Posted by Matt Walker on October 6, 2017
Over the next 3 weeks, companies across the communications sector will begin reporting third quarter (3Q17) results.
Watch for telco progress
The world has never been so reliant on secure communications, but the underlying market is in a bit of turmoil. The cloud and its key providers keep on growing, but many large telcos are treading water. They’re trying to cut costs (both operating & capital), and use modest investments and partnerships to tap revenue growth in areas like video/content and IoT. Many are also involved in M&A deals, which can help competitiveness if integrated well, but it can also make you lose a step. Nearly all telcos are under some level of competitive pressure from the cloud world, some extreme. As such, the most interesting earnings ahead lie in November, when most telcos report. But we’ll learn a thing or two in October.
Economic outlook stabilizing
The IMF’s Managing Director, Christine Lagarde, gave a relatively optimistic speech yesterday on the global economic outlook. Lagarde noted that the IMF’s last (July 2017) forecast projected 3.5 and 3.6% GDP growth for 2017 and 2018, respectively, adding that the forecast to be released next week “will likely be even more optimistic…Measured by GDP, nearly 75 percent of the world is experiencing an upswing; the broadest-based acceleration since the start of the decade.” She also noted some important risks, “from high levels of debt in many countries, to rapid credit expansion in China, to excessive risk-taking in financial markets.” The broadly positive tone was a plus for the communications sector, though, where revenues tend to be closely linked to overall GDP.
Wide range of companies play into the communications sector
The communications sector’s supply chain is long & complex, from chip vendors selling into networking & data center markets (e.g. Intel, Micron, Amphenol), to infrastructure vendors supplying hardware, software & related services directly to network operators (Ericsson, Huawei, Ciena); to services & software specialists (Amdocs, Mavenir, Nutanix), to the network builders & operators themselves. These can be telcos (Orange, Softbank, Verizon), cloud providers (Microsoft, Amazon, IBM), infrastructure specialists (Equinix, Zayo, Crown Castle), or part of another vertical market building large carrier-scale networks (finance, energy, government).
Most of the suppliers along this chain sell into other markets beyond communications; that’s most obviously the case at the chip level, but also for others, including IT services vendors. Some cloud providers (IBM, HPE, SAP, and Oracle in particular) are also large suppliers of IT equipment & services to telcos, who they compete with in some areas.
Another layer of complexity is manufacturing: few big tech vendors actually do this themselves nowadays, so electronics manufacturing services (EMS) players (e.g. Benchmark, Flex, Jabil) are also relevant. Note that some companies in the cloud (e.g. Facebook, Alphabet/Google) develop their own product designs, and contract with EMS/ODM partners to manufacture and ship to site.
Look for the cloud effect in October results
Despite the IMF’s endorsement for overall growth, the communications sector is less certain. Many big players are struggling with changes wrought from the cloud, and finding top-line growth isn’t easy. The growth of “the cloud” will be seen across earnings, sometimes indirectly. Cloud is motivating business strategy shifts, new investments, mergers, and layoffs. The latter subject will surely come up at Ericsson’s 3Q17 call, set tentatively for October 20.
Many semiconductor players selling into communications markets report earnings later this month, starting the 19th of October (TSMC) to the 30th (Cavium; estimated date). One of the early (19 Oct.) reporters, Maxim Integrated, also illustrates the impact of the cloud.
Maxim’s 2016 revenues were about $2.2B, flat from 2015 and down slightly from 2014. Last month, it announced a “business model update“. One goal was to increase operating margins, another to reduce dependence on individual large customers. Also important, though, is the need to better address cloud applications. Maxim does this through its “Comms & Data Center” unit, focused on data center optical connectivity & power.
When Maxim crafted its strategy shift, Intel’s dedicated “Data Center Group” (DCG) may have been on Maxim’s mind. Intel’s DCG revenues were $17.8B in the 12 months ended June, from $13.4B 3 years prior (3Q13-2Q14). That’s attractive growth, when it’s (mostly) organic and comes with above average margins: in the first half of 2017, 42% of Intel’s operating income came from DCG, which contributed only 29% of revenues. Intel reports on October 26th.
Some positive early news from an unusual reporter
Not all companies follow a calendar year-based fiscal year, and some also stagger their quarters. Accenture is an example. Its fiscal year ends in August. The benefit of this, for a market watcher, is that Accenture already reported its equivalent of 3Q17 (June-August 2017).
The results, published on September 28, are positive for the company’s “Communications, Media, & Technology” (CMT) vertical market. Accenture’s CMT revenues were $1.82B in 3Q17, up 7% YoY; CMT revenues for the 12 months ended August were also up, by 4%, to $6.88B. This is good for Accenture, but it’s too early to tell what it means (if anything) for the sector. Accenture provides a wide range of software & services to CMT players. Its growth could be driven by market share gains, or an expanding market: telcos are leaning more on vendors/partners (e.g. Accenture) in certain areas, which can expand the addressable market. Digital transformation is one area. Importantly, Accenture is offering a number of services geared towards new service rollout & management. That hits what telcos need most of all: new revenue streams.
(Photo credit: Diego Jimenez)