In the past five trading days, telecom stocks witnessed a steady descent followed by a slight uptrend as deteriorating trade relations between the United States and China shook the domestic and international markets. With both the countries appearing resolute to not open up to any negotiation at the moment, trade uncertainty played spoilsport and dragged the industry down. However, a stable quarterly performance on average lent stability toward the end of the past week as the industry aimed to shake off trade impediments.
With bilateral trade negotiations moving at a sluggish pace and failing to yield any concrete result, President Trump announced his intentions to impose a fresh round of 10% tariff on $300 billion worth of imports from China from September in addition to the existing set of tariffs. The decision to put the entire import basket from China under the tariff regime was also fueled by the fact that it reportedly backtracked on its promise to buy more U.S. agricultural products. The move derailed the trade talks and the markets went on a free fall. In retaliation, the communist nation allowed the Chinese yuan to drop below 7 per U.S. dollar – the lowest valuation for the currency in 11 years. This negated the impact of the proposed tariff and forced the Trump administration to label China as a ‘currency manipulator’. An escalation in the existing tariff rate is also on the anvil as the U.S. President vouched to up the ante to seek more leverage.
Further, the administration unveiled rules that formally ban Chinese telecom equipment manufacturer Huawei and four other firms from any government contracts. The rules prohibit any U.S. federal agency from purchasing telecom or technology equipment from the firms, except waivers under certain circumstances. This is likely to affect the supply chain of various U.S. telecom firms that depend on the Chinese market to a large extent. In addition, the average American household is expected to bear the brunt of the additional taxes as the tariffs are likely to lead to $1,000 increase in prices. This, in turn, is likely to dent demand and result in higher inventory levels.
In another development, the U.S. Federal Communications Commission’s streamlined licensing rules for small satellites passed the voting process for faster implementation in the near future. The rules would allow companies to secure spectrum rights much faster and cheaper by paying only $30,000 instead of nearly $500,000 mandated under existing norms. The new licensing would encourage operators to set up satellites that weigh 180 kilograms or less and operate below 600 kilometers, benefiting the industry as a whole.
Regarding company-specific news, 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 - Free Report) reported relatively healthy second-quarter 2019 results, primarily led by the wireless business. With industry-leading wireless products and services, the company remains well poised to benefit from increased 5G deployment across the country under the new operational framework.
Excluding non-recurring items, adjusted earnings were $1.23 per share compared with $1.20 in the year-earlier quarter and beat the Zacks Consensus Estimate by 3 cents. Consolidated GAAP revenues declined 0.4% year over year to $32,071 million as wireless service revenue growth was offset by lower wireless equipment and wireline service revenues. The top line missed the Zacks Consensus Estimate of $32,395 million. (Read more: Verizon Q2 Earnings Surpass Estimates, Revenues Lag)
2. Qualcomm Incorporated (QCOM - Free Report) reported healthy third-quarter fiscal 2019 financial results, wherein both the top line and the bottom line beat the Zacks Consensus Estimate.
Quarterly non-GAAP net income came in at $982 million or 80 cents per share compared with $1,491 million or $1 per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 4 cents. On a GAAP basis, total revenues for the fiscal third quarter were $9,635 million compared with $5,577 million in the prior-year quarter. The figure surpassed the consensus estimate of $5,112 million. (Read more: Qualcomm Q3 Earnings & Revenues Top Despite Trade Woes)
3. Motorola Solutions, Inc. (MSI - Free Report) reported solid second-quarter 2019 results with year-over-year increase in revenues and earnings, driven by strength in both segments and diligent execution of operational plans. The company is well poised to sustain its momentum throughout the year with healthy demand across its portfolio and record order backlog.
Non-GAAP earnings per share were $1.69 compared with $1.46 in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 9 cents. Quarterly net sales were $1,860 million compared with $1,760 million in the year-ago quarter, primarily driven by growth in both the segments and solid performance in the Americas. The top line exceeded the Zacks Consensus Estimate of $1,849 million. (Read more: Motorola Trumps Q2 Earnings Estimates, Raises Guidance)
4. Arista Networks, Inc. (ANET - Free Report) reported solid second-quarter 2019 results, wherein both the bottom line and the top line surpassed the respective Zacks Consensus Estimate, and increased year over year. The strong quarterly performance reflected the underlying strength of the resilient business model and diligent execution of operational plans.
Quarterly non-GAAP net income came in at $198.6 million or $2.44 per share compared with $155.7 million or $1.93 per share in the year-ago quarter. The bottom line beat the consensus estimate by 22 cents. Quarterly total revenues increased 17% year over year to $608.3 million and were at the higher end of the company’s guidance of $600-$610 million, driven by healthy overall demand with strength across the business, particularly in cloud titans vertical. The top line surpassed the Zacks Consensus Estimate of $606 million. (Read more: Arista Tops Q2 Earnings Estimates on Product Strength)
5. Sprint Corporation (S - Free Report) reported healthy first-quarter fiscal 2019 financial results, wherein the top line increased year over year and surpassed the Zacks Consensus Estimate.
For the June quarter, net loss was $111 million or loss of 3 cents per share against net income of $176 million or 4 cents per share in the year-ago quarter. The sharp decline was primarily due to higher net operating expenses. The bottom line matched the Zacks Consensus Estimate of loss of 3 cents. Quarterly total net operating revenues increased to $8,142 million from $8,125 million in the year-ago quarter mainly driven by higher equipment rentals. The top line surpassed the Zacks Consensus Estimate of $8,024 million. (Read more: Sprint Incurs Q1 Loss as Expected, Beats on Revenues)
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, Motorola was the sole gainer with its share price increasing 4.6% while Arista was the biggest decliner with its stock down 16.4%.
Over the past six months, Qualcomm has been the best performer with its stock appreciating 26.8%, while CenturyLink was the biggest decliner with its stock down 21.8%.
Over the past six months, the Zacks Telecommunications Services industry has recorded average decline of 2.1% while the S&P 500 has rallied 5%.
What’s Next in the Telecom Space?
In addition to the remaining earnings releases within the industry, all eyes will remain glued to how the government handles the trade war that has spilled to the currency frontier, and its cascading effect on the industry.
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