UBS: Margins for US wireless carriers have peaked, it’s all downhill from here

UBS, citing company reports and its own estimates, offers a look at the consolidated vs. wireless EBITDA growth for the four nationwide wireless carriers.

Investment banking firm UBS issued a report this morning arguing that “wireless clouds are starting to gather” and that U.S. wireless carriers’ margins will soon begin to shrink from their historically high levels. “We believe this will begin to impact the financials in 2017,” the firm noted.

Importantly, UBS said T-Mobile US remains its top pick in the sector due to its ongoing momentum in acquiring new smartphone customers during the past several years. The firm added that AT&T appears well positioned due to its acquisition of DirecTV and its ongoing efforts to bundle video content with its wireless services.

“The industry has reported record profitability for three straight years (largely due to the accounting for financing plans), but against this backdrop service revenues fell in 2015 for the first time and total wireless revenue growth noticeably slowed,” UBS noted, pointing out that the U.S. industry’s overall earnings before interest, taxes, depreciation and amortization (EBITDA) margins hit a record 40.1 percent in the second quarter.

Impressively, UBS added that the U.S. wireless industry has managed to surpass other regions such as Europe in terms of ARPU, churn, EBITDA and margins. “We estimate the U.S. will generate $271 in wireless EBITDA per POP in 2016 – 45 percent more than it did in 2010,” the firm wrote. “Were these trends to continue, the U.S would soon become the most profitable wireless market on a per POP basis despite the recent emergence of the current four player race.”

But UBS argued that there are three key factors that will slow U.S. carriers’ financial performance starting next year.

First, the firm said equipment financing – where carriers sell smartphones through equipment installment plans (EIP) rather than through two-year contracts and handset subsidies – have contributed to an improvement to carriers’ margins. But the firm said that 65 percent of the market now uses those installment plans, and “the accounting boost the carriers have enjoyed will begin to abate.”

Second, UBS said it expects churn to rise as customers begin to upgrade their aging phones. The firm noted that recent evidence suggests that the average user keeps an iPhone for 3.85 years, a full year longer than in 2011, but that the rate of customers getting new phones will increase in the coming months and years.

Third, UBS expects carriers’ average ARPU to fall as they cut costs on data plans. “This is largely the result of the industry's declining ability to monetize data usage. While it's hard to gauge the impact of recent price changes on ARPU, one thing is for sure, carriers are providing more value for the same price, lowering the inherent yield of additional data usage.”

Of course, wireless carriers would likely push back against UBS’ findings. Carrier executives have generally argued that the rise of the IoT space and sectors like autonomous cars will create additional opportunities for growth.

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