Telecommunications and IT Industry Analysis

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Telecommunications and IT Industry Analysis

• Adil Ahsan
• Ray Bishop
• Victor Coker-Appiah
• Mike Mangino
• Brian Stevens

2
Telecom sector size and breakdown

• 3.73 of the SP 500
• 3.52 of the SIM Portfolio
• Largest companies are Verizon, SBC and Bell South
• Two sectors
• Wireless
• Wireline

3
Business and Life Cycle

• Wireless businesses are growth businesses in the
  growth stage of their lifecycle
• Wireline businesses are defensive businesses in
  the mature stage of their lifecycle

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Wireless 5 forces analysis

• Barriers To Entry (High)
• Large capital expenditure and area presence
  required
• Supplier Power (Low)
• Cell phone components inexpensive
• Spectrum licensing required
• Buyer Power (Low)
• High Concentration
• Contracts create switching costs

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Wireless 5 forces analysis continued

• Rivalry (Moderate)
• Rivalry between competitors is strong, but has
  not resorted to price competition due to high
  switching costs
• Encourages innovation
• Substitutes (Low)
• Land lines
• Pay phones are disappearing
• Beware of new technology

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Wireline 5 forces analysis

• Barriers To Entry (High)
• Physical equipment and line ownership
• Heavy government regulation
• Buyer Power (Low)
• commodity product, but buyers have a small local
  choice of supplier
• Supplier Power (Moderate)
• Suppliers of major equipment have equal power
• Most suppliers supply commodity products

7
Wireline 5 forces analysis continued

• Rivalry
• Due to geographic barriers, few rivals
• Rivalry in long distinct is in price competition
• CLECs gaining power
• Overcapacity in long haul data networks
• Substitutes
• Wireless phones
• Cable networks have large data bandwidth
• Voice over IP

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Financial Analysis - Balance Sheet
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Financial Analysis Income Statement
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Financial Analysis Cash Flows
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Financial Analysis - Dupont
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Valuation Analysis (P/E, P/B, P/S, P/CF)
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Valuation Analysis (P/E by segment)
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Valuation Analysis (P/S by segment)
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EPS Estimated vs. Actual
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IT Sector Size and Breakdown

• 16.9 of the SP 500
• 11.7 of the SIM Portfolio
• Four major sectors
• Hardware
• Consulting
• Semiconductors
• Software

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Business and Life Cycle

• All sectors are cyclical businesses
• Sectors are in the late growth to mature stage of
  the lifecycle

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5 forces analysis Hardware

• Barriers To Entry (High)
• Large capital investment
• patents
• Buyer Power (Moderate)
• Open standards level the playing field
• Supplier Power (Low with the exception of Intel)
• Open standards again
• Rivalry (Moderate)
• High concentration with good signaling
• High switching costs
• Substitutes (Low)
• Very few

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5 forces analysis Consulting

• Barriers To Entry (Low)
• Anyone can be a consultant
• Buyer Power (High)
• Low concentration ratio
• Supplier Power (Low)
• Unemployment means an excess supply of labor
• Rivalry
• Strong, as price has become a major selling point
• Substitutes
• Internal IT hiring
• Offshore outsourcing

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5 forces analysis Semiconductors

• Barriers To Entry (High)
• Extremely high production costs
• Buyer Power (low to moderate)
• Very high switching costs for proprietary
  products
• Very low switching costs for open standard
• Supplier Power (Low)
• Raw materials are easily obtained
• Rivalry (moderate)
• High switching costs dull rivalry
• Substitutes (Low)
• Very few substitutes
• Watch out for new technology!

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5 forces analysis Software

• Barriers To Entry (Low)
• Little capital investment required
• Buyer Power (Low to Moderate)
• Open standards level the field for some products
• High switching costs
• Supplier Power (Low)
• Increase when unemployment decreases
• Rivalry (Moderate)
• Switching costs and low concentration reduce
  rivalry
• Substitutes (Moderate)
• Open Source

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Other Demand Factors

• Business spending
• Anemic recently, mostly to drive cost savings
• Government spending
• Integrity and backlash effects from boom
• Many companies overspent with little benefit
  during the boom
• IT lost integrity with over promising

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Financial Analysis - Balance Sheet
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Financial Analysis Income Statement
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Financial Analysis Cash Flows
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Financial Analysis - Dupont
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Valuation Analysis (P/E, P/B, P/S, P/CF)
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Valuation Analysis (P/E by segment)
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Valuation Analysis (P/S by segment)
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EPS Estimated vs. Actual
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Recommendations Telecom

• We are currently slightly underweight
• The wireless industry is gaining customers as
  people move to cell phones exclusively
• We are concerned with the wireline segment
• We recommend moving to slightly overweight

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Recommendations IT

• We are currently 5.2 underweight
• As free cash flows increase, we believe that
  companies will increase spending on IT projects
  that have been delayed to reduce costs
• We recommend remaining underweight, but moving
  closer to market weight