Telecom Stock Roundup: Verizon & AT&T to Stop Certain Legacy Services, Sprint to Overhaul Cost Structure

Though most of the major telecom stocks lost value over the last week, the sector witnessed a number of important events. Notable among the many developments are U.S. telecom behemoths Verizon Communications Inc. VZ and AT&T Inc.'s T decisions to discontinue some of their legacy services.

While Verizon is keen to shut down its postpaid calling card and personal 800 services, offered through its MCI subsidiary; AT&T intends to drop its operator assisted services like collect calling, person-to-person calling, billed to third party, Busy Line Verification, Busy Line Interruption and International Directory Assistance from its operational portfolio. Both companies cited steady decline in usage of these services due to obsolescence as the main reason behind the move.

On the other hand, according to a popular technology site Re/code, Sprint Corp. S has finalized its cost cutting framework with an expectation to save around $1 billion. The plan involves a few operational overhauls and layoffs. Last year in October, Sprint had announced its intention to lower costs by implementing job cuts. However, several industry researchers have cautioned that implementation of unproven new technology may cause unwanted disturbance in Sprint's network.

In a separate development, U.S. telecom regulator Federal Communications Commission (FCC) recently removed Cuba from its exclusion list enabling U.S.-based telecom operators to provide telephone and Internet services to Cuba without the need of a separate approval from the FCC. The U.S. telecom industry is currently witnessing cut-throat pricing competition. At this juncture, an opportunity outside the U.S. may bode well for the industry.

Outside the U.S., the Mexican division of Spanish telecom giant Telefonica S.A. TEF has decided not to take part in the country's upcoming auction of 80 MHz of spectrum in the AWS band (1.7-2.1 GHz). The auction is scheduled to start on Feb 15, 2016. Moreover, as per a recent Reuters report, Telefonica is interested in purchasing AT&T's Latin American pay-TV assets. According to sources, the assets are valued at roughly $10 billion.

Meanwhile, leading Canadian telecom operator Shaw Communications Inc. SJR reported mixed financial results in the first quarter of fiscal 2016. While net earnings surpassed the Zacks Consensus Estimate, revenues missed the same. The company has also struck a deal with Corus Entertainment Inc. to sell 100% of its wholly owned broadcasting subsidiary, Shaw Media Inc., in a cash and stock deal worth C$2.65 billion (roughly $1.86 billion).

Shaw Communications aims to utilize the net proceeds from the sale of its media assets to finance the company's proposed purchase of a 100% interest in Mid-Bowline Group Corp., the parent company of WIND Mobile Corp., for an enterprise value of approximately C$1.6 billion (around $1.16 billion).

China Unicom (Hong Kong) Ltd. CHU and China Telecom Corp. Ltd. CHA, the second and third largest mobile phone carriers in China respectively, have reportedly entered into an agreement to share their resources for various strategic initiatives. The partnership is being largely seen as a strategic cooperation to challenge the dominance of the much larger China Mobile Ltd. CHL. Presently, China Mobile enjoys a 63% share of the Chinese mobile market in terms of subscribers, far ahead of the combined 36% market share held by China Unicom and China Telecom.

Read the last Telecom Stock Roundup for Jan 14, 2016.

Recap of the Week's Most Important Stories

1.    Verizon stated that out of around 300,000 MCI calling cards in service in 2014, only 7500 connections showed any usage in the prior 24-month period. Also, usage of such cards has declined 30% over the past two years. The personal 800 service also shows a similar downward trend. Less than a thousand of the remaining 215,000 personal 800 subscribers have actually used the service in the last two years. (Read More: Verizon Looks to Suspend Postpaid Calling Card, 800 Services.)

2.    AT&T highlighted that its operator-assisted calls have declined annually at a rate of 18% over the last five years. Moreover, its total operator assisted service traffic plunged 93% from the 2004 levels, with the last two years witnessing around 19% fall. With technology evolving in leaps and bounds, these legacy services are gradually losing relevance. (Read More: AT&T to Stop Operator Assisted Services, Seeks FCC Approval.)

3.    Sprint is looking to boost its earnings going ahead and lend confidence to its stakeholders. Reducing operating costs is one of the strategies that the company has undertaken to achieve the same. However, we believe given the stressed financial position it is in currently, use of new technologies can pose financial and operational challenges in the times ahead. Such new infrastructure may not also bode well with its expansion plans. (Read More: Is Sprint Looking to Cut $1 Billion in Operating Costs?)

4.    President Barack Obama's decision to normalize U.S. diplomatic and economic relations with Cuba, which had been strained until recently since 1961, has started showing results. The newly developed truce between the two countries will allow U.S. telecom carriers to export telecom equipment and products to Cuba.

The operators will also be able to establish the necessary infrastructure in Cuba to offer various telecom services including the Internet. This will enable Cuban citizens to communicate freely with the U.S. and the rest of the world. (Read More: Is Cuba the Next Investment Hub for US Telecom Companies?)

5.    The driving reason behind Telefonica's decision to opt out of the auction is Mexican telecom regulator, the Federal Telecommunications Institute's IFT instruction that these spectrum bands will not be operational for the next two years. Notably, Telefonica currently commands around 20% of the Mexican wireless market. In Dec 2015, the IFT had approved the swapping of frequency blocks and a spectrum rental deal between AT&T and Telefonica valued at $168 million. (Read More: Telefonica to Give Mexican AWS Spectrum Auction a Miss.)

Price Performance

The following table shows the price movement of major telecom players over the past week and the last six months.

The U.S. stock market continued to trade in the red over the last week as the benchmark S&P 500 index declined 1.64%. In convergence with the broader market movement, price movement of almost all major telecom stocks was also negative. Sprint (20.97%) and DISH Network (7.13%) declined the most over the past week.

Likewise, over the last six months, the price performance of key telecom stocks has been predominantly negative. America Movil (38.06%), Sprint (35.70%), DISH Network (27.16%), China Mobile (17.95%), Vodafone (17.90%) and Comcast (15.92%) have depreciated substantially over the six-month period.

What's Next in the Telecom Sector?

We expect a lot of activity in the telecom sector over the next week as big names like Verizon, AT&T and Canadian telecom giant Rogers Communications will release their fourth-quarter 2015 financial results. Qualcomm is also slated to report its first quarter of fiscal 2016 financial results. Further, leading videoconferencing and telepresence firm Polycom will come up with its fourth-quarter results. The market will closely evaluate these quarterly results in a bid to assess industry dynamics and future growth prospects.

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