Valentine’s Day greetings from Kansas City, Miami, Jefferson City (capitol pictured) and Nebraska. What a crazy start to the year! In this Brief, we will continue to analyze telecommunications carrier results with a look at Verizon and AT&T.
Several of you have asked for more details on the bi-weekly market capitalization changes. We have decided, starting next Sunday, to publish a short (300-word) market commentary weekly, along with a more detailed look at market capitalization changes since the beginning of 2019. For those of you who receive email notifications because you signed up through the website, you will now receive an weekly message. While this will not be a full Brief, it should help those of you who are more interested in market conditions to get a regular update. We will not send out through the legacy email channel, so if you want to receive it, please sign up at www.sundaybrief.com.
The Week That Was
The familiar Sesame Street song “One of These Things is Not Like the Others” is an apt description of the Fab Five activity over the past two weeks. In six weeks, the Fab Five has lost $1.054 trillion (43% of 2021’s gain, and just over 20% of 2020 + 2021’s gain), more than the entire market value of the Telco Top Five. Over the last two weeks, however, the non-Facebook Four lost a measly $20 billion, helped by Amazon (+$94 billion) and Google (+$12 billion) gains. Offsetting the Four flatness was a singular $227 billion loss by Facebook, most of which happened in the trading day after their dismal earnings outlook.
It’s a different story with the Telco Top Five (+$7 billion in the last 2 weeks), with all of that driven by T-Mobile (+$11 billion; earnings analysis below). Offsetting Magenta’s gain were $20 billion in combined market cap losses at Comcast and Charter as the market bet against profitable growth at America’s two largest broadband companies. We think that bet is unfounded and that cable will continue to show surprising gains, especially with new home builds.
For those who are interested, the spread between AT&T and T-Mobile’s market capitalization is now less than $17 billion. The gap will favor T-Mobile in a few weeks when WarnerMedia is merged with Discovery (more on the approval status here from Bloomberg).
The closest thing to Facebook’s plunge in the telecommunications industry happened on Wednesday as Lumen announced their costly earnings outlook. Here is the chart showing more than 21% of equity losses (slightly under $2.1 billion) in two trading sessions:
Without going into the details of Lumen’s earnings, the conference call boiled down to three things: 1) The sale of the properties to Apollo is on track to happen this year (as early as ~120 days); 2) Enterprise and global market share growth is going to be disproportionately skewed to Lumen after the market fully adopts the benefits of edge computing, and 3) Quantum fiber performs well today and deployment to 12 million homes is right around the corner (and there are options being considered, including government-subsidized grants, for the 9 million remaining homes in the post-Apollo Lumen footprint).
On the last point, here is the 8-quarter view of Mass Markets broadband subscribers. Note the post-pandemic peak acceleration of losses in 2021:
There was a lot of cohort discussion on the call, including 29% market penetration in fiber markets, and even the mention that they are doubling their penetration rates in traditional copper areas. At the end of the day, however, it’s difficult to find the leveling off of losses in 2021, even as more fiber is deployed (a trend we saw in AT&T’s results).
Lumen’s CEO Jeff Storey and CFO Neel Dev attempted to paint the best picture of their company’s future, but the financial markets are struggling to believe it. We thought they had some very good explanations but believe that the shareholder would be best served if they would cut the dividend entirely, have no talk of share buybacks, and devote all capital to fiber deployments (admittedly, in our new role at American Broadband, a rural fiber services provider, we may be biased on the matter). The reality is that Lumen can’t have it all, and shareholders would be better served if they addressed that issue immediately.
One final note as we transition into Verizon’s and T-Mobile’s earnings: Verizon announced via Twitter that they would be running an ad featuring The Cable Guy star Jim Carey during the Super Bowl, which is going to be broadcast over Comcast’s NBC network. Most Verizon ads have short shelf lives (exception: the “Can You Hear Me Now?” sequence from two decades ago) and are focused on promotions and bundles. But… What if this ad is a hit and spawns new ads? One can only wonder how the next conversation between Manon Brouillette (who approved the ads and is also the executive responsible for the MVNO relationships with cable) and his cable counterparts will unfold.
Verizon and T-Mobile: Whose Growth Story is More Believable?
In the last Brief, we discussed Comcast’s, Charter’s and AT&T’s earnings. Our focus was primarily on their wireline operations, particularly the increase in capital intensity as cable prepares for DOCSIS 4.0 and AT&T transitions from fiber to cable. We also talked about cable’s continued steady gains in postpaid wireless.
Because T-Mobile had not announced earnings, we decided to park Verizon’s strong earnings report and compare it with T-Mobile’s as a platform for discussing trends impacting the wireless industry. Interestingly, as we completed our analysis and prepared this Brief, we discovered that the future value creation opportunities for each of the “Big Three” wireless companies have less to do with iPhone releases, and more about their ability to – you got it – compete with other broadband providers.
Verizon’s growth story is best summarized by their CEO, Hans Vestberg, in response to a question during their earnings call (slightly edited from the published transcript here):
“I think this is sort of the full strategy of Verizon coming together. This was what we envisioned when some of us were in a conference room in New York in 2018 talking about Verizon’s Intelligent Edge network. I wanted to build that in order to serve a market where capacity and connectivity is needed all across the network for all types of customers. And clearly, the C-band is just adding enormous lot of capacity for us.
“But don’t forget millimeter wave. I mean, that strategy is really working for us as well because we take a lot of the high-volume areas with millimeter wave, which unleashed out the spectrum. And hey, we haven’t even started to do carrier aggregation and using part of our spectrum yet coming into the 5G.
“So I would say, clearly, we will be more aggressive on it, especially on fixed wireless access because we feel so good about capacity management, and we have the best engineers in the industry. They have never failed the strategies that were put up.
“So I feel really good about our capacity. We can go wherever we want. We have Tami and Manon, the two CEOs of our units, going hard on to all the products we have in all angles of the network. So yes, I think we feel really good about our capacities right now. And what the team is doing is just amazing.”
We agree with Verizon’s capacity-driven assessment of their growth potential. C-Band, Tracfone, and even FiOS all have the potential far to exceed any business case expectations. Why, then, did Verizon give a tepid “around 3%” organic service revenue and 2-3% EBITDA growth projection for 2022 (note that the EBITDA figure includes Tracfone and the 2021 slight operating loss at Verizon Media Group, while the revenue figure excludes Verizon Media Group and Tracfone)? Is it because they wanted to stay in the 3% boundaries that they projected at 2021’s Investor Day (highly unlikely)? Or is it because they anticipate increased wireless competition, or continued secular pressure in enterprise (particularly with public sector in a post-COVID world)? Or is it something entirely different?
There is no clear answer, but it’s likely driven by a) a lower pool of switchers as T-Mobile largely completes their Sprint customer transition (more on that below), b) continued FirstNet and other pressures on the public sector segment, c) increased Mobile Edge Compute operating expenses, and d) increased operating expenses related to One Fiber and C-Band deployment. Verizon shed over 11,000 employees in the third quarter of 2021, likely a result of store rationalization and increased use of authorized retailers. Even if each of these four items came to fruition, it’s still hard to see anything less than 4 or even 5% EBITDA improvement.
Bottom line: Verizon’s guidance contrasts with what was a very strong quarter. Their fiber and C-Band assets, inclusion of broadband in their Mix and Match offerings, and Tracfone potential set up for a very strong hand. Their growth forecast, however, hints that others’ hands might be stronger. Hopefully they will clarify their forecast at their March 3rd Investor Day.
T-Mobile reported very strong earnings driven by cost discipline and – yes – fixed wireless growth (full package here). Most important to the company is customer account growth, and they continued their trend with 315K net new accounts in 4Q and 1.46 million for the year (interestingly, if we interpret Dow Draper’s comments correctly, about 90-95K (40%) of these new accounts are coming from the fixed wireless product).
The big story is High Speed Internet, which added 224K net additions in the fourth quarter and 546K for the year (see nearby chart from their 4Q Investor Fact Book). This is a remarkable achievement, and we agree with Mike Sievert’s comment that, due to the newness of the lifecycle, 2022 will likely follow a linear sequence (without the seasonality we tend to see in cable). Our expectation is that customers who have used T-Mobile High Speed Internet to game the system (e.g., get off of cable long enough to trigger a promotional offer, usually between 30 and 60 days, then return to DOCSIS) are dwindling as a percentage of total new gross adds. The company’s comment that much of their growth is coming from suburban and metropolitan areas is also very interesting and bodes well for other fixed wireless launches (especially Verizon’s).
T-Mobile’s postpaid growth came with a cost, however. As we have noted in several previous Briefs (and in separate website posts on iPhone 13 availability), they were clearly executing on their iPhone 13 promotion. The impact of this is shown from this page in their Investor Fact Book:
There is no doubt that the quarter was strong because of their iPhone promotion, and that it (and other promotions) had a demonstrable effect on the converting Sprint base. As we discussed with respect to AT&T last week, the addition of trade-ins into the marketing equation changed phone promotions forever (it’s become the equivalent of T-Mobile’s post-Sprint JUMP! Plan minus the increased ARPU).
Interestingly, T-Mobile neglected to mention prepaid in the earnings call, absent a stray opening remark that Metro and Assurance Wireless were their means to address the government’s affordable connectivity program. Prepaid represented $9.7 billion in revenues in 2021 (17% of total service revenues) and grew 3.3% annually. Monthly churn crept back up above 3%, and T-Mobile did not report prepaid to postpaid conversions in their Investor Fact Book this quarter. We think that prepaid can serve as a bridge to postpaid, and detailing conversion metrics is important. Understanding the dynamics between AT&T-owned Cricket (not a focus for 2022), Verizon-owned Tracfone (a transition year but revenue growth is important), and Metro by T-Mobile will be important in 2022 and 2023.
Finally, T-Mobile provided earnings guidance (see table nearby) and also teased a share buyback (which we think is premature given the opportunities in 2023 with fixed wireless). Core adjusted EBITDA growth is projected to be as high as 11% (which is why we continue to scratch our heads on Verizon’s tepid forecast). While this excludes merger-related costs, it provides a reflection of the overall profit picture in 2023 and beyond.
Bottom line: Synergy expectations + Mid-band leadership makes T-Mobile’s growth story more believable. While T-Mobile’s value proposition to businesses is not as comprehensive as AT&T’s or Verizon’s, they also do not have the capital costs of metropolitan fiber for either legacy or new builds. Over the long run, that’s a problem that the company needs to address; more fiber in the capital mix would be better for the company. For the next few years, however, T-Mobile builds out mid-band, grows distribution in every locale, and improves their business capabilities. It should be a closer call, but company guidance suggests that it isn’t.
That’s it for this week’s Brief. In two weeks, we will round out our earnings assessment with some of the other broadband companies who are transitioning to fiber. We will also have a deep dive into Samsung’s latest mobile devices (Unpacked replay here). Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list (or they can sign up directly through the new website). Thanks again for the referrals, and go A-10-leading Davidson Wildcats!