Jefferies: iPhone 7 promotions 'lacking discipline,' impacting Q3 and Q4 margins

iPhone 7 Plus
Image: Apple

Recent iPhone 7 promotions from the four major wireless carriers lack the “discipline” shown through the first half of the year, causing profit margin reductions to spin out into the fourth quarter, Jefferies analysts said in a recent research note. Verizon and AT&T are particularly suffering, though T-Mobile appears to be weathering the storm.

The two carriers still offering the promotions – Verizon and Sprint – stand to see their postpaid net adds rise or remain steady. But conversely, the promotions driving those additions cause profit reductions, Jefferies analysis showed.

Jefferies lowered Verizon's full year earnings per share, for instance, from $3.90 to $3.96. Much of that drop will come in the fourth quarter, as third quarter EPS only dropped from $1.01 to $0.99. Sprint's third quarter EPS fell from $0.14 to $0.10.

“The reduction reflects greater wireless subsidies as a result of the promotional activity and the impact of early quarter price changes, partially offset by higher wireline margin expectations,” the Jefferies analysts wrote.

Meanwhile, AT&T, which canceled its promotion last weekend, will see lowered net adds from the competition and lowered earnings per share from its own promotion. Jefferies lowered its postpaid net adds estimate from 294,000 to 192,000, and its estimated full year earnings per share from $2.89 to $2.84. However, that didn't change its “buy” rating for the company, unlike other analysts that reduced it to “neutral.”

Holding strong through all of this is T-Mobile, which stands to see its postpaid and prepaid handset outlook improve from an original estimate of 700,000 and 525,000, respectively, to new estimates of 825,000 and 700,000. Its full year earnings per share also improved by one cent in the revised forecast.

Although T-Mobile also ended its iPhone 7 promotion last weekend, the “un-carrier” is still offering an array of other attractive options, including new unlimited pricing. This has allowed it to emerge ahead in the current landscape.

Yet there's trouble ahead for T-Mobile. Jefferies noted that with the ending of Walmart's distribution program, in which T-Mobile aimed to sell postpaid devices, the carrier should expect to see reduced churn with greater impacts in the fourth quarter.

The estimates echoed the conclusions of UBS' recent analysis, which similarly downgraded Verizon's estimates while giving T-Mobile its best grade.

Jefferies also noted one other trend to watch out for: An increase in leasing activity for the carriers that offer it. Sprint's iPhone 7 promotion was only available through leasing plans, which likely accounts for its increase, but T-Mobile's leasing activity has increased as well. Jefferies estimated leasing would account for 8 percent of T-Mobile's device sales, up from low single digits previously.

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