Expectations for a strong third quarter got off to a rocky start as early reports from three of the industry’s five largest operators have shown customer growth falling short of the previous year and analysts estimates.
Reigning heavyweight Cingular Wireless L.L.C. missed reduced expectations for customer growth during the third quarter-adding 867,000 total subscribers-but maintained its position as the industry’s largest wireless operator with 52.3 million customers. Cingular managed to surpass the 808,000 pro-forma subscribers it added during the third quarter of last year, but analysts expected the carrier to add between 900,000 and 1 million subscribers this quarter.
Lower-than-expected gross customer additions of 4.4 million impacted Cingular’s customer-growth shortfall, which was a 17-percent drop compared with the 5.3 million pro-forma gross additions last year and just shy of the 4.5 million gross additions forecast by analysts. Cingular said customer churn dropped from 3.2 percent pro forma last year to 2.3 percent this year, which was in line with estimates.
The customer short-fall could be more dramatic later this week when No. 2 operator Verizon Wireless is expected to post industry-leading growth of between 1.7 million and 1.9 million net customer additions. Verizon Wireless began the third quarter with a reported 47.4 million customers and-if it meets expectations-could end the quarter with more than 49 million subscribers.
Verizon Wireless’ strong growth-including more than 8 million net customer additions during the past seven quarters-also pushed the operator further from No. 3 Sprint Nextel Corp. Sprint Nextel pre-announced last month that it added 700,000 direct postpaid net customer adds during the third quarter. Sprint Nextel ended the period with nearly 36 million direct postpaid customers, and nearly 45 million including its Boost Mobile L.L.C. prepaid service, network affiliates and mobile virtual network operator partners.
Cingular also reported a 5.2-percent year-over-year drop in pro-forma average revenue per user from $52.40 during the third quarter of 2004 to $49.65 this year. The carrier attributed the drop to the transition of customers to lower-priced GSM plans, the continued popularity of family plans and the carrier’s Rollover plans. Cingular did note that data ARPU increased 4.1 percent sequentially to $4.33 due to increasing use of messaging applications, downloadable content and media bundles.
Verizon Wireless has reported similar ARPU dilution over the past several quarters, citing similar strong growth from family-plan offerings that allow customers to add lines to their accounts for as little as $10 per month.
Despite the customer and ARPU drag, Cingular reported that total revenues increased from a pro-forma $8.5 billion during the third quarter of last year to $8.7 billion this year.
Cingular’s management also updated its integration process following the acquisition of AT&T Wireless Services Inc. last fall. The carrier said it has cut more than 15,000 full-time equivalent jobs this year, including approximately 2,500 employees who were laid off and another 4,000 lost through attrition. The remaining cuts were employees not on the carrier’s payroll or outsourced positions. Cingular ended the third quarter with around 62,500 employees.
Cingular also said it plans to close up to 470 stores this year, which would leave the carrier with around 2,100 stores and kiosks. Cingular recently announced a 10-year agreement with RadioShack Corp. to replace Verizon Wireless in more than 5,000 retail locations beginning next year.
Cingular reported in a Securities and Exchange Commission filing last week that it approved the second and final phase of its network integration plan. The carrier said the final phase includes integrating its GSM networks, decommissioning redundant cell sites and core network elements, and swapping vendor equipment in various markets to have like equipment in each operating market.
Cingular noted the plan includes decommissioning about 7,600 cell sites, of which 5,700 were acquired from AWS. The plan is budgeted at $620 million, with complete network integration finished by the end of next year.
Alltel Corp., which thanks to a rash of industry consolidation is the industry’s No. 5 operator, posted a disappointing 20,887 internally driven net customer additions during the third quarter-less than half the 58,254 customers the carrier added in 2004 and below analyst estimates. Alltel attributed the shortfall to higher churn in markets it recently acquired from Cingular, which resulted in the loss of 67,000 customers in the new markets.
Analysts said they expect Alltel to lose the remaining 119,000 customers in those markets as the carrier is turning off the legacy GSM network at the end of the year and plans to install CDMA technology.
Alltel added more than 1.3 million subscribers following its acquisition of Western Wireless Corp., which closed during the third quarter. The carrier ended the period with 10.4 million total wireless customers.
Alltel’s customer churn increased from 2.33 percent during the third quarter of 2004 to 2.37 percent this year, highlighting the issues it had in the markets it bought from Cingular.
ARPU surged $2.84 year-over-year from $45.24 during the third quarter of 2004 to $48.08 this year. Wireless data services contributed $2.16 to ARPU during the quarter.
Alltel’s wireless revenues, which the company said accounted for 70 percent of its total revenues following the Western Wireless acquisition, jumped more than 30 percent year-over-year, from $1.3 billion during the third quarter of 2004 to $1.7 billion this year. Total company revenues jumped 20 percent, from $2.1 billion in 2004 to $2.5 billion this year.
Net income also improved from $323.2 million during the third quarter of 2004 to $361.2 million this year, though earnings per share dropped slightly from 92 cents per share last year to 90 cents per share this year. The EPS drop was due to a 19-percent increase in outstanding shares.
NP posts bright 3Q
Nextel Partners Inc. has been one of the few bright spots in the quarter, posting a company-record 107,200 customers, which was well above analysts’ estimates and a 14.7-percent jump from the 93,500 customers the carrier added during the third quarter of last year. Nextel Partners ended the quarter with more than 1.9 million customers.
In support of its strong customer growth, Nextel Partners reported that customer churn remained steady at 1.3 percent, which was in line with its second-quarter results and below the 1.4-percent churn the carrier reported last year. ARPU also improved sequentially from $68 during the second quarter to $69 during the third quarter, but was flat year-over-year.
Nextel Partners also reported that service revenues increased 8.5 percent year-over-year from $410 million during the third quarter of 2004 to $445 million this year. The carrier is set to release full third-quarter results Oct. 27.
