Zacks Rank #4 (Sell).
ARRIS GROUP INC (ARRS): Free Stock Analysis Report
CHELSEA THERAP (CHTP): Free Stock Analysis Report
SPRINT CORP (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
T-MOBILE US INC (TMUS): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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