Technicolor is unexpectedly finding itself battling the capex winds with a couple of its major US customers.
In a little-noticed trading update on its 2016 financial performance issued last week, Technicolor (Euronext Paris: TCH; NYSE: TCH) reported that its large Connected Home unit will record less revenue than expected for the fourth quarter because of capex reductions "decided by two large US customers." Technicolor did not name the customers that scaled back, but two possible candidates are AT&T Inc. (NYSE: T) and Charter Communications Inc. , both of which have been losing wireline video subscribers lately while shifting their capital spending priorities. The Connected Home division now churns out millions of cable and telco set-top boxes, following Technicolor's $604 million acquisition of Cisco Systems Inc. (Nasdaq: CSCO)'s ailing set-top unit in late 2015 (See Cisco Sells STB Unit to Technicolor for $604M and How Technicolor Plans to Beat Arris.)
The big French vendor, which will report its full year-end results next month, also blamed the disappointing fourth-quarter revenue results on the accelerated "devaluation of Latin American currencies versus the US dollar" in November, particularly in Mexico. It said that devaluation caused "substantial capex reductions" in the region.
As a result of these financial hits, Technicolor said its Connected Home segment will report around €650 million ($694 million) in revenue for the fall quarter. While that will represent an improvement from its third quarter results, the lift will not be as great as anticipated. For the full year, Technicolor expects Connected Home to generate around €2.6 billion ($2.8 billion) in revenue, down about 12% from 2015 on a pro forma basis.
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Looking ahead to 2017 and beyond, Technicolor said customer capex cuts and Latin American doldrums will continue to hurt Connected Home's revenue performance and profitability. In particular, it cited "capex restrictions announced by a large US cable customer," which it did not name.
Despite "a record year in terms of new contract wins, particularly with US customers," following its purchase and ongoing integration of Cisco's old Connected Devices unit, Technicolor said it does not expect Connected Home "to catch up this revenue miss" in the coming year. In addition, the vendor said it, like the rest of the industry, will be negatively impacted this year by "the global pricing pressure on memory chips" that started in the fourth quarter.
Even with the revenue and net income drain, though, Technicolor said it "remains confident" that Connected Home will continue generating "substantial free cash flow" in 2017 and "further improve its Adjusted EDBITDA margin in 2018." For 2016, the company estimates that Connected Home will generate adjusted EBITDA of about €215 million ($230 million), up 19% from 2015 on a pro forma basis but still below its expectations.
— Alan Breznick, Cable/Video Practice Leader, Light Reading