) is set to announce its 4Q12 earnings on January 24, after
the market close. During the earnings call, we will take a close
look at subscriber additions to see how the carrier is performing
amid an industry-wide saturation in wireless growth. Increasing
smartphone penetration should however enable the company to
post a sequential increase in postpaid ARPU levels, bolstered by
data average revenue per user (ARPU). The company's wireless
margins will be of special interest given its record smartphone
sales during the recent holiday season.
In addition to the company's financials, we will also take note
of the uptake in LTE subscriber numbers as AT&T will
look to promote LTE widely this year, challenging Verizon (
) and Sprint (
), in the wireless market. We feel much of the earnings call will
focus on AT&T's acquisition plans for 2013 and its strategy for
financing these deals.
See our complete analysis for AT&T here
In an interesting development, AT&T announced a $780 million
all-cash acquisition of Atlantic Tele-Network's rural retail
business that operates under the brand name Alltel, just two days
prior to the earnings announcement. Alltel has a rural presence
spanning six states: Georgia, Idaho, Illinois, North Carolina, Ohio
and South Carolina. As part of the deal, AT&T will acquire the
585,000 existing subscribers along with wireless, network access
and retail stores.
Profit Margin Pressure
In a prelude to the upcoming fourth quarter earnings
release, AT&T (
) announced it sold a record 10 million smartphones in 4Q12, and we
estimated around 8 million of these to be Apple's (
) iPhone (see
AT&T's Smartphone Sales Point To A Strong
Holiday Quarter For Apple
). While this indicates a growing smartphone penetration, the
impact on margins is considerable. An entry level iPhone
without subsidy costs around $650, while AT&T sells the same
for $200 under a two-year contract. This translates to a $450
subsidy on an iPhone or nearly $3.6 billion for 4Q just on iPhones.
Carriers expect to recover this investment over the two-year
contract period through higher internet revenue per subscriber.
However, the resulting pressure on margins will likely continue as
manufacturers continue to launch high-end smartphone models, and
AT&T will be forced to subsidize them to hold its ground in a
fiercely competitive market place.
Expensive Acquisition Is A Distraction
According to the
Wall Street Journal
, AT&T (
) is scouting for an acquisition or merger in Europe. The company
is looking at international markets as the U.S. wireless market is
saturated, and with Verizon gaining market share in the wireless
segment, the company is forced to look across the Atlantic for
growth. The names of two potential acquisition targets have been
floating around since the news broke. One is U.K.-based Everything
Everywhere (EE) and the other is Netherlands-based Koninklijke
KPN NV (KPN). EE is a 50:50 joint venture between France Telecom
and Deutsche Telekom, it is rumored to be valued at nearly $13
billion. KPN has current market value of $8.5 billion. Either
acquisition would be expensive for AT&T, which already has $60
billion of long term debt on its books. With competition in the
U.S. heating up between AT&T and Verizon, coupled with a newly
invigorated Sprint (
), and a potential DISH Network (
) entry into the wireless game, we believe that AT&T would
be better served investing further in the United States to defend
market share, or return capital to its shareholders.
With increasing penetration and usage of cell phones, landlines
are experiencing a painful decline. We expect this trend to
continue, adding pressure to the wireless business to outperform.
Margins have been deteriorating as the American consumer shifts
from a traditional family landline to individual cellphones.
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