The telecommunications industry is identified as a major driver
of global economic recovery. Unprecedented growth in high-speed
mobile Internet traffic, in particular 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 huge growth potential.
Currently, the U.S. Telecommunications Industry is evolving around
broad factors, including wireless gradually becoming the future of
the telecom industry, and consequently spectrum is gaining
popularity. 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 for 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
Currently, the U.S. has approximately 300 million wireless
subscribers. Mobile broadband has become the most lucrative source
of revenue for the wireless operators. Massive growth of data
buoyed by mounting smartphone adoption is the main reason for this
favorable scenario. The U.S. currently accounts for 70% of LTE
subscribers in the world. Apart from the terrestrial wireless
network, the U.S. has an advanced satellite broadband network,
mobile satellite radio system and extensive WiFi network.
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.
The U.S. wireless industry is facing acute spectrum shortage,
resulting in data packet dropping at times. Carriers are
concentrating on the effective utilization of existing spectrums
along with acquiring more of it.
Mergers and Acquisitions to Continue
We believe that the U.S. telecom industry will witness more mergers
and acquisitions in 2013. As the scarce and valuable wireless
spectrum becomes utmost necessity, mergers and acquisitions
increased exponentially. The strong established players need more
spectrums to gain competitiveness, small players prefers to merge
with strong rivals rather than trying to establish a nationwide
foothold which is extremely capital intensive.
Verizon Communications Inc.
) bought spectrums from major cable MSOs including
Time Warner Cable Inc.
) 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 the Verizon
Wireless Network from Vodafone Group plc. (
) for about $130 billion. Verizon currently holds the majority 55%
of this venture.
Pre-paid wireless operator MetroPCS has been acquired by
T-Mobile US Inc.
) and another pre-paid operator
Leap Wireless International Inc.
) is awaiting regulatory approval to be acquired by
). Softbank of Japan recently acquired a 78% stake in
) for $21.6 billion. Satellite TV operator
DISH Network Corp.
) 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.
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
Over the last 15 years, the U.S. wireless sector has invested a
whopping $300 billion to install the most efficient seamless
communications networks worldwide. In 2012, the size of the U.S.
wireless ecosystem was around $200 billion. The telecommunications
industry generates over 2.6 million jobs in the U.S. This momentum
is expected to continue in 2013 on increasing adoption of
next-generation super-fast 4G LTE networks.
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
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 #77,
Communications Component is #93, Satellite Communications is #216,
Communications Semiconductor is #123, Wireless Equipment Supplier
is #166, National Wireless Service providers is #204 and Non-U.S.
Wireless Operators is #56. 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. Full 100%
of the sector participants have reported second-quarter 2013
results, which have been strong in terms of beat ratios (percentage
of companies coming out with positive surprises) but generated a
Both earnings and revenues beat ratios were pretty robust at 66.7%
and 50.7%, respectively. However, total earnings for the companies
have shown a significant 10.1% year-over-year decrease on a modest
0.4% growth in revenues. This compares with a substantially lower
earnings decline of 4.6% on a much higher 2.9% growth in revenues
in the first quarter of 2013.
The consensus earnings expectations for the rest of the year
however depict a fairly strong trend. Earnings growth is expected
to stabilize at 0.2% in the third quarter and is expected to
improve further to 3.4% in the fourth quarter. Overall, the sector
is expected to register full-year growth of 1.3%.
For a detailed look at the earnings outlook for this sector and
others, please read our weekly Earnings Trends reports.
The telecommunications industry as a whole offers a number of
attributes that are difficult to ignore from the standpoint of
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.
The FCC has decided to free up spectrum currently used by TV
broadcasters for commercial wireless networks and to deploy a
nationwide interoperable public-safety broadband network. Huge
proliferations of smartphones, tablets, and several other
pocket-sized mobile devices have significantly increased the
demand for bandwidth for seamless wireless connectivity. The
spectrum auction is expected to shore up $15 billion in the U.S.
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 folds over the next five years.
The companies that match well with the aforementioned
Arris Enterprises Inc.
SK Telecom Co. Ltd.
Shaw Communications Inc.
) . All these stocks currently have a Zacks Rank #2 (Buy).
Generally 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
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 are offering personal computers and mobile
phones are frequently interchanging their areas of
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
Signs of the above-mentioned weaknesses can be seen in
JDS Uniphase Corp.
DISH Network Corp.
Gilat Satellite Networks Ltd.
). All these stocks currently have a Zacks Rank #4 (Sell).
ARRIS GROUP INC (ARRS): Free Stock Analysis
COMCAST CORP A (CMCSA): Free Stock Analysis
DISH NETWORK CP (DISH): Free Stock Analysis
GILAT SATELLITE (GILT): Free Stock Analysis
HARRIS CORP (HRS): Free Stock Analysis Report
JDS UNIPHASE CP (JDSU): Free Stock Analysis
LEAP WIRELESS (LEAP): Free Stock Analysis
ORANGE-ADR (ORAN): Free Stock Analysis Report
SPRINT CORP (S): Free Stock Analysis Report
SHAW COMMS-CL B (SJR): Free Stock Analysis
SK TELECOM CO (SKM): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
T-MOBILE US INC (TMUS): Free Stock Analysis
TIME WARNER CAB (TWC): Free Stock Analysis
VERIZON COMM (VZ): Free Stock Analysis Report
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