Last week most of the major telecom stocks lost value with numerous factors impending growth. Telecom behemoths Verizon Communications Inc. (VZ) and AT&T Inc. (T) reported their fourth-quarter 2014 financial results.
Although both companies' earnings were in line with the respective Zacks Consensus Estimate, increased churn rate, higher customer acquisition costs and deterioration of margins are near-term concerns. Although wireless revenues increased for both companies, but this was mainly attributed to significant increase in low-margin equipment revenues.
On the flip side, considerable gains of postpaid wireless subscribers resulted in higher average revenue per user (ARPU). FiOS video and an Internet subscriber base have also increased markedly.
Meanwhile, price competition has intensified considerably in the U.S. telecom industry. Recently, Sprint Corp. (S) has decided to offer a lucrative credit plan to all T-Mobile US Inc. (TMUS) customers in order to lure them away. Additionally, AT&T is focusing on strengthening its foothold in Mexico and is planning to acquire currently bankrupt NII Holdings Inc.’s Mexican operation, Nextel de Mexico.
In a separate development, leading cable MSO, Cablevision Systems Corp. (CVC) unveiled the cable TV industry’s first independent wireless venture using its own WiFi network. WiFi networks are flourishing throughout the U.S. and have become a major concern for large wireless operators. If this trend continues, it may severely jeopardize the existence of national wireless service providers, who have already invested significantly on installation of high-speed 4G LTE networks.
Recap of the Week’s Most Important Stories
1. Verizon reported better-than-expected financial results in the fourth quarter of 2014. The bottom line was exactly in line with the Zacks Consensus Estimate while the top line significantly surpassed the same. Excluding pension and other post-employment benefit liabilities, adjusted earnings of 71 cents per share were on par with the Zacks Consensus Estimate.
Quarterly total revenue increased 6.8% year over year to $33,192 million significantly outpaced the Zacks Consensus Estimate of $32,532 million. Wireless segment operating margin came in at 23.5% against 29.5% in the year-ago quarter. Wireline segment operating margin came in at 4.4% against 1.2% in the year-ago quarter. (Read More: Verizon Q4 Earnings in Line, Revenues Beat Estimates.)
2. AT&T reported mixed financial numbers in the fourth quarter of 2014. The company’s earnings came in line with the Zacks Consensus Estimate whereas revenues missed the same. AT&T’s adjusted earnings per share moved up 3.8% year over year to 55 cents, in line with the Zacks Consensus Estimate.
Quarterly total revenue increased 3.8% year over year to $34,439 million but lagged the Zacks Consensus Estimate of $34,502 million. Wireless segment operating margin came in at 16.3% against 21.4% in the year-ago quarter. Wireline segment operating margin stood at 10.1% against 9.9% in the year-ago quarter. (Read More: AT&T Q4 Earnings in Line, Revenues Miss Estimates.)
3. Competition in the U.S. telecom industry is intensifying. Leading telecom operators are coming up with new data and credit plans to lure subscribers from competitors. The latest of this trend is Sprint’sdecision to pay at least $200 instant trade in value to all T-Mobile US customers when they take their wireless number to a participating Sprint store and trade in their current working T-Mobile smartphone.This offer will be available until Apr 9, 2015.
Additionally, this credit facility can be combined with a contract buy-out credit worth up to $350 per line through a prepaid or reward card to cover any T-Mobile subscribers’ instalment billing balance on their current device or early termination fees after online registration. (Read More: Sprint Eyes T-Mobile US Customers with New Credit Plan.)
4. Cablevision recently unveiled an innovative wireless service on WiFi networks. Named “Freewheel,” this service will be launched commercially in February and will be the cable TV industry’s first independent venture in the wireless arena. Freewheel will provide unlimited voice, data and text on Motorola’s Moto G smartphones. The most important feature of this product is its low price.
Freewheel will be available at as low as $29.95 per month for new customers, whereas Cablevision’s existing Optimum WiFi network subscribers will enjoy the service for just $9.95 a month. The service comes with no annual contract. Moreover, Freewheel subscribers will get the Android-based Moto G smartphone at a subsidized price of $99.95 as against the original tag of $180. (Read More: Cablevision Forays into Mobile Business with Freewheel.)
5. AT&T has decided to extensively explore the Mexican telecom market for future growth. In keeping with this objective, the company has decided to acquire the Mexican operations (popularly known as Nextel de Mexico) of currently bankrupt wireless operator NII Holdings Inc. Notably, just a couple of weeks ago, AT&T completed the acquisition of Iusacell, the third largest wireless service provider in Mexico.
As per the latest endeavor, AT&T will acquire NII Holding’s wireless properties in Mexico, including spectrum licenses, network assets and retail stores for a total consideration of approximately $1.875 billion less the outstanding net debt of the business at closing of the deal. (Read More: AT&T to Strengthen Mexican Foothold, Eying Nextel Mexico.)
Price Performance
The following table shows the price movement of major telecom players over the past week and the last six months.
|
Company |
Last Week |
Last 6 Months |
|
VZ |
-4.56% |
-9.33% |
|
T |
-3.88% |
-8.23% |
|
S |
-0.68% |
-45.50% |
|
TMUS |
+0.03% |
-3.37% |
|
VOD |
-1.36% |
+4.78% |
|
CHL |
-1.83% |
+21.31% |
|
AMX |
-4.15% |
-6.53% |
|
CMCSA |
-2.12% |
+0.07% |
|
DISH |
-0.49% |
+14.30% |
Over the last five trading sessions, the share price movement of most of the major telecom stocks was negative. This can be primarily attributed to concerns emanating from the cut-throat pricing competition in the industry. Verizon lost the maximum value over this time frame.
Meanwhile, over the last six months, the price performance of key telecom stocks was mixed. China Mobile Ltd. (CHL) witnessed a considerable rally in stock price of 21.31% while DISH Network Corp. (DISH) gained 14.30%. On the other hand, Sprint collapsed a massive 45.50%.
What’s Next in the Telecom Sector?
We expect telecom sector activities continue to increase in the next week as several telecom operators and network equipment manufacturers will release their earnings results. Cable MSOs Time Warner Cable Inc. (TWC) and Rogers Communications Inc. (RCI) will release their earnings results. Additionally, investors will be closely monitoring a series of crucial economic reports, including those on consumer confidence, durable orders, housing and GDP numbers.
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