Capex as a percentage of revenue for US telecom service providers has slowed in FY07. We attribute this slowing to a combination of already high penetration and coverage quality, and accelerated capex in FY06 arising from network restructuring. We find that growth pockets are limited to a few high growth companies with national network expansion ambitions.

The current capex trend is downward. Our study of capex and revenue trends of US telecom service providers leads us to conclude that capex spending trended down during the period studied for big telecom companies in North America. Looking at the average capex as a percentage of revenue, we see that the 5 largest telecom providers in North America spent 18% in FY05 and 17% in FY06 and 12% through the first 3 quarters of FY07. We have compiled 26 North American companies’ capex and revenue trend for this analysis and have done quick analysis of capex of five major US telecom companies.

What are the potential catalysts? It is possible that the current slowdown is a breather before service providers scale up capex post the 700MHz auction in early FY08 and commit more to 3G network and broadband infrastructure rollout. However, slowdowns in consumer spend and in the related areas of housing and infrastructure remain a key risk to capex growth in FY08.

The Gridstone platform currently covers 62 of the largest global telecom companies, and it regularly tracks as-reported-by company data on segment revenue, capex and other financial and operating metrics. For a complete list of telecom coverage see Appendix A. read more…

Arpita Lulla, Hemina Mehta and Vishal Kapse also contributed to this Note
Calendar shift (resulting in an additional week after Thanksgiving) and cold weather boosted November comparable store sales for most retailers
Discounters and department stores outperformed apparel retailers reflecting tighter consumer spending due to the current macro-economic conditions. Most retailers have a conservative outlook towards December sales and have estimated lower y/y comparable store sales growth.
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Vishal Kapse also contributed to this Note
In a competitive environment coupled with tighter consumer spending, warehouse clubs appear to have an edge over discounters due to the value that they offer at an affordable price.

A quick analysis of the latest earnings announcements of major discounters and warehouse clubs leads us to the conclusion that consumer spending is being impacted by:

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Bhushan Khushalani also contributed to this Note

Mixed macroeconomic environment affects major automakers differently

US auto sales faltered in November 07 as the macroeconomic environment displayed mixed signals comprising of continued housing industry downturn marked by lowest single family home starts since 1991, soaring fuel prices, rising food prices and dip in consumer confidence index on one hand, and growth in excess of 1% in employment rate and 3% in real income and a lower interest rate regime on the other. The month closed with an estimated seasonal adjusted annual rate (SAAR) in the range of 16.0 to 16.4 million unit vehicles sold.

US auto sales in the model transition month of November suggest mixed results for the US automakers with GM taking a hit in truck sales due to inventory shortage led by heavy sales down in the few past months and timing issue in fleet sales, while Ford Motor inched up marginally on the strength of fleet sales. Japanese automakers, particularly Nissan Motor and Honda Motor, have surged ahead with higher sales of fuel efficient compact vehicles and continued high level acceptability of hybrid vehicles. However, Toyota Motors grew marginally with decline in Toyota Division truck sales and Lexus Division sales.
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Aalap Vaze also contributed to this note

Sun Microsystems, Inc. (JAVA) continues its resurrection of earnings by treading into positive turf and achieving an operating profit in FY07, the first time since FY01. Sun recorded three consecutive quarters of positive EPS in FY07 and is now targeting an operating margin of at least 10% in FY09.

Using the Gridstone platform, we have analyzed whether Sun’s performance matches with the growth objectives spelled out by CEO Jonathan Schwartz, and we conclude that the long-term targets can be achieved by cost containment rather than revenue growth. We also set out to answer questions on whether this turnaround is a temporary blip, not having signs of a sustained performance, or whether this is a true resurgence.

Management change and new objectives

When Schwartz took over as CEO, he outlined five broad objectives:

1. FY07 revenue growth in low-to-mid single digits
2. FY07 gross margin of around 43%
3. Operating margin of at least 4% in Jun-07 quarter and long-term operating margin target of 10%
4. FY07 operating expenses of $5.6-6 B
5. Reduction in workforce by 11%-13% by FY07.

We look at Sun’s performance against each of these objectives and indicators that could substantiate Sun’s ability to achieve the FY09 target of 10% operating margin.
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