AT&T's Q3 earnings focus is margins, while Sprint's is customer growth

AT&T (NYSE:T) reports its third-quarter earnings tomorrow and Sprint Nextel (NYSE:S) will follow on Thursday, but the focus for each company will likely be different. Analysts will be poring over AT&T's margins to see how much of a hit Apple's (NASDAQ:AAPL) iPhone 5 delivered to its earnings, while the spotlight for Sprint will fall on its subscriber growth and how many iDEN customers it migrated to its CDMA/LTE network.

AT&T has historically been the largest U.S. iPhone carrier and that could be proven true again in the third quarter. The question is how much iPhone sales bit into AT&T's margins, which usually go down when a new iPhone is launched because of the higher subsidy costs AT&T incurs. "[We] believe lower-than-expected iPhone 5 volumes (650,000 compared to our expectation of ~1 million) and a lower upgrade rate (6.8 percent, in line with our expectation but lower sequentially from an already-low 7 percent rate in 2Q12) were positive factors," wrote Guggenheim Securities Shing Yin in a recent research note, which forecasted that AT&T sold 6.8 million smartphones in the quarter.

AT&T's wireless EBITDA service margin was 45 percent in the second quarter compared with 41.1 percent in the second quarter of 2011. AT&T has said changes it made last year to its upgrade policy, higher upgrade fees and altered pricing for mobile data (which increased the size of data tiers as well as pricing) all helped boost its margins.

Verizon Wireless (NYSE:VZ) notched a record-high wireless EBITDA service margin of 50 percent in the third quarter, thanks in part to more customers signing up for its Share Everything shared data plans, which generate more revenue than other plans. AT&T introduced similar plans in late August, but unlike Verizon does not make new customers sign up for them.

For Sprint, the focus will be on whether it was able to grow its postpaid customer base and how many Nextel customs it managed to convert to its upgraded CDMA push-to-talk solution. Sprint said that in the second quarter overall it recaptured 60 percent of fleeing Nextel postpaid customers. Sprint CFO Joe Eueteneuer said in July that during the next two quarters Sprint expects to capture around 40 percent of leaving iDEN postpaid customers to the Sprint platform, but that figure may drop off after that.

In addition to any insights about Softbank's plan to purchase 70 percent of Sprint for $20.1 billion, analysts will also be looking to see how much progress Sprint has made with its Network Vision network modernization project. Sprint said in July that it had taken 9,600 Nextel iDEN cell sites off the air, earlier than previous guidance of doing so by the end of the third quarter. Sprint's progress on Network Vision will be key to determining Sprint's costs over the next several quarters as it moves through the project, which is scheduled to be largely completed by the end of 2013.

For more:
- see this The Street article
- see this Kansas City Star article

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