Cellular Wars

Cellular wars are heating up by the day. AT&T and Verizon are fighting hard for the smartphone infused momentum in the consumer and prosumer markets. Verizon just overtook AT&ampT as the No. 1 wireless carrier. Last week AT&T (NYSE:ATT) reported declines in revenue and profits but still beat estimates, mainly due to the iPhone, which had strong sales even in this gloomy economy. And this week, Verizon (NYSE:VZ) reported a strong quarter driven by the Alltel acquisition. Let’s take a closer look at their performances in the context of the wireless industry.

AT&T, the leading wireless carrier with annual revenue of $124 billion, reported Q1 revenue of $30.6 billion, a decline of 0.6% mainly due to continuing decline in wireline revenues despite growth in wireless revenue. Net income was $3.1 billion or $0.53 per share, down from $3.5 billion or $0.57 per share last year. Analysts were expecting earnings of $0.48 per share on revenue of $31 billion.

Cash from operations in the quarter was $7.9 billion and free cash flow totaled $4.6 billion. The company paid $2.4 billion in dividends. Since mid 2008, it has reduced its debt by $5.8 billion. Operating expenses were $24.8 billion, the same as last year. Operating margin was 18.8% and up 20%, excluding the impact of incremental pensions and retirees. In the quarter, AT&T reduced its headcount by 8,000.

AT&T reported a 1.2 million net gain in subscribers taking the total to 78.2 million, compared to 71.1 million last year. This subscriber gain is driven by 1.6 million iPhone activations (down from 1.9 million last quarter), about 40% of which are from new subscribers. Apple’s iPhone not just drives the subscriber numbers but also high data revenue. Wireless data revenue grew 38.6% to $3.2 billion, and wireless revenue was up by $1 billion or 9.6%.

As we saw in our last post, smartphones and integrated devices are driving wireless growth. About 32% of its postpaid subscribers have integrated devices and account for more than 100% of its postpaid net adds.

Wireline revenue continued to be impacted by the weak economy but the company added 284,000 U-Verse TV subscribers and 471,000 broadband connections in the quarter, up from last quarter. AT&T is currently trading around $25 with a market cap of about $151 billion.

Verizon, on the other hand, reported a strong quarter with Q1 revenue increasing 11.6% to $26.6 billion versus analyst estimates of $26.3 billion. Net income was $3.21 billion or $0.58 per share, compared with 3.05 billion, or $0.57 per share last year. Adjusted earnings were $0.63 per share, beating analyst estimates of $0.59 per share.

Cash flow from operations was up 19% to $6.4 billion, up 19% and free cash flow was $2.7 billion, compared to $1.5 billion last year. As a result of the Alltel acquisition, net debt increased to $65.2 billion.

With 13.2 million subscribers from the Alltel acquisition, Verizon is now the No.1 wireless carrier in the US, with 86.6 million subscribers and $97.4 billion in annual revenue. Excluding the acquisition, it added 1.3 million subscribers compared to AT&T’s 1.2 million. Its churn is 1.47% and post-paid churn is 1.14% versus AT&T’s 1.2%. Wireless revenue grew 29.6% to $15.1 billion. Data revenue was up 56.2% to $3.6 billion.

The wireline business story was somewhat less delightful with operating revenues declining 3.8% to $11.6 billion. Business access lines declined 5.5% to 14.7 million and residential access lines declined 12.5% to 20.3 million. However, the number of high-speed Internet customers increased by 252,000 to 8.9 million. Subscribers to Verizon’s FiOS network increased by 298,000, while FiOS TV increased by 299,000.

There have been many rumors lately regarding Verizon and its deals with Microsoft, Google’s Android and even Apple’s iPhone, but none have been confirmed. AT&T still has two years of its exclusive contract with Apple, but Verizon will be deploying its 4G network by 2010 and it would not be surprising if these deals do materialize then. AT&T’s 4G network is not expected to be deployed till 2012. Verizon is currently trading around $31 with a market cap of about $88 billion.