The telecommunications industry is identified as a major driver
of global economic recovery. Unprecedented growth in high-speed
mobile Internet traffic, chiefly for wireless data and video, has
transformed the 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 significant 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 network upgrades with the latest
technologies. In 2013, carriers’ expenditures rose 6% year over
year and are expected to rise at a CAGR of 2% from 2013 to 2019,
most likely to reach a significant $367 billion.
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 the emerging markets of China, India, Brazil and Russia.
Carrier expenditures have increased in Japan and even major telecom
operators in Western Europe, the most economically vulnerable
region, have raised their budgets.
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 attainment of economies of scale.
Innovative product launches are expected 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 Key
Despite the massive growth in fiber-to-the-home networks, we
believe that wireless networks will boost growth in the telecom
industry. The GSM Association’s research wing, GMSA Intelligence,
recently revealed its estimation of more than 1 billion global LTE
connections by 2017. Currently, approximately 274 LTE networks are
commercially available in 101 countries. More than 350 LTE networks
will be commercially functional by the end of 2014. By 2017, the
number is likely to reach nearly 465 LTE networks across 128
countries. At present, there are approximately 200.1 million LTE
subscribers globally.
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 than 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.
Research firm ABI Research recently reported that a significant
boost for LTE network is expected to come from the Asia-Pacific
region. In 2014, the Asia-Pacific region is likely to excel all
other regions in the world with respect to LTE base-stations
installation. LTE base-stations, which are popularly known as radio
access networks (RAN), are expected to grow eight fold in the
region this year. Also, wireless operators are projected to spend
around $35 billion for RAN in 2014, globally, with Asia-Pacific
accounting for the major share.
Technical Shift in the Telecom Vendor Market
The telecom infrastructure developer’s market is witnessing a
technical change globally. So far the main thrust of the
communications service providers was on developing advanced
hardware, which would enable them to attain enhanced speed,
scalability and reliability. However, recent developments suggest
that operators are gradually shifting focus from a hardware centric
growth model to an IT/software centric business model. The primary
reason behind this shift is the significant growth of cloud-based
virtual networking.
Growth of software-defined networking (SDN) and network function
virtualization (NFV) encouraged newly emerging digital media
companies to invest heavily in the communications infrastructure
market. SDN provides customers increased bandwidth utilization,
higher reliability and reduced capital spending. NFV is designed to
consolidate and deliver the networking components needed to support
a fully virtualized infrastructure -- including virtual servers,
storage and even other networks. It utilizes standard IT
virtualization technologies.
Mergers and Acquisitions to Continue
The U.S. telecom industry is likely to witness more mergers and
acquisitions in 2014. Owing to the rising demand for scarce and
valuable wireless spectrum, mergers and acquisitions have increased
exponentially. While established players need more spectrums to
gain competitiveness, small players prefer to collaborate with
strong rivals rather than trying to establish a nationwide
foothold, which is extremely capital intensive.
Recently, Verizon Communications Inc. (VZ)
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. In Feb 2014, Comcast reached an agreement with
Time Warner Cable Inc. (TWC) to acquire the latter
in an all-stock deal valued at around $45.3 billion.
Softbank of Japan recently acquired a 78% stake in Sprint
Corp. (S) for $21.6 billion. Sprint is further eyeing
T-Mobile US Inc. (TMUS) to acquire. Satellite TV
operator DISH Network Corp. (DISH) boasts 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 are
compelling wireless operators to seek other options to raise
revenues. Further, growing demand for technically superior products
has been the silver lining for the telecommunication industry in an
otherwise tough environment.
The cloud-managed WiFi market has become a major growth driver for
telecom operators as increasing number of large and mid-sized
business enterprises are adopting this technology. According to a
recent report by IDC, worldwide cloud-managed infrastructure and
managed services revenues are estimated to reach $653 million in
2014 and might scale up to $2.5 billion by 2018.
Large business enterprises generally have presence throughout the
world. A strong and robust wireless network is essential for these
companies to maintain connections with remote sites. Cloud-managed
WiFi networks have become indispensable for these large business
houses as they offer several advantages like central manageability,
smaller physical footprint and linear scalability.
The machine-to-machine (M2M) wireless communications technology has
been significantly driving mobile data revenues for wireless
service providers. M2M is a rapidly growing market opportunity.
According to a report by research firm IDATE, the global M2M
communications market is expected to generate revenues of over $53
billion in 2019, substantially up from $33 billion in 2013. Over
the same timeframe, the number of M2M module deployment is
predicted to rise from 175 million to 470 million.
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 anticipated to offer a market opportunity worth $20
billion to $30 billion in the long term.
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 nine industries
at the expanded level: Communications Infrastructure,
Communications Components, Satellite Communications, Communications
Semiconductor, Wireless Equipment Supplier, National Wireless
Service Provider, Non-U.S. Wireless Operator, National Wirleline
Operator and Non-U.S. Wireline 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 #168,
Communications Component is #186, Satellite Communications is #110,
Communications Semiconductor is #49, Wireless Equipment Supplier is
#104, National Wireless Service providers is #95, National Wireline
Operators is #110, Non-U.S. Wireless Operators is #236 and Non-U.S.
Wireline Operators is #245. Looking at the Zacks Industry Rank of
the nine 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 strong with respect to earnings. So far,
as much as 81.3% of the sector participants have reported
first-quarter 2014 results, which have been strong in terms of beat
ratios (percentage of companies coming out with positive surprises)
and generated a positive growth.
Although earnings beat ratio was pretty robust at 73.1%, the
revenue beat ratio was a moderate 59.6%. Additionally, total
earnings for the reported companies have shown a 4.9%
year-over-year increase on a 4.2% growth in revenues. This compares
with a substantially higher earnings growth of 5.3% on a much
higher 6.1% growth in revenues in the fourth quarter of 2014.
Nevertheless, the consensus earnings expectations for full year
2014 also depict a lackluster trend. Earnings growth is expected to
decline at 0.1% in the second quarter and is expected to decline
further to 1.5% in the third quarter. Overall, the sector is
expected to register full-year earnings growth of 2.5%.
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 the performance of select
service providers and equipment manufacturers.
- Barriers to Entry: The lack of public airwaves
(spectrum) in the telecommunications industry creates high barriers
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. Thus, these barriers protect the profits of
incumbents.
- 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 Polycom Inc. (PLCM),
Arris Group Inc. (ARRS), Juniper Networks
Inc. (JNPR), BlackBerry Ltd. (BBRY) and
Citrix Systems Inc. (CTXS). Both Polycom and
Arris currently sports a Zacks Rank #1 (Strong Buy) and the rest of
these stocks 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. While mobile phone makers are now gradually offering
tablets (small laptops), chipset manufacturers -- who provide chips
for personal computers and mobile phones -- frequently interchange
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 these weaknesses can be seen in Rogers
Communications Inc. (RCI), Motorola Solutions
Inc. (MSI), NII Holdings Inc. (NIHD),
Vodafone Group plc. (VOD) and Frontier
Communications Corp. (FTR). Motorola Solutions, Vodafone
and Rogers currently have a Zacks Rank #5 (Strong Sell) while the
rest have a Zacks Rank #4 (Sell).
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ARRIS GROUP INC (ARRS): Free Stock Analysis Report
BLACKBERRY LTD (BBRY): Free Stock Analysis Report
CITRIX SYS INC (CTXS): Free Stock Analysis Report
DISH NETWORK CP (DISH): Free Stock Analysis Report
FRONTIER COMMUN (FTR): Free Stock Analysis Report
JUNIPER NETWRKS (JNPR): Free Stock Analysis Report
MOTOROLA SOLUTN (MSI): Free Stock Analysis Report
NII HLDGS-CL B (NIHD): Free Stock Analysis Report
POLYCOM INC (PLCM): Free Stock Analysis Report
ROGERS COMM CLB (RCI): Free Stock Analysis Report
SPRINT CORP (S): Free Stock Analysis Report
T-MOBILE US INC (TMUS): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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