'Too early to declare victory' despite healthy Q2 results thus far: Deutsche Bank

Results
The wireless industry is expected to become much more competitive in the second half of 2017.

With three of the four major U.S. carriers already having reported their most recently quarterly earnings, the U.S. wireless industry appears to be surprisingly healthy at first glance. But a deeper look reveals some significant concerns, according to analysts at Deutsche Bank Market Research.

Verizon, AT&T and T-Mobile each posted net postpaid phone subscriber results that exceeded analysts’ expectations—Sprint will report its earnings tomorrow morning—and each enjoyed record-low postpaid churn. But those results have raised the eyebrows of some investors who question whether they’re truly indicative of long-term trends or simply an anomaly due to several factors.

Deutsche Telekom estimates that roughly 125,000 of T-Mobile’s postpaid phone net adds actually stemmed from its new Digits service, which wouldn’t necessarily represent new customers. And while AT&T’s adjusted EPS of 6 cents soundly beat analysts’ forecasts, Deutsche Bank figured roughly 4 cents of that figure stemmed from “more transitory/non-recurring items.”

Two major looming questions, then, are where the growth in postpaid phone customers is coming from, and how that growth might have impacted Sprint in the second quarter.

“We highlight several factors that may explain this surprising trend (especially given market maturity): (1) Demand spillover from 1Q to 2Q (note 1Q postpaid phone net adds were -62% year over year, and 2Q is trending to be +53%; even stripping out T-Mobile’s Digits contribution, 2Q would be +36%, (2) Greater skew/migration towards postpaid phone (away from prepaid); If we look at total retail phone net adds (postpaid phone/prepaid), 1Q was -26% and 2Q is trending to +31% (+20% ex-Digits); reported postpaid phone net adds are trending +5% year over year in the first half of 2017, while prepaid is trending -4%,” Deutsche Bank’s Matthew Niknam wrote in a note to investors.

A third implication, Niknam wrote, is “potential weakness at Sprint.”

And while the second quarter is typically relatively placid, the wireless industry is certain to grow more competitive in the second half of the year.

“(W)e think it’s too early to declare victory just yet, especially given the ‘seasonal lull’ in 2Q promo activity ahead of a more competitive 3Q/4Q (back to school, holiday season),” Niknam wrote. “This is in the context of a maturing market now competing on unlimited plans (ie: limiting pricing power/long-term revenue upside), facing competition both intra-industry (Sprint/T-Mobile) and from new cable MVNOs, ahead of a bigger iPhone refresh later this year. We expect the industry disruptors to ratchet up competitive activity in upcoming months.”