Despite wireless operators offering a variety of pricing discounts to some customers, the pricing turmoil in the market has not really impacted the Tier 1 carriers' bottom lines, according to analysts at New Street Research. In fact, the analysts say carriers are set to report stronger-than-expected quarterly subscribers for the first quarter, thanks in large part to booming tablet subscription adoptions.
In a research note, New Street Research analyst Jonathan Chaplin wrote that intensified pricing competition hasn't yet hit carriers, largely because of two factors. One is that tablet sales are driving higher-than-expected subscriber additions for all the carriers, which is "masking the impact of handset share gains" T-Mobile US (NYSE:TMUS) is making. T-Mobile is likely still gaining share thanks to its offer to pay off the Early Termination Fees for customers who switch to T-Mobile.
Additionally, according to the analysts, margins are still riding high thanks to a greater shift to device financing plans, so the carriers are still getting the same revenue, although it's shifting more from service pricing to monthly device financing costs.
Over all, the analysts think that the first-quarter for all four of the Tier 1 carriers should look good, with them all beating estimates for either subscriber additions, EBITDA or both. However, Chaplain noted that "we remain cautious on the group as we expect rising competition to take its toll on the group eventually."
At Verizon Wireless (NYSE:VZ), New Street is revising its net add forecast up from 363,000 to 485,000 subscribers for the first quarter, as Verizon has benefited from tablet adoption "despite some pressure on churn from rising competition." Additionally, they expect Verizon's segment EBITDA margin on service revenues to be around 52 percent, helped by installment plans (though less than at the other carriers), usage-driven data growth and lower upgrades.
New Street estimates that AT&T Mobility (NYSE:T) will add 229,000 net new subscribers in the quarter, up from their previous estimate of 142,000. They do expect churn to increase "modestly" thanks to T-Mobile's ETF plan, but expect AT&T to do well on gross subscriber additions, helped by tablets.
For Sprint (NYSE:S), although Chaplain wrote that "subscriber trends at Sprint don't seem to be as bad as we had feared" (the analysts expect postpaid net loss of 247,000, compared to 365,000 losses before), they think tablet strength "will mask weak handset trends for the quarter." The company's margins should be helped by installment plans and cost savings.
Sprint just announced it is cutting at least 1,400 jobs across the country, and perhaps more, as it closes call centers, trims jobs related to refurbishing phones and shuts down underperforming retail stores. Further, Sprint has said it expects churn to remain elevated through the middle of the year as its finishes its Network Vision network modernization and then gradually improve in the second half of the year as the network improves.
New Street thinks T-Mobile "could easily add" 1.1 million new subscribers in the first quarter, compared to its previous estimate of around 810,000. The analysts expect the impact of the ETF offer to fade over the course of the year, but say "the company is on track to beat 2014 postpaid net add guidance" of 2 million to 3 million. However, the company's average revenue per user will likely be pressured as more customers shift to its Simple Choice plans, which deliver lower monthly ARPU due to lower service charges compared to traditional postpaid plans at other carriers in which devices are subsidized. T-Mobile expects between 85 percent and 90 percent of its branded postpaid customers to be on its Value/Simple Choice plans by the end of 2014.
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