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'Pinch of Salt'

TMT Companies Increasingly Facing Recession Questions From Wall Street

Citing an increasingly shaky global economy, telecom, media and tech companies are starting to warn of softening ad markets, hiring slowdowns and reduced output. Questions about the economy are increasingly common in quarterly earnings calls, with numerous TMT companies being pressed by analysts in recent days. However, many say they don't foresee major difficulties.

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Broadcasters all cited recession concerns in their Q2 earnings calls this week. There's “an ongoing weakness in demand from national [ad] clients,” said Cumulus CEO Mary Berner in an earnings call Wednesday, noting a “challenging macroeconomic environment.” “The more you’re exposed to national advertising [markets], maybe the bumpier the road over the near term,” said Nexstar CEO Perry Sook Thursday. Beasley Media will “remain watchful” given “the declining economic backdrop,” said CEO Caroline Beasley.

Noting "the uncertain global economic outlook," Alphabet Chief Financial Officer Ruth Porat told analysts last week the company will "slow the pace of hiring." Qualcomm CFO Akash Palkhiwala said due to economic uncertainty and the COVID-19 measures China is taking, mobile handset volumes this year should be down a mid-single-digit percentage from a year ago. "Customers [will] act with caution in managing their purchases in the second half of calendar '22," he said.

Questions about the economy and recession are increasingly coming up in earnings calls, Mani Sethuraman, Cornell University assistant professor-accounting, told us. Analysts want to know the idiosyncrasies of the company and what the economic issues might mean for it, such as impacts on sales forecasts, the supply chain or hiring, he said. An economic downturn isn't always a threat, and could also be an opportunity for some businesses, he said. But claims about being well positioned "we still have to take with a pinch of salt," he said. "Companies might think they are well positioned, but we don't know what's going to change tomorrow," he said.

In an analysis of more than 1,100 quarterly reports filed with the SEC since July 1, 162 mentioned the word "recession," emailed Victor Wang, California State University-Long Beach assistant accounting professor. "Based on this number, my guess is that most firms are not very concerned about an imminent recession risk," he said. Analysts are always trying to forecast the future, while investors frequently think about whether those answers have positive or negative tone in them, emailed Duke University business administration professor Bill Mayew. Negative tone is higher when in a recession, he said.

Many TMT companies maintain they aren't especially worried about the economy. Microsoft "will be exposed to consumer-driven businesses" as the macroeconomy softens but "will do fine" in other areas, CEO Satya Nadella said. He said the downturn is driving more enterprise customers toward cloud services, and “coming out of this macroeconomic crisis, the public cloud will be even a bigger winner because it does act as that deflationary force.”

Broadcasters said their companies were prepared for an economic downturn, by lowering expenses, an emphasis on digital and local advertising offerings, and multiple revenue streams. “Although it is unclear if there will be a recession in the coming year, if one were to occur Townsquare is well positioned,” said CEO Bill Wilson. Advertisers are more likely to spend money on digital ads during a period of inflation because they’re cheaper, said Nicole Ovadia, BIA Kelsey analyst, in an interview.

Paramount CFO Naveen Chopra also cited macroeconomic pressures affecting ad demand for the programmer but told analysts Thursday that should be mitigated by political advertising and price increases, especially in Q4. However, added CEO Bob Bakish, "these aren't long-term issues. There are short-term challenges we have to just work through."

Many broadcasters also said they expect recession-related revenue losses to be cushioned by stratospheric political ad spending. With numerous local races fueled by lightning rod issues such as abortion, broadcasters are expecting record spending, said Sinclair Chief Operating Officer Robert Weisbord. In every political ad cycle, broadcasters have a drop-off in nonpolitical advertising because those ads get crowded out by political ads that broadcasters are required to carry under the FCC’s reasonable access rules.

Radio broadcasters are likely to be harder hit by a possible recession than TV broadcasters, partially because they tend to receive fewer political ad dollars, Ovadia said. TV broadcasters also have the benefit of retransmission consent revenue, which Ovadia said is unlikely to be affected by recession. “This contractual and recurring high-margin revenue source has historically been resistant to periods of economic downturn,” said Sook. None of the broadcast companies announced specific M&A plans on its call, and that’s consistent with expectations during a period of inflation and higher costs to borrowers, Ovadia said.

Inflation was cited as an issue on all the Q2 calls for major wireless carriers. AT&T Chief Financial Officer Pascal Desroches warned in June that inflation was running “at a faster clip” than the company expected and more price hikes are possible (see 2206140061). In the Q2 call, CEO John Stankey said inflation will drive up AT&T’s costs by more than $1 billion for the year. Inflation “is clearly impacting consumer behavior,” said Verizon CEO Hans Vestberg. Partly as a result of the economy, Verizon introduced its Welcome Unlimited plan last month, he noted. The plan meets “the needs of budget-conscious consumers without providing device subsidies,” he said. T-Mobile CEO Mike Sievert said inflation helped his company gain market share over AT&T and Verizon (see 2207270054). “We’ve always been famous for great prices and great value,” he said last week on Bloomberg TV: “Right now, that’s what consumers and businesses are looking for.”