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Nokia: 5G paves the way for higher earnings

Nokia: 5G paves the way for higher earnings

 

Shares of Disruptive Technology company Nokia (NOK) are gapping up nicely this Thursday afternoon, following better than expected December quarter results, and favorable long-term guidance that reflects the pending ramp in 5G mobile technology. For the December quarter Nokia delivered EPS of $0.13 vs. the expected $0.11 and $0.12 in the year ago quarter. Despite a modest dip in revenue for the quarter, Nokia’s revenue for the final three months of the year came in ahead of expectations.

Breaking down the results across the Nokia’s two core businesses – Networks and Nokia Technologies – our core investment thesis on the shares that hinges on the IP licensing business was confirmed as both revenue and profits at Nokia Technologies soared during the quarter. Year over year Nokia Technologies revenue rose 79% year over year and profits rose 145% due primarily to new licensing agreements as well as catch up payments from licensees. With a gross margin of more than 90%, incremental wins like those had during the quarter tend to flow through to the company’s bottom line. During the fourth quarter 2017, Nokia Technologies entered into a multi-year patent licensing agreement with Huawei and received an arbitration ruling related to a contract dispute with BlackBerry.

With approximately 20,000 patent families, we see Nokia Technologies being well positioned to expand its licensing customer base as 5G networks move mobile connectivity beyond today’s smartphone-centric market into the connected home, connected car, wearables, and the industrial internet – in other words, the Internet of Things. We see this high margin business delivering meaningful EPS expansion in the coming quarters as 5G deployments gain momentum similar to past 3G and 4G rollouts.

One of the leading indicators that we’ll be watching for that expansion will be Nokia’s own networks business as well as that of others. We’ll also be listening to comments from AT&T (T), Verizon (VZ) and T-Mobile USA (TMUS), all of which are expected to begin 5G deployments later this year.

Sticking with Nokia’s Networks business, for the December quarter, currency moved against it, leading revenue to fall 4%; however, on a constant currency basis, revenue was up 2% year over year. For the coming year, Nokia sees the transition to 5G network deployments from 4G/LTE ones weighing on margins in 2018, but as those deployments scale and mature the company sees a more favorable financial impact in 2019 and 2020. We see the above comments about AT&T, Verizon and T-Mobile USA as confirming Nokia’s expectations.

This expected uptick in 5G is reflected in Nokia issuing longer-term guidance and the boosting of its divided points to the confidence in the pending upturn related to 5G. For 2018, Nokia is forecasting EPS of €0.23-€0.27 vs. €0.33 in 2017 rising to markedly to €0.37-€0.42 in 2020. In terms of its dividend, the company has proposed dividend of €0.19 per share for 2017, which is up considerably from the $0.02 per share paid for 2016. In terms of 2018 and beyond, management continues to target a dividend payout of between 40%-70% of EPS. What this likely means is as the Networks business turns up as 5G ramps and Nokia Technologies expands its reach, we are apt to see further increases in the company’s annual dividend.

While this position has been frustrating, the key with any business tied to cyclical spending is to catch the shares as the winds of spending are poised to blow harder driving revenue and earnings higher in the process. That’s what we see in the coming quarters for 5G, and that means being a patient investor with NOK shares.

  • Our long-term price target on Nokia (NOK) shares remains $8.50
Corning beats, but smartphone comments will be the near-term guide for the shares

Corning beats, but smartphone comments will be the near-term guide for the shares

 

Amid a falling stock market open this Tuesday morning, which comes on the heels of a Monday that was the worst day thus far for stocks in 2018, Disruptive Technology company Corning (GLW) reported better than expected December quarter earnings, beating on both the top and bottom lines. The sparse release from the company showed positive results across the majority of its business and hinted at expectations for the company’s top line to rise 5% this year. All in all, a solid report ahead of the company’s 8:30 AM ET conference call, which should shed far more details on its quarterly results and outlook. It’s that more granular view, especially for the smartphone market, that will determine how GLW shares will trade later today as well as those for Apple (AAPL) and Universal Display (OLED).

Piecing some comments together from its earnings press release, it appears Corning’s Display Technologies business (31% of sales) will continue to benefit from larger screen sizes and better LCD glass pricing, while Optical Communications (34% of sales) is expected to grow 10% year over year due in part to a contract with Verizon (VZ) as well as ongoing backhaul demand. That year over year improvement at the Optical Communications segment is forecasted without any benefit to be had from the recently acquired 3M Communications Market Division. Two of the company’s other segments – Life Sciences and Environmental Technologies – are slated to deliver positive sales gains, but there is some rather cryptic wording for the company’s Specialty Materials business (14% of sales)

As I noted above, Corning is holding its December quarter earnings conference call this morning and we expect the dialog to be had to provide far more details on management’s expectations as well as the dynamics, such as smartphone shipment expectations for the first half of 2018, that will impact product mix and profits. Current consensus expectations have the company delivering EPS near $1.80. Because the company’s Display Technologies business accounted for 46% of earnings in the December quarter and 47% in all of 2017, we expect Wall Street to pepper the company with questions surrounding iPhone production levels in the coming quarters. Those answers will determine the likelihood of those 2018 EPS forecasts that fall between $1.64 – $1.98 per share. Quite a wide berth, and the answers will determine if there is upside to our $37 price target.

I have shared there is much speculation over iPhone X production levels to be had, but we would remind subscribers the iPhone X is just one of Apple’s smartphone models. That said, given the rapid rise in the overall stock market year-to-date, up 6.7%-8.2% across the major market indices after yesterdays’ performance, and the 7% increase in GLW shares over the same time frame, Corning’s smartphone commentary could weigh on the shares if it indicates an overall weaker than expected smartphone market. It will also help chart the near-term direction for the Apple and Universal Display shares on the Tematica Investing Select List.

From my perspective, we are hearing reports of larger format smartphones from Apple and others hitting shelves later this year. Paired with the growing adoption of larger format organic light emitting diode (OLED) displays on both smartphones and TVs, as well as burgeoning demand for backhaul technologies that should grow in the coming quarters as 5G networks are built, we’ll use any pullback to be had in GLW shares in the near-term to improve our long-term position.

 

 

Ahead of CES 2018, AT&T targets 5G in 2018. Another positive for NOK and AXTI shares

Ahead of CES 2018, AT&T targets 5G in 2018. Another positive for NOK and AXTI shares

Early this morning it was announced that AT&T (T) “will be providing 5G services in around 12 markets by late 2018” and “plans to add 3 million more locations to the AT&T Fiber network, for a total of 12.5 million locations across 82 metro areas by mid-2019.” This follows comments several weeks ago by T-Mobile USA’s (TMUS) CTO Neville Ray that it would look to deploy its own 5G network across the entire nation by 2020. At the time of the T-Mobile news, we shared the likelihood that AT&T and Verizon (VZ) would soon be putting their own 5G stakes in the ground, and that is what we are seeing today. Given the impact of 5G networks on our Disruptive Technologies and Connected Society investing themes, we are following these developments rather closely.

Whenever I heard of this big spending plans on networks, facilities or other forms of capital spending, my mind switches into detective mode and the first question tends to be: Who benefits?

In this case, it’s who benefits as AT&T opens the purse strings and spends on the network and as its competitors follow suit?

On the Tematica Investing Select List, we have existing positions in mobile infrastructure company Nokia (NOK), as well as AXT (AXTI) whose substrates are the core building block for wireless and fiber optic related semiconductors. Both stocks are trading up modestly today, but I’d note that given the winter storm that is pounding the Northeast today (believe me I know on this as I am huddled in a hotel room about 30 miles outside of Manhattan right now) trading volumes are rather lite.

As I shared in yesterday’s Tematica Investing, I expect to hear much more about 5G next week when CES 2018 is held. Heading into next week, I remain bullish on both Nokia and AXT shares, which have respective price targets of $11 and $8.50.

On the back of the AT&T news, we are eyeing bringing specialty contractor Dycom (DY) back into the Tematica Investing Select List fold. I say eyeing because as much as a positive as the 5G race will be for the company, the record low temperatures across the country and winter storm Grayson are likely to lead to some disruptions in the current quarter for Dycom and could thus push revenue from the first quarter into the second quarter. Once these probable disruptions are priced into DY shares, I’ll look to revisit them as well as other chip companies that are poised to benefit from incremental 5G demand, but must first contend with the seasonal slowdown in smartphone demand.

 

 

Previewing AT&T (T) Earnings and Watching Capital Spending Levels for Dycom (DY)

Previewing AT&T (T) Earnings and Watching Capital Spending Levels for Dycom (DY)

After today’s market close when Connected Society company AT&T (T) reports its 1Q 2017 results we will get the first of our Tematica Select List earnings for this week. This Thursday we’ll get quarterly results from both Amazon (AMZN) and Alphabet (GOOGL) with several more to follow next week.

Getting back to AT&T, consensus expectations call for the company to deliver EPS of $0.74 on revenue of $40.57 billion for the March quarter. As we have come to appreciate, these days forward guidance is as important as the rear view mirror look at the recently completed quarter; missing either can pressure shares, and mission both only magnifies that pressure. For the current (June 2017) quarter, consensus expectations are looking for AT&T to earn between $0.72—$0.79 on revenue of $40.2-$41.3 billion.

Setting the state for AT&T’s results, last week Verizon (VZ) issued its March quarter results that saw both its revenue and earnings miss expectations. Buried in the results, we found decreased overage revenue, lower postpaid customers and continued promotional activity led to a year on year revenue delicate for Verizon Wireless. The culprits were the shift to unlimited plans and growing emphasis on price plans that likely led to customer switching during the quarter.

If AT&T were still a mobile-centric company, we’d be inclined to re-think our investment in the shares, but it’s not. Rather, as we’ve discussed over the last several months, given the pending merger with Time Warner (TWX), AT&T is a company in transition from being a mobile carrier to a content-led, mobile delivery company. As we’ve seen in the past, consumers will go where the content is (aka Content is King investment theme), and that means AT&T’s content portfolio provides a competitive moat around its mobile business. In many ways, this is what Comcast (CMCSA) established in buying NBC Universal — a content moat around its broadband business… the difference is tied to the rise of smartphones, tablets and other mobile content consumption devices that have consumers chewing content anywhere and everywhere, and not wanting to be tied down to do so.

For that reason, we are not surprised by Comcast launching Xfinity Mobile, nor were we shocked to hear Verizon is “open” to M&A talks with Comcast, Disney (DIS) and CBS (CBS) per CEO Lowell McAdam. In our view, Verizon runs the risk of becoming a delivery pipe only company, and while some may point to the acquisitions of AOL and Yahoo, we’d respond by saying that both companies were in troubled waters and hardly must-have properties.

With AT&T’s earnings, should we see some weakness on the mobile side of the business we’re inclined to let the stock settle and round out the position size as we wait for what is an increasingly likely merger with Time Warner.

 

We’re Also on the Look Out for Datapoints Confirming Our Position in Dycom (DY)

As we listen to the call and dig through the results, we’ll also keep an eye on AT&T’s capital spending plans for 2017 and outer years, given it is Dycom’s (DY) largest customers (another position in our Tematica Select List). As we digest that forecast and layer it on top of Verizon’s expected total capital spending plan of $16.8-$17.5 billion this year, we’ll look to either boost our price target on Dycom or revise our rating given we now have just over 8 percent upside to our $115 price target.

 

Tematica Select List Bottomline on AT&T (T) and Dycom (DY)
  • Our price target on AT&T (T) shares remains $45; should the shares remain under $40 following tonight’s earnings, we’ll look to scale into the position and improve our cost basis.
  • Heading into AT&T’s earnings call, our price target on Dycom (DY) shares remains $115, which offers less than 10 percent upside. This earnings season, we’ll review customer capital spending plans to determine addition upside to that target, but for now given the pronounced move in DY shares, up more than 18 percent in the last month, we’d hold off committing fresh capital at current levels.

 

 

Verizon and AT&T Go Unlimited Data, Now Chevrolet Does Too

Verizon and AT&T Go Unlimited Data, Now Chevrolet Does Too

We’re seeing Connected Society mobile carriers morph their business models toward Content is King given their thinking that people will want to consume content on all these mobile devices. It’s true, so true in fact that Chevrolet is following AT&T and Verizon in offering an unlimited data plan for Chevrolet owners who have an in-vehicle OnStar 4G LTE Wi-Fi hotspot. Priced at $20/month, it’s another step forward for the Connected Car; in 2016 Chevrolet owners and their passengers streamed the equivalent of more than 17.5 million hours of video. Let’s just hope the driver had his or her eyes on the road and hands on the wheel… that said does it mean movie time will now be had in the car once self-driving cars go mainstream?

The new plan is priced at $20/month with service provided by AT&T.AirPodsChevrolet is claiming to be the first major automaker to offer an unlimited in-vehicle data plan.

The automaker shared interesting data about its customers who have been using the OnStar LTE hotspot in Chevrolet vehicles over the last few years. In 2016 in-vehicle data usage grew almost 200% as compared to 2015.To put this data usage in perspective, Chevrolet owners and their passengers streamed the equivalent of more than 17.5 million hours of video in 2016.

“We have contractors bidding jobs in their Silverados, families streaming movies in their Suburbans and Malibus and everyone tapping into the cloud for music,” said Alan Batey, president of GM North America and global head of Chevrolet. “With the most affordable unlimited 4G LTE data plan in the auto industry, the widest availability of Apple CarPlay and Android Auto and new connected services like OnStar AtYourService, our momentum can only grow.”

As the first automaker to offer 4G LTE connectivity across its entire retail portfolio, Chevrolet has sold more than 3.1 million OnStar 4G LTE-connected vehicles since June 2014 and has more vehicles on the road equipped with 4G LTE than any other automaker.

Chevrolet’s new unlimited prepaid data plan via OnStar and AT&T will be available starting tomorrow for $20/month. It doesn’t seem to be a limited time offer (as least for now) and looks to be a great deal as currently the $20/month option is for 4GB with $40/month giving customers 10GB.

Source: Chevrolet is first automaker to offer in-vehicle unlimited data for $20/month | 9to5Mac

Prepping for Dycom’s Earnings This Week

Prepping for Dycom’s Earnings This Week

While we are finally starting to see the pace of corporate earnings reports subside, there are still a number of stragglers on the Tematica Select List. One of those is Dycom Industries (DY), which will report its quarterly results on Wednesday (Mar. 1) before the market open. Consensus expectations call for this communications heavy specialty contractor and Connected Society company to deliver EPS of $0.69 on revenue of $661.8 million and guide the current quarter to EPS of $1.09-$1.18 on revenue of $708-$725 million.

We’ve noted that as Dycom customers have been reporting and sharing their 2017 capital spending plans over the last few weeks, the combined 2017 capital spending plans for Dycom’s core customers — AT&T (T), Verizon (VZ), CenturyLink (CTL) and Comcast (CMCSA) — for broadband and wireless will be up modestly year over year with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber). We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending.

As we noted earlier today, this week the 2017 iteration of Mobile World Congress is being held and its one of the major wireless trade shows of the year. We expect a number of announcements to be had, some of which should shed light on expected 5G deployments. We see those items as filling in between the lines for Dycom’s core customers, many of which continue to build out existing 4G LTE networks as they begin to test their 5G offerings.

As we get ready for Dycom’s earnings and follow on management comments during the follow-up conference call, we are inclined to sit tight and be patient with the position given our view that, worst case, it’s only a matter of time for next-generation network technologies to be deployed. Keep in mind, in order for them to be deployed, they first have to be constructed.

  • We continue to rate DY shares a Buy with a $110 price target.
AT&T CEO puts DirecTV Now at $35/month, but…

AT&T CEO puts DirecTV Now at $35/month, but…

AT&T has been all over the news the last several days, and the news flow continues today when fresh from yesterday’s conference call to discuss the merger with Time Warner,  CEO Randall Stephenson shared its soon to launch DirecTV Now video streaming service will cost $35 per month. Details were rather sparse and we expect more when the official launch happens “next month.”

We expect many comparisons to offerings from Sling as well as pricing relative to Netflix and Hulu, but we suspect it will be far cheaper than the video services offered by Verizon’s FiOS, Comcast and others. As potential chord-cutters, we are anxious for the details!

Speaking at a Wall Street Journal conference today, AT&T CEO Randall Stephenson reportedly told attendees that DirecTV Now will launch in November at a price of $35/month. That puts the service $15/month above the starting point for the competing Sling TV live-TV streaming offering, and about the same price point for the barest-bones versions of Sony’s PlayStation Vue service.Where DirecTV Now appears to be trying to compete is on content. According to reports — again, this has not been officially announced or confirmed — Stephenson says that DirecTV Now will offer 100 channels.

Source: AT&T CEO: DirecTV Now Streaming Service Will Cost $35/Month, Launch Next Month – Consumerist