In the past five trading days, telecom stocks flattered to deceive as the initial rally was soon eclipsed by a continued downturn, as deteriorating trade relations between the United States and China took its toll. Trade uncertainty continued to play spoilsport and dragged the industry down with both the countries remaining firm in their respective stance. In addition, relentless pressure from the ongoing geopolitical crisis and challenging macroeconomic environment, triggered by a plunging Argentine peso, apparently led the industry to a free fall.
During the past week, the U.S. government formally implemented the new rule of the National Defense Authorization Act, which prohibits federal agencies from buying “telecommunications equipment or services as a substantial or essential component of any system” from certain Chinese entities. These include Huawei, ZTE, and several other providers of video surveillance equipment and services from the communist nation. The latest move follows President Trump’s decision to impose a fresh round of 10% tariff on $300 billion worth of imports from China, effective September, in addition to the existing set of tariffs, after the bilateral trade negotiations failed to yield any concrete result.
However, in a dramatic turnaround, the U.S. President has opted to delay taxing some items within the new import basket until Dec 15. These include cellphones, video game consoles, computer monitors, some clothing and footwear items that formed a sizeable portion of the consumer shopping basket. The strategic decision is aimed to offer some respite to the retailers and enable them to stockpile things for the back-to-school and holiday season. Although this is likely to benefit the industry as 5G deployment across the country gains pace, the continued tariff war is expected to affect the supply chain of various U.S. telecom firms that depend on the Chinese market to a large extent.
Regarding company-specific news, divestment, product launches and quarterly earnings primarily took the center stage over the past five trading days.
Recap of the Week’s Most Important Stories
1. Verizon Communications Inc. VZ has inked an agreement to divest the social media blogging site Tumblr for an undisclosed amount. The blogging platform is being sold to San Francisco-based web developer firm Automattic Inc., which is the parent of publishing site WordPress.com, WooCommerce, Jetpack, Simplenote, Longreads, and more.
Although the selling price was not officially revealed, various unconfirmed reports have valued the transaction at about $20 million, which is less than 20% of its original buyout price. In 2013, Tumblr was acquired by Yahoo for $1.1 billion, when it was at the peak of its business. Later, this iconic brand became part of Verizon, when the telecom major acquired Yahoo for $4.8 billion in 2017. (Read more: Verizon to Sell Tumblr to Focus on Premium Original Content)
2. CenturyLink, Inc. CTL reported mixed second-quarter 2019 financial results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same.
Net income (excluding integration and transformation costs, and special items) came in at $369 million or 34 cents per share compared with $282 million or 26 cents in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 3 cents. Quarterly operating revenues declined 5.5% year over year to $5,578 million due to difficult year-over-year comparison, as the company implemented guardrails to drive profitable revenues during 2018. The top line lagged the consensus estimate of $5,625 million. (Read more: CenturyLink Q2 Earnings Beat, Revenues Decline Y/Y)
3. Motorola Solutions, Inc. MSI recently augmented its security solutions portfolio with two new product launches.
These are the Avigilon video for radio site security and the KVL 5000 key variable loader for secure communications. The products are likely to facilitate the company to keep networks secure against cybersecurity threats through customized risk assessments and round-the-clock security monitoring. (Read more: Motorola Boosts Security Portfolio With Twin Product Launch)
4. CommScope Holding Company, Inc. COMM reported mixed second-quarter 2019 results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same.
Non-GAAP net income came in at $152.8 million or 66 cents per share compared with $133.1 million or 68 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 8 cents. Quarterly net sales increased 107% year over year to $2,566.7 million. The amount included ARRIS sales of $1.37 billion from the date of acquisition (Apr 4, 2019) through the end of the reported quarter. The top line, however, lagged the consensus estimate of $2,588 million. (Read more: CommScope Q2 Earnings Beat Estimates, Revenues Miss)
5. Viasat, Inc. VSAT reported solid first-quarter fiscal 2020 financial results, wherein both the bottom line and the top line surpassed the respective Zacks Consensus Estimate, and increased year over year.
Non-GAAP net income came in at $6.4 million or 10 cents per share against net loss of $17.5 million or loss of 30 cents per share in the prior-year quarter. The bottom line substantially beat the Zacks Consensus Estimate by 39 cents. Quarterly total revenues increased 22.4% year over year to $537 million. This was driven by more than 20% growth in both satellite services and government systems segment, which more than offset the expected ramp down effects of lower Phonetic terminal deliveries in commercial networks segment. The top line surpassed the consensus estimate of $503 million. (Read more: Viasat Q1 Earnings & Revenues Beat Estimates, Up Y/Y)
The following table shows the price movement of some of the major telecom stocks over the past week and during the past six months.
In the past five trading days, Qualcomm was the biggest gainer with its share price increasing 3.9%, while Arista was the biggest decliner with its stock down 1.8%.
Over the past six months, Qualcomm has been the best performer with its stock appreciating 28%, while CenturyLink was the biggest decliner with its stock down 19.7%.
Over the past six months, the Zacks Telecommunications Services industry has recorded average decline of 2.9% while the S&P 500 has rallied 4.2%.
What’s Next in the Telecom Space?
In addition to a few earnings release within the industry, all eyes will remain glued to how the government handles the trade war issues that has spilled to the currency frontier, and their cascading effects on the industry.
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