Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T) have both embraced equipment installment plans (EIPs) and shifted away from marketing subsidized smartphones with two-year contracts, but because AT&T is further along in that transition, it won't feel as much financial bite in the third quarter, according to financial analysts.
In a pair of research notes, Evercore ISI analysts Jonathan Schildkraut and Justin Ages said that Verizon will likely see increased adoption of its EIP program in the third quarter, but that could come at the expense of service revenues.
They said that Verizon, which reports earnings tomorrow, will likely see 60 percent of phone activations in the third quarter on EIP, which should help boost wireless EBITDA margins to around 43.1 percent. "However, we estimate that well over 100% of this improvement comes from the accounting change associated with the rapid scaling of EIP customers," they said. "That is, on an apples-to-apples basis, VZ's wireless cash EBITDA margins are actually contracting" 2.10 percent from a year ago.
The analysts expect that Verizon will now have 30 percent of its smartphone base on EIP, but that wireless service revenue will remain under pressure as more revenue shifts to equipment revenue. The analysts think Verizon's service revenues will dip 3.7 percent year-over-year.
In the second quarter, Verizon said 49 percent of phone activations were on its Edge EIP program, which it now simply calls "device payment option." However, Verizon has been pushing its EIP program, especially to new customers. Starting in mid-August Verizon said new customers and customers who are off contracts and who want its new shared data plans would need to buy a smartphone through Verizon's EIP program or pay full retail price for their phones.
The analysts expect Verizon to add 1.1 million postpaid customers and 200,000 postpaid phone subscribers in the quarter, but warned of a potential coming slowdown in subscriber growth. "Despite our expectation for the second best net adds in the sector, over time we believe VZ will become less aggressive in signing subs," they said. "Management has signaled that the focus is shifting towards attracting profitable subs instead of chasing each sub."
Meanwhile, at AT&T the analysts expect wireless service revenue of $15.4 billion, which would be up 1.7 percent from the second quarter and down 0.3 percent from a year ago. "This would represent the second consecutive quarter of positive wireless service revs growth, reinforcing our belief that T has turned the corner on the revs pressure from moving to EIPs" and no-subsidy Mobile Share Value plan pricing, they said, and MSV pricing. "We believe this will help drive wireless revs to $19.1B (+4.0% Y/Y)."
Sales on AT&T's Next equipment installment plans also increased during the second quarter as 68 percent of all postpaid smartphone gross additions and upgrades chose AT&T Next. AT&T has aggressively pushed Next plans and has indicated it thinks that it will eventually stop selling subsidized smartphones with two-year contracts. Nearly 37 percent of AT&T's postpaid smartphone base were on AT&T Next plans at the end of the second quarter.
However, the analysts expect AT&T, which reports earnings Oct. 22, to add 500,000 total net postpaid subscribers, which would be down sharply by 36.3 percent from a year ago. They expect AT&T to lose 150,000 postpaid phone customers, which would be down from additions of 301,000 such customers.
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