Bloomberg
With all that’s going on in telecommunications news, earnings numbers are likely to take a back seat this quarter.
Verizon Communications Inc. kicks off reporting season for the sector with its Tuesday morning release, but investors may be more preoccupied with events that won’t show up in the company’s results. Verizon and AT&T Inc. are reportedly the subject of a Justice Department inquiry that’s examining whether the two companies colluded with a wireless-standards organization to make it harder for people to switch to new phone carriers, according to Friday news reports.
The investigation hinges on eSIM technology, which would allow for an easy switch between wireless carriers without requiring that customers get a new SIM card from a provider. The New York Times report, which cites multiple people familiar with the inquiry, said that Verizon and AT&T wanted to be able to lock phones even if they contained an eSIM card. The report said that Apple Inc. was among the companies that asked the Justice Department to look into the issue.
Both companies confirmed to the New York Times awareness of the inquiry, with a Verizon spokesperson saying it was “much ado about nothing”.
AT&T is no stranger to the Justice Department, which has sued the company over its plans to buy Time Warner Inc. AT&T CEO Randall Stephenson testified about the $85 billion acquisition plan in district court earlier this month, arguing that the purchase is a “vision deal” that will help the company better compete with tech giants, which have their own content and delivery vehicles.
When AT&T reports earnings on Wednesday afternoon, analysts are likely to have questions about the likelihood and timing of deal approval.
Then there’s Sprint Corp. and T-Mobile US Inc. which are apparently once again holding deal talks, according to The Wall Street Journal. The two broke off discussions a few months back due to disagreements about who would have control over the joint company. Analysts will presumably ask about deal chatter during the company’s conference calls, though it’s doubtful the companies will have much to say.
J.P. Morgan’s Philip Cusick wrote recently that it’s unlikely the Justice Department’s collusion probe will end up hurting the carriers much, but it could cut the odds of a hypothetical Sprint/T-Mobile deal gaining approval. “It is worth noting that, while we see the wireless industry as highly competitive, a DoJ view that carriers are colluding could mean that a potential Sprint + T-Mobile merger would face higher scrutiny, making us somewhat less optimistic about that deal,” wrote Cusick, who rates Sprint shares at neutral and T-Mobile shares at overweight.
Sprint and T-Mobile are expected to deliver quarterly results in early May, though dates haven’t been announced.
What to expect:
Analysts surveyed by FactSet expect that Verizon earned an adjusted $1.11 per share on revenue of $31.2 billion for the March quarter. That’s up from 95 cents and $29.8 billion a year earlier. According to Estimize, which crowdsources estimates from hedge funds, academics, and others, the average projection is for earnings per share of $1.10 and revenue of $31.2 billion.
Verizon shares are up 1.4% over the past 12 months, and they’ve risen following four of the company’s last 10 earnings reports. A total of 32 analysts cover the stock, according to FactSet, with 11 rating it a buy and 21 rating it a hold. The average price target on shares is $55.52, 16% above current levels.
For AT&T, analysts are projecting adjusted earnings per share of 87 cents, up from 74 cents a year earlier, according to FactSet. Consensus figures call for revenue of $39.4 billion, roughly even with last year’s figure. At Estimize, projections are for 87 cents in adjusted earnings per share and $39.7 billion in revenue.
AT&T’s stock has gained 13% in the past year, but it’s gained after seven of the company’s last 10 earnings reports. Of the 30 analysts who cover AT&T, 12 rate the stock a buy, 17 call it a hold, and one rates it a sell, according to FactSet. The average price target of $39.75 represents 14.6% upside.
Analysts covering Sprint project that the company will deliver a per-share loss of 7 cents for the March quarter on revenue of $8 billion. The company lost 7 cents a year ago and reported revenue of $8.5 billion. Estimize predicts a loss of 1 cent per share and revenue of $8.3 billion.
Sprint’s stock tends to make big swings following earnings results. Shares have risen after seven of the company’s last 10 earnings releases but are down 29% over the past 12 months. Of the 29 analysts who follow Sprint’s stock, only one rates it a buy, while 20 call it a hold and 8 label it a sell, according to FactSet. The average price target of $5.31 is 12% below current levels.
For T-Mobile, analysts tracked by FactSet are calling for adjusted earnings per share of 71 cents, down from 80 cents a year ago, on revenue of $10.4 billion. Estimize projects 76 cents per share in earnings and $10.4 billion in revenue.
Shares are down 3% over the past 12 months but have gained following six of the company’s last 12 earnings releases. Wall Street sentiment is overwhelmingly positive, with 27 out of 31 analysts who cover the stock rating it a buy, according to FactSet. Three rate it a hold and one rates it a sell. The average price target of $73.89 represents 17.1% upside from today’s levels.
The stocks of all four carriers have underperformed the S&P 500 index and Dow Jones Industrial Average over the past 12 months. The S&P has gained 17%, while the Dow is up 19%.
What else to watch for:
Given that Verizon and AT&T report results before Apple Inc.’s quarterly release, investors will be looking to company commentary, as well as the raw numbers, for read-throughs on iPhone demand. Analysts have pointed out that some carriers were more promotional than others.
Instinet analyst Jeffrey Kvaal highlighted a relative lack of major discounts in a recent Verizon earnings preview. “Few aggressive promotions in 1Q suggest the low churn and strong net adds Verizon has enjoyed since unlimited pricing will continue,” he wrote. Kvaal rates Verizon’s stock a buy with a $63 price target.
Wells Fargo analyst Jennifer Fritzsche noted that other carriers discounted somewhat more heavily. “T-Mobile and AT&T, in particular, were the most promotional in Q1 and we believe those 2 carriers will be the only two of the Big 4 carriers to post positive postpaid handset growth,” she wrote.
For AT&T, television will be a key theme to watch for beyond Time Warner talk. CEO Stephenson said during his testimony that the company plans to soon launch a skinny bundle called AT&T Watch that won’t feature any sports content. The service will be available to anyone but will be free for AT&T subscribers, with the idea that they may eventually upgrade to enhanced packages for a fee. AT&T owns DirecTV.
“While there are many skinny bundles in the market today, the key part about this one is it will be free to AT&T’s wireless subs,” wrote Wells Fargo’s Fritzsche. “If successful, we believe this could put more pressure on the other three wireless carriers… to act in a more formal way in the content space. That said, we would remind investors that AT&T, T-Mobile, and Sprint all offer one content channel (Sprint - Hulu, T-Mobile - Netflix, AT&T - HBO) in the service today.” She rates all four carriers at outperform.
Also notable on the AT&T front will be updates on the traditional DirecTV business as well as on the reception to new streaming offerings.
On the wireless side, T-Mobile is likely to lead in terms of net postpaid subscriber additions, in Fritzsche’s view. “T-Mobile has had several BOGO [buy-one, get-one] offers in the market for select Apple, Samsung and LG phones and has noted postpaid porting trends vs. the other carriers improved modestly in Q1,” she wrote. “We expect T-Mobile had a strong quarter in adding other connected devices, particularly with smartwatches and connected cars.”
UBS analyst John Hodulik predicts several positive points for Sprint, including “sustained gross add share in postpaid handsets” as well as “stability in wireless service revenues on a sequential basis.” He also foresees a “pick-up at Virgin” that could help the company’s prepaid business. Negatives include elevated churn and higher capital expenditures, Hodulik wrote. He rates Sprint shares at neutral with a $55 target price.
In general for the industry, Hodulik wrote that “pricing stability should contribute to improved service revenue declines (ex-accounting) while industry margins expand (partly helped by deferred commission expenses).”