SmartPhones Driving At ATT, VZ

This week, the US Telecom industry’s leading providers, AT&T and Verizon, reported their results. Let’s take a closer look as these carriers’ performances are a telling indication of the health of the industry in the wake of the tough economic conditions.

In its Q4 and fiscal 2008 results reported on January 28, AT&T recorded strong wireless subscriber gains that more than offset lower wireline voice revenues and economic downturn. Q4 revenue was up 2.4% to $31.1 billion while net income was down 22% to $2.4 billion or $0.41 per share. Non-GAAP earnings were $0.64 per share. Analysts expected earnings of $0.65 per share on revenue of $31.4 billion.

Free cash flow was $5.4 billion in Q4 and $13.3 billion for the full year. Also for the full year, revenues were $124.0 billion while net income was $12.9 billion. In 2008, AT&T paid dividends worth $9.5 billion and bought back shares worth $6.1 billion. Capital expenditures in 2008 totaled $20.3 billion.

The iPhone has been critical to the growth of the Wireless segment. Wireless revenue grew 13.2% to $12.9 billion, driven by a 2.1 million net gain in subscribers, of which 1.9 million (down 21% q-o-q) were due to Apple’s phone. AT&T paid an iPhone subsidy bill of $450 million in the quarter, or about $236 per iPhone. Data revenue grew 51.2% to $3.1 billion while postpaid ARPU was $59.59, up 3.9%. So despite the huge subsidy bill, the iPhone is adding to AT&T’s revenue: apart from the high data revenue AT&T already receives, an iPhone subscriber pays an additional $10 per month as the company had increased rates to make up for the loss of not sharing subscription revenues with Apple. A total win-win situation for AT&T.

AT&T now has a total of 77 million wireless subscribers, up from 70 million last year. Its churn rate has come down to 1.6% versus 1.7% last quarter and last year.

Wireline revenue, on the other hand, declined 3.3% to $17.1 billion driven by a 10% decline in voice revenues and offset by the growth in the company’s U-Verse broadband and TV service and 14.2% growth in IP data revenue. AT&T added 264,000 U-Verse TV subscribers and 357,000 broadband connections in the quarter.

To offset its wireline losses, last month the company cut 4% of its workforce, or 12,000 workers. For 2009, AT&T expects revenue growth in the low single digits and to reduce its capital expenditure by 10%-15%. The stock is currently trading around $26 with market cap of about $153 billion. It hit a 52-week low of $20.90 on October 10.

Verizon reported Q4 revenue of $24.6 billion, up 3.4% and net income of $1.7 billion, or $0.61 per share. Analysts expected earnings of $0.61 on revenue of $25 billion.

For the full year 2008, revenue grew 4.2% to $97.4 billion and EPS was $2.26 versus $1.9 last year. Cash flow from operations was $26.6 billion versus $25.7 billion in 2007. Dividends and share repurchases totaled $6.4 billion and capital expenditure was $17.2 billion, versus $17.5 billion last year. Net debt is $42.2 billion, including more than $9 billion in cash held in anticipation of the Alltel closing.

Wireless revenue grew 12.3% to $12.8 billion in Q4 and 12.4% to $49.3 billion in 2008 driven by the success of the BlackBerry Storm. Smartphones accounted for 37% sales in Q4 versus 30% in Q3. In Q4, Verizon added 1.4 million organic subscribers versus two million last year, and its subscriber base totaled 72.1 million. Including customers from the recently completed Alltel acquisition, its total customer base is over 80 million, the largest in the industry. Verizon also has the lowest churn in the industry at 1.35% versus 1.21% last year. ARPU was $51.72, up 1.4% and data revenues were up 41.4% to $1.7 billion in Q4 and up 44% to more than $10 billion in 2008.

As fewer people are installing or keeping their landlines, Verizon lost 911,000 customers in Q4 and 3.7 million in 2008. Operating margin declined to 25.4% from 28.4% last year. On the bright side, Verizon added 303,000 FiOS TV subscribers, up from 226,000 last year, and 282,000 broadband customers, up from 244,000 in Q4 2007. However, analysts doubt if this growth will be profitable enough to sustain the $18 billion introduction cost of FiOS.

Verizon has not provided any outlook for 2009 but expects capital expenditure to be less than 2008 levels. The stock is currently trading around $31, recovering well after its 52-week low of $23.07 on October 10. Market cap is around $88 billion.

In conclusion, the telecom companies are having a tough time due to declining wireline business, but the success of smartphones like the iPhone and the BlackBerry Storm is allowing them to just about survive. In fact, the upgrade to smartphones has kept both AT&T and Verizon is reasonably strong positions even in this dismal market.