Verizon Wireless (NYSE:VZ) is expected to lead U.S. wireless carriers in terms of net subscriber additions in the fourth quarter, according to analysts' estimates. However, all operators, including Verizon, will likely see their margins come under pressure as a result of higher subsidy costs for smartphones.
Verizon has already noted that it expects 2.1 million net adds for the fourth quarter, which is above what any other carrier is expected to achieve for the period. Morgan Stanley analysts Simon Flannery, John Mark Warren and Armintas Sinkevicius wrote in a research note that all of those additions--especially of smartphone users--will come at a cost. They said Verizon's wireless EBITDA margin will decline from a record 50 percent in the third quarter of 2012 to 41.5 percent.
Of the 9.8 million smartphones Verizon activated in the fourth quarter, the Morgan Stanley analysts expect Apple (NASDAQ:AAPL) iPhones to make up 6 million. The iPhone 5, introduced widely in the fourth quarter, is the first iPhone to run on LTE networks, and Verizon's LTE network coverage--273.5 million POPs, or roughly 89 percent of its U.S. footprint--is far greater than any other carrier, which perhaps gave Verizon an advantage in the period. The analysts said they will be looking for an update on Verizon's Share Everything shared data plans; in mid-October the carrier said more than 13 percent of its customer base was on the new plans.
AT&T (NYSE:T) is also expecting to report a strong quarter for its wireless segment. The carrier said earlier this month that it sold a record 10.2 million smartphones in the fourth quarter. Yet in a regulatory filing with the Securities and Exchange Commission, AT&T warned it would record a $10 billion charge in the period related to its pension plans. The company also said that due to the higher subsidy costs associated with smartphones, "we expect a near-term pressure on operating income, margins, and earnings per share in the fourth quarter of 2012."
The Morgan Stanley analysts expect AT&T to report 759,000 postpaid wireless net subscriber adds for the period, which would be up from 151,000 in the third quarter of 2012 and 717,000 in the fourth quarter of 2011. AT&T's wireless EBITDA service margin was 40.8 percent in the third quarter of 2012, but the Morgan Stanley analysts think that will fall to 31.2 percent in the fourth quarter.
The growth at the larger carriers appears to have come at the expense of smaller, prepaid rivals. MetroPCS (NYSE:PCS) reported that it lost around 93,000 subscribers during the fourth quarter, bringing its total subscriber loses for 2012 to around 460,000. MetroPCS' fourth-quarter declines were far greater than analysts had expected. Further, Cricket provider Leap Wireless (NASDAQ:LEAP) also remains under pressure. Jefferies analyst Thomas Seitz cut his rating on Leap, noting the carrier will face even greater competition in 2013.
- see this SEC filing
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Barron's post
- see this release
Analysts: Wireless carriers' margins likely took a big hit in Q4
Verizon Wireless gained 2.1M net adds during Q4
AT&T sold a record 10M smartphones in Q4
MetroPCS' Q4 subscriber losses surprise analysts