Analysts cite lack of new handset excitement to expected lower device-related revenues and overall postpaid device-related growth
AT&T and Verizon Communications were both dinged within the past week over concerns about first quarter performance.
Wells Fargo Securities Senior Analyst Jennifer Fritzsche early last week cautioned investors about the potential for the nation’s two largest carriers to post lower than expected device-related revenues tied to a dearth of impactful device launches during the quarter and general seasonality. Fritzsche said Wells Fargo expects AT&T Mobility postpaid handset upgrades will be around 5% of its overall base, compared with 7.5% during the fourth quarter of last year and 9% during Q1 2015.
“We believe [Q1 2016] results for the industry overall have seen very little handset upgrade activity,” Fritzsche wrote in a research note. “While some of this is due to the lack of an iconic device launch in the quarter (and likely pent up demand waiting for the next iPhone) we also note Q1 tends to be a low switcher one for subs. The result of these trends will be seen in lower equipment revenue for [AT&T] this quarter. We are making a similar change with [Verizon].”
At Verizon Wireless, Fritzsche lowered handset upgrade predictions from 6.5% down to just 5.5% for the first quarter.
Fritzsche also lowered forecasts for overall connection growth at AT&T Mobility for the quarter, citing muted promotional activity outside of its unlimited data plan option for customers signing up for DirecTV service. Fritzsche said she expects AT&T Mobility to post 250,000 postpaid net additions for the quarter, down from previous forecasts of 300,000 net additions, with the drop associated with deeper losses in postpaid handset connections.
Speaking at a recent Deutsche Bank Media, Internet and Telecom Conference, AT&T CFO John Stephens said 500,000 customers signed up for the unlimited data offer in the first two weeks after it launched Jan. 12, and has since tagged on another 1.5 million customers. Stephens did note most of the initial uptake was from customers already signed up for AT&T Mobility cellular service or either its DirecTV or U-verse video service, but that the carrier is now seeing net customer additions for those products.
“I will tell you we are adding wireless customers through the process and we are adding video customers in both areas from the package, but we haven’t given the detailed breakout,” Stephens said.
Verizon Wireless’ postpaid gross connection additions are expected to come in 7% lower year-over-year. The carrier has refrained from moving back into the unlimited data promotional waters, noting such offers don’t work in the current LTE environment.
“I have been pretty public saying unlimited model does not work in an LTE environment,” said Verizon CFO Fran Shammo when questioned on the topic. “Look, this industry has always been competition comes in and out with promos. That is just the nature of what we deal with on a quarterly-to-quarterly basis. A lot of the things that are out in the marketplace today are promos. These are not permanent pricing type things so you have to be careful how much you react to different competitor promotions and of course we run our own promotions. So the promotional activity will always be there and I don’t think it is more intense than it was, it is not like we are seeing what happened a couple of years ago where the entire industry was reset in pricing. I don’t see that. I just see this as business promotional activity to try to gain ground to get some maybe incremental net adds here and there.”
Instead, Shammo said Verizon Wireless will remain stable in terms of pricing moves as it looks to stabilize revenues.
“But I think for Verizon what we have done is we will do our promos, but we are steady as she goes and we are not going to respond to everything in the marketplace if we don’t think that we need to respond to,” Shammo said. “It is going to be a very logical approach because look, at the end of the day I need to grow top line and I need to grow profitability and I need to generate cash. And some of these promos you see out there they may generate growth, but they are certainly not generating cash. So they are short term and so we will ride that out.”
The device-related concerns come despite Samsung during the quarter rolling out its latest Galaxy S7 smartphone, which most domestic carriers touted with some form of promotion. Apple also released its iPhone SE model, though the device didn’t reach the public until the final day of the quarter.
The Wells Fargo concerns were followed by downgrades from MoffettNathanson, which moved its rating on Verizon to “neutral” and on AT&T to “sell” citing growth concerns.
“Our sum of the parts valuation for AT&T remains meaningfully below the stock’s current trading range,” MoffettNathanson analysts wrote, according to a report from FierceWireless. “Real growth metrics are much weaker than they appear on the surface. As we enter the back half of this year, AT&T will begin to anniversary their new segment reporting, and the weak organic growth rates of underlying businesses will be much more apparent. Recent commentary about the company’s ‘success’ in creating a quad play bundle with DirecTV only underscores our concern.”
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