As wireless carriers increasingly embrace equipment installment plans (EIPs), they are working to mitigate the risk of those plans to their balance sheet by turning to a variety of financing alternatives, according to a report from investment bank Jefferies.
In a research note, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata note that Verizon Wireless (NYSE: VZ), AT&T Mobility (NYSE: T), Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) are increasingly likely to turn to esoteric financing schemes like accounts receivables factoring and securitization for short-term funding to account for EIPs.
In the fourth quarter, Verizon said around 25 percent of all of its phone activations were completed through its Edge program, up from 12 percent in the third quarter. That was low compared to Verizon's peers. By comparison, AT&T said 58 percent of its smartphone activations were on its Next equipment installment plan (EIP), and Sprint reported a comparable figure of 46 percent for the fourth quarter. T-Mobile's Simple Choice plans are all on the EIP model.
Equipment installment plans let customers pay off their devices in installments, in many cases after paying $0 down up front. By giving away an expensive smartphone in the hopes that the customer will pay the cost of that back over time, carriers are employing a great deal of working capital to cover the up-front expense of the phones they are selling through EIP plans. All of those phone sales add up to billions of dollars. To mitigate the risk, carriers are looking to options like securitizing future EIP payments customers are expected to make.
"The magnitude of the working capital drag caused by the plans, and the benefits provided by factoring and securitizing the associated receivables is the primary motivation" for carriers embracing the financing alternatives, the Jefferies analysts noted.
"With sales on financing and leasing plans accounting for more half of all national carrier postpaid device sales in 2015, we estimate the four national wireless carriers will help subscribers finance over $37 billion of devices throughout the year, resulting in a cumulative equipment accounts receivable balance of $29 billion by year-end," they wrote. "Furthermore, we expect the total amount to continue rising with nearly $50 billion worth of devices sold on the plans in 2017, leading to more than $40 billion worth of cumulative working capital."
The Jefferies analysts noted that while accounts receivables factoring and securitization is not a new concept for the global telecommunications industry, T-Mobile's $500 million service payment receivable factoring facility in March 2014 was a first for a major U.S. carrier. Such facilities have been used globally by carriers like KPN, Deutsche Telekom, SoftBank and Telecom Italia. AT&T has factored more than $4.7 billion of gross equipment receivables throughout 2014, according to Jefferies.
The practice is likely to spread this year. "While AT&T and T-Mobile have been at the forefront of the practice, given the sheer magnitude of working capital use by equipment financing plans, and today's low interest rates, we expect all major carriers to engage in factoring and securitization of equipment receivables in 2015," the analyst firm wrote. "We believe it is unlikely that AT&T and Verizon will factor their service payment receivables given their higher quality subscriber bases."
Recon Analytics: U.S. handset sales slipped 15% in 2014 amid equipment installment plan boom
Analysts: Verizon's new price cuts indicate willingness to take on Sprint, T-Mobile
AT&T beats expectations, roars back with 854K postpaid net adds
T-Mobile to let lower-credit customers who pay on time get access to $0-down smartphones
AT&T's new Next installment plan lets customers pay off device costs over 30 months
Analysts: Sprint's iPhone leasing plan to boost earnings, while Verizon's Edge changes will help against AT&T