Telecom Updates #1

Softbank CEO Predicts Major Recovery for Sprint

Softbank, which is Sprint’s Japanese corporate parent, recently posted 19% gains in first quarter profits. A report by ABC News reports however that Sprint continued to be a liability, posting net losses this quarter which were in turn offset by Softbank’s robust telecom sales in Japan. Softbank’s quarterly sales exceeded $20 billion, while its overall profits were $3 billion.

Softbank also recently announced plans to acquire ARM, a British chip manufacturer, for $32 billion in a move that signals the Japanese telecoms and internet conglomerate’s commitment to furthering its involvement in the internet of things and is also being hailed as a vote of confidence in the stability of the post-Brexit British economy.

“I’m telling ARM management – let’s increase the number of engineers, boost R&D spending and make investments proactively,” Softbank CEO Masayoshi Son said in a briefing. Son also signaled that he would slightly reduce his time commitment to Sprint in order to focus on the process of integrating ARM’s operations.

Sprint, while posting deeper quarterly losses, part of its ostensibly lackluster sales could be attributed to an unfavorable exchange rate. The American telco also began showing glimmers of recovery, with a sharp uptick in postpaid phone subscriptions and promises of positive cash flows as early as the next financial year.

“Sprint has been a drag, but I’m now seeing signs of a V-shaped recovery,” Son said, promising that Sprint would soon become a moneymaker. Softbank has also liquidated its stake in Alibaba and sold off its stake in SuperCell to Tencent, freeing up cash reserves, though it still has $112 billion in debt. Son expressed confidence in his moves and has decided to helm Softbank for another decade.

American Tower’s Foreign Operations Compensate for Lagging US Market Growth

American Tower Corporation, one of the largest cell tower operators in the US, has posted $1.44 billion in quarterly revenue, up 23% year over year as well as a 22.4% rise in net income. Earnings per share however underperformed, hitting 37 cents rather than the expected 54 cents.

Analysts are reporting that much of American Tower’s earnings could be attributed to its move to diversify into foreign markets, which has paid handsome dividends, with international acquisitions of towers driving 69.7% of growth in international tower revenues. Motley Fool notes that its portfolio of foreign towers now accounts for 42% of total revenue and 32% of segment operating profit. It is also growing twice as fast as its domestic portfolio.

In all, American Tower’s Asian portfolios experienced 274.3% year over year growth in revenue to $225 million in the second quarter, on the back of its fruitful acquisition of a 51% stake in India’s Viom networks, which added 42,000 towers to its holdings. EMEA regional revenues also grew 91.4% to $135 million.

Much of its lagging growth in the US segment could be attributed to organic growth in tenant billing.

“Our company’s strong second quarter total property revenue growth of nearly 24 percent was powered by solid U.S. organic tenant billings growth of 6 percent, and more than double that level in our international markets, at approximately 14 percent,” said American Tower CEO Jim Taiclet.

Concerns have been growing regarding downturns in capital expenditures among American wireless carriers, which have been investing heavily in small cell densification in order to increase capacity and throughput in their networks. Such shifts have prompted questions regarding the viability of the traditional tower model, as companies such as Sprint famously shift to a small-cell oriented model to expand its network footprint.

“Tower investors have been waiting for an upturn in carrier capex; that didn’t transpire in Q2,” MoffettNathanson researchers wrote, regarding American Towers. “Verizon and T-Mobile maintained their full-year spending outlooks, whereas AT&T’s level of investment is trending below its 2016 guidance. Sprint stole the show, however, spending less than $500 million on network-related capex in the quarter, for a mid-single digit level of capital intensity. This really isn’t new news for tower investors, but it’s not what one wants to hear for a demand-driven model like this one, either.”

The analysts also expressed their reservations at the promise of international diversification, noting the limited value of international assets compared to American ones: “However, readers of our work will know we’re more sanguine about the appeal of international tower assets than most. This isn’t to say the assets are somehow categorically bad, or that American Tower is misallocating capital, but rather that they are demonstrably less attractive than those in the U.S. (to degrees that vary by country) and warrant lower multiples as a consequence. While we still like the shares here, we worry that investors who do not take this into account are investing with a slimmer margin of safety than they may believe.”

T-Mobile and Sprint Express Doubts Regarding Verizon’s Yahoo Purchase

Verizon recently announced a major acquisition, paying $4.83 billion in exchange of Yahoo’s core assets. The news sent waves rippling through the telco and internet industries, signaling Verizon’s decisive move into turning to content production and digital advertising for new revenue streams and presages potentially vast shifts in both industries.

In addition to the $10 billion purchase of AOL and its digital properties, the Yahoo acquisition brings its websites, e-mail users, search engine, and Tumblr into Verizon’s growing online portfolio. Other outlets such as the LA Times have also observed that the acquisition also includes valuable Silicon Valley real estate, making Verizon a significant landowner in a region notorious for exorbitant rent prices.

It also brings a definitive end to CEO Marissa Meyer’s failed attempts turn the flagging tech company’s fortunes around. While the CEO made splashy acquisitions and hires in order to boost advertising revenues, in the end it was Yahoo’s 40% stake in Alibaba which is worth $30 billion that proved to be the most valuable asset in an otherwise moribund portfolio.

As we noted before, Verizon competed with Berkshire Hathaway and AT&T in bidding for Yahoo assets and expressed confidence in its ability to marry up its internet holdings to increase advertising revenues. In particular it seeks to leverage the wealth of user data it holds to improve advertising strategies on AOL and Yahoo properties.

However, Sprint and T-Mobile CEOs have taken the opportunity to express skepticism at the wisdom of the acquisition. John Legere of T-Mobile, for instance, has noted in an interview with USA TODAY that the telco would be hard pressed to compete with established tech juggernauts such as Google and Facebook: “It becomes clear that they see customers as units of advertising revenue. They’re going into that game against the most powerful companies, Facebook and Google. I think it’s going to be a slippery slope for them. I don’t think it impacts us.”

T-Mobile, which added 1.9 million customers last quarter but saw earnings fall to $225 million, expressed that the transition to a media platform could prove to be a major distraction. Sprint’s CEO Marcelo Claure also expressed doubts as to Verizon’s ability to move successfully into the content business, noting that all such attempts had failed historically.

Unlike Verizon and AT&T, which seek to produce content and generate ad revenue streams, Sprint and T-Mobile focus on providing the throughput and capacity to support increased data consumption in intensive use cases like high definition video streaming.

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