Glentel is facing earnings headwinds, says Paradigm Capital

Diamond Wireless and Wireless Zone both reported year over year improvements in their top and bottom lines, but Paradigm Capital analyst Gabriel Leung thinks Glentel is up against several obstacles. A very competitive market is beginning to chip away at Glentel’s (TSX:GLN) margins, says Paradigm Capital analyst Gabriel Leung.

Yesterday, Glentel reported its Q2, 2014 results. The company lost $14.99-million on revenue of $372-million.

CEO Tom Skidmore said a quarter in which the company lost its Virgin mobile business in Australia and customer Diamond Wireless and Wireless Zone renewed their agent contracts with Verizon “proved to be a concentrated focus on relationship management”.

“As some relationships grow, others end,” said Skidmore. “In the second quarter of 2014, Optus advised AMT that it would be exercising its right to terminate its retail managed services agreement with AMT for the management of its 45 corporate ‘Virgin Mobile’ branded stores as of the fourth quarter of 2014. The termination of this management contract has resulted in a non-cash accounting impairment of $25-million, $20.3-million net of tax. Although we are disappointed that our retail relationship with Optus is ending, we see many opportunities in other aspects of our global business which will mitigate the impact of the loss of this contract.”

Leung says Glentel is challenged by a market that is very competitive. Although he notes that the company’s U.S. division performed well, with both Diamond Wireless and Wireless Zone reporting year over year improvements in their top and bottom lines, Leung thinks Glentel is up against several obstacles.

In Canada, the analyst sees shorter wireless contracts terms, an increasing proportion of upgrades versus new activations, and general competitiveness in the space as headwinds. In the U.S., Leung worries that Glentel’s earnings could be volatile because of recent aggressive promotions from the likes of Verizon.

In a research update to clients this morning, Leung we are maintained his “Hold” rating and $12.00 one-year target on Glentel.