CGI Voice of the Client Telecoms Industry IT Trends for 2015
Spring 2016 Telecom Update
1.
2. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Agenda
• Review of Fall 2015 sector decisions
• Summary of Telecommunications
Sector and our current position
• Current Holdings Overview
• Proposal Moving Forward
3. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Fall Transaction Review
Held Sold Purchased
LVLT LBTYA CMCSA
VZ NFLX
5. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
What is Telecom?
Telecommunication Services Companies
• Phone services
• Mobile communication products
• Wireless services
• Internet
• Networks
• Cable TV
• Satellite
6. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Current Industry Trends
• Pay-TV services decline
• “Skinny Bundles” becoming
more popular
• Broadband only homes on the
rise
• M&A is a critical theme
– Altice buys Cablevision and
Suddenlink
– Charter buys Time Warner
• “Bundling” shift to include
wireless
12. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Netflix (NFLX)
Netflix Inc operates as an internet television network
providing TV shows & movies which include original
series, documentaries & feature films. The
Company's business segments are Domestic
streaming, International streaming and Domestic
DVD.Key Metrics
MKT Cap $42.11 Billion
Beta
1.49
P/E 345.99
PEG 5.46
Annualized
Return since
purchase
(11/16/2015)
(5.4%)
Return YTD (14.01%)
17. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Earnings Surprise
Earnings Surprises
Period Estimate Actual Surprise
Q4 2015 .021 .100 233.33%
Q3 2015 .076 .070 7.89%
Q2 2015 .042 .060 42.86%
Q1 2015 .063 .054 39.68%
18. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Catalysts and Risks
• International Expansion (+)
• China (+/-)
• Slowing new subscriber growth (-)
• Growth in original content investment
(+)
• Increasing competition (-)
• Increase in broadband only homes (+)
19. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Summary
Why Purchased?
• Innovation leader
• Extreme international growth
• Long track record of performance
What has Changed?
• Slowing US subscriber growth
• Portfolio goals
• Speculative earnings
Recommendation: TRIM
20. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Verizon (VZ)
Key Metrics
MKT Cap $111.16 Billion
Beta 0.83
P/E 13.45
Dividend/Yield 4.16%
Annualized
Return Since
Purchase
7.09%
Return YTD 17.10%
Initial Purchase 10/23/2009
Verizon Communications Inc. is an integrated telecommunications
company that provides wire line voice and data services, wireless
services, Internet services, and published directory information.
24. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
VZ Earnings and Expectations
Earnings Surprises
Period Estimate Actual Surprise
Q4 2015 0.883 0.881 -0.23%
Q3 2015 1.022 1.040 +1.76%
Q2 2015 1.008 1.040 +3.17%
Q1 2015 .950 1.020 +7.37%
25. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
ESG
Total
32.10 Social
32.81
Environmental
14.63
Governance
69.64
• Initiatives including
energy use, supply
chain, and
emissions
reduction
• Phone and paper
recycling programs
• Human rights, health and
safety, and several other
policies
• 29% women in management
• Women make up 37% of
the board
26. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
VZ Reasons for Entry
• Massive market share
• Growing dividend yield
• Lowest churn rate of major providers
27. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
VZ Catalysts/Cautions
• Leader in the wireless carrier industry
with highest rankings across the board
(+)
• Wireless is now 100% owned by
Verizon (+)
• Exiting wireline and expanding to fiber
optic market with FiOS (+/-)
• Growth will be slow over next few years
(-)
28. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Comcast Corp. (CMCSA)
Key Metrics
MKT Cap $146.57 Billion
Beta 1.03
P/E 18.43
Dividend/Yield 1.83%
Return Since
Purchase
-0.92%
Initial Purchase 11/16/2015
Comcast Corporation provides media and television
broadcasting services.
33. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
CMCSA ESG Scores
Environmental:
9.30
• “deep sleep”
modes on set-
top boxes
Social:
21.05
• Had scores over
57 in FY13
• No information
posted in FY14
Governance:
58.93
•75% of directors
on board are
independent
Total:
23.55
34. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
CMCSA Reasons for entry
• Wide economic moat (+)
• Consistent revenue growth
(+)
• Industry leader (+)
• Huge market cap (+/-)
35. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
CMCSA Catalysts/Cautions
• Wireless subscribers continue to grow
(+)
• Diversified services (+)
• The company's customer satisfaction
often ranks among the lowest in the
cable industry(-)
• Pay- TV household count will drop to
96.4 million by 2019 (-)
• Hybrid wireless service (+)
Recommendation: HOLD
36. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Level (3) Communications (LVLT)
Key Metrics
MKT Cap $18.41 Billion
Beta 1.17
P/E 28.09
Original
Purchase Date
9/23/2014
Annualized
Return Since
Purchase
7.865%
Return YTD 5.10%
Level 3 Communications, Inc. is an integrated
communications network company that provides Internet
Protocol and data services, content distribution services,
colocation services, and softswitch and voice services.
41. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
LVLT ESG
Environmental:
1.55
• Risks of climate
change
discussed
Social:
14.04
• Health and
Safety Policy
• Equal
Opportunity
Policy
Governance:
55.36
• Independent
audit
chairperson
Total:
16.94
42. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
LVLT Reasons for Entry
• High M&A activity
• Smaller company with room to grow
• Plans for global expansion
• Finally became revenue-positive.
43. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
LVLT Catalysts/Cautions
• Robust revenue growth (+)
• Expanding profit margins (+)
• High M&A activity (+/-)
• Low ESG score for 2015, and no recent improvement
(-)
Recommendation: HOLD
46. Fall 2015 Review
Sector Overview
Company Overviews
Proposals
Proposed Allocation
Company Ticker
Holding
Value
Verizon VZ $2999.36
Level (3) LVLT $2734.27
Netflix NFLX $5901.60
Comcast Corp (A) CMCS $3600.60
Total - $15235.83
Funds to allocate (300)
Total $14,935.83
Editor's Notes
More volatile sector, used to be considered defensive, but has evolved to a more sensitive sector that attributes to higher betas.
Verizon is very highly correlated with the telecom sector, much more so than any of our other holdings since VZ is ~3% of s5tels
Currently has 45 million subscribers
Netflix added 5.6 mil subscribers last year and estimated to add 4.7 mil this year.
Price increase happening in May $2 increase.
Sales growth 24% YoY
Spent 3.2 billion on original content in 2014
Netflix now operates in 190 different countries.
Main area they do not operate is China where there is an estimated 200 million user base.
Projecting 15.75 million net adds for 2016 internationally
The Company also provides network services for the federal government including business phone lines, data services, telecommunications equipment, and payphones. Initial Purchase: 10/23/2009
Very correlated with sector and industry
Verizon wireless makes up the majority of its revenue, followed by wireline. Wireline is declining because they intend on being fully out of wireline by 2025.
Planning to enable a 20 percent reduction of global CO₂e emissions by 2030
Allow customers to trade in old device and get paid
FiOS is only in a limited number of cities and subscribers to the video service continue to decline.
Growth in 2016 will be dampen because In 2014, acquire full ownership of its wireless business, 2015 verizon acquired AOL to improve its platform technology, due to Verizon’s debt load it has to sell of some of its non core business assets.
The Company has two operations Comcast Cable and NBCUniversal. The Company offers video streaming, television programming, high-speed internet, cable television, and communication services. It serves customers world-wide.5
Outperformed for the last 2 quarters, underperformed past few months
Not much of earning surprise here
ROE: Amount of profit a company generates per dollar invested by shareholders.
OPM: Operating Margin: What proportion is left over after a company pays off it’s variable costs of production (raw materials, wages, etc) Profit Margins: % of revenue that equals profit
Comcast is partnering with silicon chip manufacturers to integrate auto-power-down "deep sleep" modes and other energy features on its set-top boxes
Wireless subscribers will grow. As of January 2016, 198.5 million people in the U.S. owned smartphones, representing about 79.1 percent mobile market penetration
video, high-speed Internet, and filmed entertainment
the rate will slow down as pay-TV providers start offering their own streaming services along with more customized cable TV bundles. That said, cord cutting is a concern, but giant cable TV companies are still growing,
if comcast moves forward with a hybrid wireless service in combination with verizon's mobile network, it could potentially sell a quadruple play service, which refers to a bundle of video, data, wireline phone and wireless.
Initial Purchase: 9/23/14
Total Return since purchase 15.73% (Not dividend paying)
colocation services: co-location services: equipment, space, and bandwidth are available to rent
softswitch services: connects one phone line to another across networks or the internet.
Spin off from Kiewit in 1998- a Fortune 500 contracting company (Mining, engineering
February drop: Negative surprise in comparable earnings, EPS was .535, but adjusted EPS was .107 (adjusted for a Tax Provision)
Coal Mining – Level (3) is a spin off of Kiewit and was designed to be in Telecommunications but it took a few years to really find their identity as a Telecom company
Adjustments: GAAP error in 2011, adjustment labeled as an increase in revenue
Communications revenue includes: IP and Data services, Transport and fiber, Voice Services, Colocation and datacenter
Other Communications revenue: Selling of communications hardware.
LABELS: WHITE- IP and Data services
ORANGE- Transport and Fiber
BLUE- Voice Services
Pink- Colocation and Data services
YELLOW- Sales
Beat 6 out of 8 previous estimates
NEGATIVE EARNINGS SURPRISE IN BLOOMBERG- Bloomberg adjusts for comparable earnings, LVLT had a 3 billion tax benefit
Key takeaways: Large increases in revenue from expansion of services and taking market share from carriers
EPS is larger due to a 3.3 billion tax allowance related to a release of the valuation allowance.
A valuation allowance is required when there is insufficient evidence supporting the future profitability needed to benefit from the Deferred tax assets. (MA) (used to extinguish debt)
ROE higher than the average and median.
Association with Kiewit (coal mining and natural resource mining, as well as carbon emissions)
Most recent MA was for Black Lotus LLC in July of 2015. a provider of DDoS mitigation services. Security capabilities enhanced
