October greetings from Louisiana and Missouri. Pictured is American Broadband’s Chief Marketing Officer, Bob O’Keefe, and yours truly outside of the Beauregard Parish courthouse. We stopped by DeRidder (the county seat) for breakfast on our way to visit our exchanges in Shipley and Elizabeth. Great Louisiana hospitality.
We have a lot to cover this week with particularly meaty earnings calls from Verizon and AT&T. Our thesis is that while AT&T and Verizon share a lot of similarities (particularly their share price performance this year), they are many differences. We will highlight some of each in our earnings analysis, which follows a full market commentary
Speaking of full, this week will be jampacked with earnings news, including the following (T-Mobile included to round out the 10 companies tracked in the Brief):
Company Date (conf call time)
Facebook Oct 25 (5 p.m. ET)
Alphabet/ Google Oct 26 (4:30 p.m. ET)
Microsoft Oct 26 (5:30 p.m. ET)
Comcast Oct 28 (8:30 a.m. ET)
Apple Oct 28 (5 p.m. ET)
Amazon Oct 28 (5:30 p.m. ET)
Charter Oct 29 (8:30 a.m. ET)
T-Mobile Nov 2 (4:30 p.m. ET)
The Week That Was
Over the last two weeks, the Fab Five have bounced back (+$193 billion – roughly one AT&T) while the Telco Top Five have continued their slide (-$13 billion). Within the Fab Five, Facebook had a rough fortnight (-$15 billion), driven by Snap’s earnings miss (which triggered a 26% loss in market capitalization last Friday). For all of the attention paid to Facebook, however, they are still up 19% YTD and boast a market capitalization in excess of $900 billion.
Light Reading had a terrific article last Monday on Microsoft’s announcement that they were entering the long-haul transport business (article here and Microsoft announcement here). If there was any confusion that transport would become a revenue stream, replacing Lumen/ Level3 and others, the picture below should clear things up:
Here’s what Microsoft touts in their announcement: 200 POPs in 60 regions (160 countries) covering 175,000 route miles of fiber. Later in the release they mention significant reserve fiber to add additional multiples of capacity. They close the blog post with the following statement:
“Microsoft is heavily invested in running a well-managed, always-available global network. We have been incorporating multiple groundbreaking technologies, including scalable optimization, formal verification of routing policies, machine learning, and AI. We envision operators to not only be able to use our WAN to transfer 5G packets, with low latency, but also to benefit from multiple network services such as DDoS protection, firewalls, traffic accelerators, connection analytics, load balancers, and rate limiters, many of which we use in running existing Azure network workloads.”
Interestingly, Lumen’s stock barely budged on the news. Microsoft (and Amazon and perhaps Google) will successfully challenge traditional global transport providers from a position of scale (and inherent advantages of widespread data center presence). They will get deeper, following the cloud’s progression to the edge as the above diagram shows. And they have a balance sheet to expand without investor concerns of capital intensity.
On a totally different (and slightly lighter) note, Facebook is expected to announce a corporate name change at their Connect conference this week (it could come as early as their earnings announcement Monday afternoon). More from The Verge on the name change as well as CEO Mark Zuckerberg’s focus on the metaverse here. While we recognize that the concept of “book” is old school, the name Bookmark has a unique ring to it and would preserve the founder’s image for eternity (in this world and others). For a detailed look at the name change odds, check out this Bezinga article.
Since we will deal with iPhone backlogs in a separate Brief website post, and the main Brief will focus on AT&T and Verizon earnings calls, it’s worth mentioning that T-Mobile used a Friday press release to announce that they were going to delay the CDMA network shutdown by 90 days (blog post here). They certainly do not mince words:
“Our reason for extending is simple: we want to give those partners who haven’t done the right thing for their customers every opportunity to step up now and do so. There should be no more room for excuses. We have provided even more time and those partners can follow suit with the effort that is needed to ensure no one is left on the wrong side of the digital divide.”
Whether this was voluntary or a part of a settlement (perhaps with the state of California – article here), it’s clear that the relationship between T-Mobile and Dish is certainly frosty.
On a final earnings-related note, America Movil announced earnings last week to minimal fanfare. Here’s the summary of their TracFone (USA subsidiary) performance over the past year:
Subscribers are down 3.5%, driven primarily by Lifeline (SafeLink), which ended the latest reporting period with less than 1.8 million subscribers. Despite the shrinkage, service revenues rose nearly 3% and are up nearly 4% for the first nine months of 2021 (not surprising given the store focus of the TracFone model which was impacted by the pandemic in 3Q 2020). As Verizon prepares to acquire TracFone (@$6.25 billion purchase price, this equates to $310.19/ per customer, which implies a monthly after-tax profitability of $11.79 per customer per month * an average life of 26.3 months), one can only wonder how they will justify the purchase price to their shareholders in a year given the current results.
AT&T and Verizon Earnings – Same, Yet Different
As we mentioned in the previous Brief, Verizon’s stock price is flirting with the meltdown levels of March, 2020. AT&T’s unadjusted (for dividends) stock price is performing at levels not seen in several years. Institutional shareholders are fretting about dividend levels and overall debt (which was driven up recently by C-Band auction bids).
T-Mobile’s acquisition of Sprint was supposed to improve industry economics. The “Four to Three” argument, if certain attorneys general were to be believed, was going to usher in higher prices which would hurt all consumers (especially lower income earners). Less competition was bad. What happened?
Along came Comcast and Charter’s MVNOs. Both are well run, focused and disciplined. Verizon willingly embraced these new competitors as a new growth vector, and the results show that they are keeping the Consumer Unit’s profitability propped up at Big Red:
Wholesale revenues from Comcast and Charter are shown in Verizon’s service revenue line. From 3Q 2020 to 3Q 2021, service revenues grew by a respectable $636 million (3.9%), while sequentially, the service revenue growth rate grew even faster ($182 million => $728 million annualized or 1.1%/ 4.4%). The quarterly growth for Comcast and Charter’s subscriber base is nearby.
In 2Q, Comcast and Charter added 545,000 customers. Assuming these customers had ARPU ~$19/ mo. to Verizon, this would equate to $30-32 million in incremental sequential growth, about 17% of Verizon’s total. Over the previous four quarters, however, Comcast and Charter grew 2.234 million net subscribers, which equates to around $318 million or about half of Verizon’s total annual service revenue growth (math is pretty straightforward – take 3Q 2020 net additions * 12 months * $19/ revenue/ mo., 4Q 2020 net additions * $19 * 9 months, etc.).
This is not to take away from Verizon’s largely successful efforts to retain market share through aggressive trade-in promotions (which also serve to migrate customers to higher rate plans), but that $318+ million in revenue growth is very good margin business. As we have discussed in many previous Briefs, Comcast and Charter’s traffic is deprioritized, and, as such, generates minimal incremental capital (or expense). Conservatively applying a 70% EBITDA to the $318 million figure yields $222 million in EBITDA growth. This happens to be greater than the entire EBITDA growth for the Consumer Unit from 3Q 2020 to 3Q 2021. The internal revenue and EBITDA waterfall charts must generate interesting discussions – were it not for the cable MVNOs, who are causing marginal churn pressure to Verizon’s retail operation, there would be less/ no cash flow growth to combat AT&T’s rich retention promotions and T-Mobile’s 5G network deployments.
The question this drives is “How dependent is Verizon’s EBITDA picture on cable growth?” From this analysis, it would appear that they are increasingly dependent. Something to watch as cable reports earnings next week.
Meanwhile, AT&T executes their challenger strategy, best summarized by this earnings chart:
They have managed to keep postpaid phone churn to pandemic levels while growing gross additions. They are also improving their market share where they have fiber to respectable levels (37%). But, if a 56 million homes passed footprint is a reasonable assumption, the 37% applies to less than 30% of their total base. The flip side of the subscriber gains shown above can be seen in their financial disclosure:
There’s a lot of challenging financial data on this page: a) 5.8% operating margins with flat EBITDA margins; b) Non-Fiber and DSL losses that offset 98% of the fiber net additions, and c) higher operating expenses (+3.2%) from operating both copper and fiber networks. No doubt that ARPU is higher (5.2% year-over-year and 0.73% sequentially), but for how long? Dividend uncertainties aside, the jury is still out on whether AT&T can pull out of the transition-to-fiber knothole.
Here’s the narrative we expect to hear from Comcast and Charter this week:
- Wireless growth is robust and cash flow accretive
- Nearly every broadband customer in the cable footprint is eligible for wireless
- Not every AT&T or Verizon customer can receive fiber (or even 100 Mbps) services today
- We are playing defense in a more competitive environment by bundling wireless and DOCSIS offerings, and we are winning
- We hold an even greater economic/ competitive advantage with respect to video economics for that dwindling but still meaningful subset of customers who want the double play
- Meanwhile, we will continue to deploy fiber deeper into our network (and expand fiber to MDU, greenfield deployments, etc.)
Which is a better bet: Instant national expansion driven by increased carrier wholesale dependency, or fiber deployments with “challenger” economics? This is why we had the following back and forth on the AT&T earnings call this week. After a question on the overall competitive (wireless) environment and rather lengthy responses from both AT&T Communications CEO Jeff McElfresh and AT&T CEO John Stankey, J.P. Morgan analyst Phil Cusick said what most of the investment community was thinking (emphasis added):
Philip A. Cusick – JPMorgan Chase & Co, Research Division – MD and Senior Analyst: I appreciate the depth of your answer. I would only follow up. And Jeff, I think everybody has been pretty impressed with the results of AT&T over the last year. I would only follow up that the market is telling you that investors don’t believe it, not necessarily about AT&T, but look at the stock price of AT&T, Verizon and T-Mobile together. And investors are discounting the terminal value of these companies pretty massively. And so more detail on that over time might be really helpful.
John T. Stankey – AT&T Inc. – CEO, President & Director: Well, I think our job is to do what we say we’re going to do each quarter and continue to meet our commitments and carry it through. And ultimately, over time that when the cash shows up, it tends to get reflected in the stock price.
Therein lies the question – when will the cash show up? Mobility EBITDA levels grew by $278 million from 3Q 2020 to 3Q 2021, but wireline declined by $173 million. That’s the core of the new AT&T – a company spending double-digit billions of fresh capital each year which only creates a few billion of incremental EBITDA.
Verizon’s wireline picture is only marginally better. Stronger in consumer (thanks to cable wholesale), but similar cash flow weakness in business, where every segment but small/ medium business was weaker on a year-over-year basis (admittedly, a lot of public sector growth peaked during 3Q 2021, but public sector has been on a three quarter negative trajectory).
The company finally disclosed fixed wireless figures (see nearby chart), citing 55K net additions (and a total base of 150K) on a deployed base of 11.6 million households passed. This equates to a market share of 1.3% (FiOS consumer wireline share is right at 40%). Note that the fixed wireless figure includes both LTE and mmWave. Speaking of mmWave, it’s uncertain who has or will absorb the capital for the mmWave build (business vs. consumer), but Verizon disclosed that 20% of total traffic is currently traveling over mmWave in their more established build-outs, with an expectation that 5-10% of total traffic in urban mmWave areas to be carried by year end.
Verizon’s challenge is asset utilization, specifically revenue per dollar of net invested capital (which includes the cost of spectrum). Hans Vestberg talked about their One Fiber as well as their access self-sourcing on the call, but using the newly deployed fiber to acquire new wireline customers seems to be a small part of their growth equation. From our take, it looks like One Fiber is more of a cost savings effort than an enterprise/ small business acquisition tool. Not surprising for now, but, as C-band hits full stride in 2022, we would expect to see business access revenues accelerate.
Bottom line: Both AT&T and Verizon see similar results – low stock prices fueled by concerns about long-term economics. But they got there through very different tactics – Verizon through significant incremental metro fiber and mmWave deployments (as well as tens of billions in C-Band spectrum expenditures), and AT&T through a host of capital-wasting acquisitions which constrained fiber deployment. In two years, Verizon will be in a substantially stronger position than AT&T. We’ll know by the next Brief the extent to which T-Mobile and cable will strenghten their threats. Until then, we expect the same steady slide for Verizon and AT&T.
That’s it for this week’s Brief. In two weeks, we will focus on cable and T-Mobile’s response to Verizon and AT&T. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list (or they can sign up directly through the new website). Thanks again for the referrals, Go Sporting KC and Go Chiefs!