AT&T and Verizon set to generate profits as wireless competition grows
Even with minimal impact from the latest iPhone launch, the growing competitiveness of the wireless industry will be fully visible when carriers begin reporting quarterly results in the coming week.
Wireless companies have become heavily promotional in recent quarters, a move meant not only to boost device upgrades but also, crucially, to encourage adoption of more expensive unlimited plans. There is an incentive for the telecommunications industry to steer customers towards more expensive plans in order to help recoup heavy investments in 5G networks, which many new phones can access.
Now, there is a relatively new dimension to competitive dynamics, according to Craig Moffett, analyst at MoffettNathanson. The big wireless companies are no longer just competing with each other, as the cable companies Charter Communications Inc. CHTR,
and Comcast Corp. CMCSA,
are stepping up their wireless ambitions by making their plans more attractive to consumers.
A few months ago, Comcast slashed the prices of its wireless plans, which served to undermine Verizon “for exactly the same network,” Moffett wrote at the time, since Comcast’s wireless offering operates through a mobile virtual network operator (MVNO) structure that uses Verizon’s network. More recently, Charter has reduced its fares to make them lower than Comcast’s in some cases, depending on the number of lines.
Compared to AT&T Inc. T,
Verizon Communications Inc. VZ,
and T-Mobile US Inc. TMUS,
cable companies don’t hand out the most lucrative device grants to generate interest, Moffett noted, although he expects them to end up becoming more promotional. But he also pointed out that cable companies have the advantage of being able to bundle wireless service with broadband service nationwide. Wireless companies, on the other hand, are encroaching more on cable territory themselves through fiber construction, but it will be time before they have a footprint large enough to offer plans everywhere.
There is also a financial angle, as wireless players have to spend “upfront, at risk, extra dollars” to increase their fiber footprint, Moffett wrote recently, while the cable companies’ MVNO deals operate on a “variable cost” basis, so they only pay Verizon if they entice people to use the service.
“As long as they charge their customers a price higher than this variable cost, the service
contributes positively to [earnings before interest, taxes, depreciation, and amortization,” Moffett wrote of the cable companies, adding that Comcast’s wireless business “has already passed breakeven.”
Competition in the wireless industry is typically good for consumers, who benefit from promotions, but can hit the margins of the wireless operators who have to subsidize device purchases. Oppenheimer’s Tim Horan wrote that the competitive pressures from T-Mobile, AT&T, cable companies, and Dish Network Corp.
could force Verizon to sustain its promotions “for a longer period of time than expected.”
Wireless executives may address the growing cable competition on their upcoming earnings calls. Verizon is set to report results before the opening bell Wednesday, Oct. 20, while AT&T follows the next morning. The cable operators report about a week later, with Comcast scheduled for the morning of Thursday, Oct. 28 and Charter following a day later.
Expect “outsized” net additions again this quarter, according to Cowen & Co. analyst Colby Synesael, who models that Verizon will deliver 359,000 postpaid phone net additions and that AT&T will have added 528,000. He recently lowered his estimates for T-Mobile—to 625,000 from 725,000—to account for potential customer wariness after a recently announced data breach.
Verizon had stronger promotions at the beginning of the third quarter, before pulling back but then later offering big iPhone 13 deals. Synesael expects “upside postpaid phone adds” on the back of those earlier promotions, though the company “may sacrifice some margin as a result.”
Analysts tracked by FactSet anticipate that Verizon earned an adjusted $1.36 a share on revenue of $33.3 billion in the most recent quarter. A year prior, it posted $1.25 in adjusted earnings per share and notched revenue of $31.5 billion.
AT&T’s earnings could have some “noise” due to the recent close of the company’s DirecTV spin, but Synesael is upbeat about the company’s ability to deliver above-consensus net additions. As with Verizon, promotional spending could weigh on margins, but AT&T’s management team noted on the last earnings call that AT&T is spending less on promotions for each new addition than it did a year earlier.
“We also note lower churn (longer customer life) justifies AT&T’s higher upfront promo spend (higher [customer lifetime value]), and investors have responded positively to the growth in the company’s subscriber base, as long as margins are reasonable, in this early 5G era, ”Synesael wrote in her note to clients.
The FactSet consensus calls for AT&T to post 78 cents of Adjusted EPS, down from 76 cents a year earlier, as well as $ 41.5 billion in revenue, up from $ 42.3 billion a year earlier.
Overall, carriers could see limited impacts from Apple’s iPhone 13 launch, according to Synesael, since the new line of devices isn’t available until the end of September. Still, analysts will be looking for clues in the call’s commentary on the benefits on the traction of new phones and the effects of wireless subsidies.
Moffett noted that carriers all have “big discounts” on new iPhones, with AT&T acting as the “most aggressive” with its offerings. The operator seemed to focus more on offering offers to all unlimited customers, he wrote, while the Verizon and T-Mobile promotions favored subscribers to the top plans.