July greetings from the Midwest and Davidson/ Charlotte/ Lake Norman, NC.
Pictured to the right is the World’s Largest Truckstop on I-80 between the Quad Cities and Des Moines (highly recommend the coffee). We’ve been traveling a lot by car over the last three weeks, and predict a bumper corn crop (latest price here). Can’t wait for the state fairs to start!
This week, after our brief market commentary, we will explore similarities and differences between AT&T and Verizon’s 2Q earnings. Here’s the full earnings announcement schedule for the Fab Five and the Telco Top Five.
The Week That Was
The Fab Five added to their July 4th Holiday gains, growing $280 billion in market capitalization over the last two weeks (and almost $800 billion over the last four weeks). Google led the way with a $110 billion increase, although Microsoft, Facebook, and Apple each grew more than $50 billion. The only loser was Amazon, down $32 billion. If the trend holds (we don’t think it will), the Fab Five will add more than three trillion in market capitalization in 2021. That’s a lot of space flights.
Even with solid earnings beats and increased guidance from AT&T and Verizon, the Telco Top Five barely budged, down $6 billion in market capitalization. Verizon contines to duke it out with pharmeceutical giant Merck for 2021’s “worst performing Dow Industrials company” designation at the same time that Comcast continues to set 52-week highs. And a mere $22 billion in equity market capitalization stands between AT&T and T-Mobile as of Friday. How much of this gap is erased following T-Mobile’s report Thursday afternoon is anyone’s guess.
We also thought this Fab Five cash scorecard for the last two quarterly reporting periods would be useful as earnings week approaches (all figures in $ millions):
While there are slight (and, in many cases, seasonally-driven) changes in cash balances, the Fab Five have managed to keep a lid on debt in 2021. We expect the cash balances to be relatively unchanged in total, with excess cash being used for share buybacks and dividend increases.
On the Apple front, Bloomberg reported after the last Brief was published that Apple is asking suppliers to produce up to 90 million iPhones for this cycle. This is 20% more than the 75 million historically produced, inicating that post-pandemic demand will be robust across the globe.
Separately, Bloomberg and other media sites reported that Apple and Goldman Sachs are reportedly working on a “buy now/ pay later” program to rival Affirm and Klarna. These payments would not be tied to the Apple Card according to the Bloomberg article. The programs would be structured as follows:
When a user makes a purchase via Apple Pay on their Apple device, they will have the option to pay for it either across four interest-free payments made every two weeks, or across several months with interest, one of the people said. The plan with four payments is called “Apple Pay in 4” internally, while the longer-term payment plans are dubbed “Apple Pay Monthly Installments.”
We don’t think this will have a significant impact on wireless provider Equipment Installment Purchases (EIP) for iPhone devices, a pillar of their overall retention strategies, but we do think that it will drive a lot of installment purchases of other items (furniture, electronics, appliances, Peletons, etc.). An interesting move by Apple and Goldman that is certainly worth monitoring.
Speaking of devices, Samsung smartphones continue to be in short supply online and in wireless carrier and third party electonics stores. T-Mobile is reporting that the S21 5G is “out of stock” for all colors but black (on backorder with estimated delivery between August 10 and August 24), while Verizon is reporting various backlog timelines on all models and colors (in nearly all cases better than T-Mobile with delivery dates of early to mid-August). The S21 5G Ultra is in stock at Verizon, but only in black. AT&T has more color limitations (only black), but both the S21 5G and the S21 5G Ultra are in stock.
Mobility bandwidth and customer experience measurement company Opensignal also spoke out since the last Brief with an assessment of overall as well as 5G mobile experience (their information is crowdsourced which can lead to different results from RootMetrics – we like both sources). The bottom line is that AT&T has the fastest download speeds where it’s available, while Verizon had the greatest coverage (more places). T-Mobile won fastest upload speed availability as well as LTE availability (see definitions and results in link here). These results look dramatically different when 5G network performance is the sole measurement (results here). Not surprisingly, T-Mobile takes the (multi-layer) cake.
Then there’s the latest RootMetrics 1H 2021 wireless report. A brief summary is as follows (this covers all measurements statewide, not just metropolitan areas):
Verizon was the outright winner for four of the seven awards, and shared the text performance award with AT&T. But, as we have been indicating, AT&T moved ahead in overall data experience and data speeds.
At the metro level, AT&T enjoyed a resurgence, taking 568 RootScore metro awards, compared with Verizon’s 738 and T-Mobile’s 235. Verizon still gets the top spot as measured by total awards, but, as we have noted in previous briefs, the number of overall ties with AT&T (or outright AT&T wins) represented more than half of the 125 metropolitan areas measured. Verizon claims another victory, but it was not the slam dunk we saw throughout 2020, and it’s definitely in jeopardy until C-Band spectrum is deployed.
AT&T and Verizon Q2 Results – Different, Yet Similar
The AT&T and Verizon earnings releases and corresponding conference calls were full of information and strategic insights (AT&T full Q2 earnings package here and Verizon here). Both companies are highly dependent on deploying C-Band spectrum to provide capacity for increasing mobility demands, yet AT&T and Verizon are at fundamentally different places when it comes to residential broadband infrastructure ambitions. Simply put, AT&T’s wireline ambitions are (and will be) focused on upgrading in-territory copper to fiber (“upgrade and defend”), while Verizon’s wireline ambitions are nationally focused largely because they have a more concentrated in-territory fiber footprint that has been substantially upgraded (“expand and extend”).
This difference creates a similarity: Both must prove their ability to be a successful challenger. Verizon as a new entrant in both millimeter wave and LTE rural markets (the latter was largely driven by capacity considerations in the past), and AT&T as a challenger in their existing but fast-growing “incumbent” markets that have seen cable broadband gains of 40-50% over the last 10-15 years (we are still intrigued by AT&T’s statement that 80% of new net fiber additions have no other current relationship with the company – that’s how much these markets have atrophied) . Different geographies, but similar credibility challenges.
Then there is the recent similarity that AT&T and Verizon each have large wholesale customers (Dish/AT&T announcement from last Monday here). Despite claims of “knowing wholesale” and “being in wholesale” for decades by AT&T CEO John Stankey on the earnings conference call, Dish is not H2O or even Straight Talk. There is no rational reason why Cricket (AT&T’s prepaid offering that competes directly with Boost Mobile) should be jilted because the Dish/ T-Mobile relationship is on the ropes (we cannot imagine how their dealers reacted to the news). We are sure that Stankey’s off-script comment during the call (“I don’t think anybody around here is upset about taking $500 million a year out of a competitor’s pocket either”) did not go over well in Littleton. That comment is evidence of how little AT&T understands their partner and why we think the best outcome looks like a roaming + infrastructure relationship vs a true network partnership (although we hope we are wrong). “Revenge relationships” rarely mature into golden anniversaries.
Verizon, on the other hand, has repeatedly defended their cable “growth vector” (we estimate that 25-30% of Verizon’s 2Q 2021 sequential consumer wireless service revenue growth came from their wholesale relationships). They even went the extra step of listing Comcast and Spectrum in as partners in their latest earnings presentation (picture nearby). As many analysts have pointed out (including previous Briefs), when cable uses Verizon, their data is at the same level as their “Start Unlimited” plans (see Xfinity Mobile’s broadband disclosure here). And, most importantly, Verizon and cable structured an “irrevocable and perpetual” deal (Craig Moffett’s term) in exchange for a broad swath of 700 MHz spectrum. Verizon and cable formed a relationship based on a mutual exchange of value – from all indications, the AT&T and Dish relationship was formed because of a rocky relationship with T-Mobile. Similar on the surface, yet very different.
Both Verizon and AT&T also have struggling enterprise units. Here’s the current quarterly trend from Verizon (note – revenue and profitability includes wireless):
Of the four segments, only small and medium business is showing sustainable growth (both Verizon and AT&T have indicated that public sector revenue volatility has been driven by pandemic-related school district mobile data needs). Wireless service growth for business customers was $229 million vs 2Q 2020, and only $30 million vs Q1 2021. Equipment sales growth (2Q 2021 vs 2Q 2020) was only $258 million, indicating that “switching” competitiveness versus AT&T and T-Mobile is picking up. Monthly churn for wireless business phone customers was the highest in ten quarters at 1.07% and overall retail monthly postpaid churn matched the Q1 2020 pandemic-driven level (1.3%). Verizon’s overall segment EBITDA margins are shrinking (down 210 basis points vs 2Q 2021 and 50 basis points vs. 1Q 2021).
AT&T’s business segment is slightly healthier than Verizon’s thanks to FirstNet (now slightly over 2.5 million subscribers across 17,000 agencies). Wireless revenues (which include equipment sales) grew 13.6% vs 2Q 2020 and slightly less than 2% sequentially. Wireline revenues, which had their pandemic peak in 2Q 2020, were down 4%. Business segment margins are also dropping at AT&T, down to 36% overall (wireline margins continue to be higher at 39%, while wireless margins are down 300 basis points versus 2Q 2020 to 30.4%). T-Mobile will definitely be talking about their business operations next Thursday, and our expectation is that their Work From Anywhere (WFX) product and overall handset sales are gaining momentum.
The lack of wireline growth in AT&T’s business wireline unit is concerning to say the least, as the economies of Texas, Florida, and North Carolina are booming (especially compared to Verizon territories of New York City, New Jersey, Baltimore and Philadelphia). It’s much more likely that business parks and office buildings are equipped with fiber to compete with cable than nearby apartment buildings and housing developments, making AT&T’s results even more difficult to explain. As we predicted (see here), cable is using the pandemic as an opportunity to quickly shift business market share, and both Verizon and AT&T appear to have been caught flat footed (more on this when we see cable’s business segment results – likely high single digit growth – next week).
The biggest difference, however, between AT&T and Verizon is focus. While AT&T appears to be doing a decent job of growing consumer fiber market share and continuing to trade off short-term wireless profitability to retain their base, they are shedding DIRECTV, WarnerMedia (WM), ad unit Xandr and LatAm unit Vrio. This impacts what is sold in stores (layout, compensation, etc.), handled through customer service, as well as IT resources. It creates new operating agreements for WM-AT&T bundles (re: HBO Max is AT&T’s sole bundling strategy), which could impact consumer mobility and broadband profitability. None of these are show stoppers, but, as many of us know from being through acquisitions and divestitures, they are show slowers.
Verizon has a clear path and direction: C-Band. No one doubts that they will execute that rollout with expediency and quality. Verizon’s primary concern is “What will T-Mobile’s 5G network look like at the end of 2021?” We think they will provide some answers to that question next Thursday afternoon.
Bottom line: On the surface, the post-DIRECTV, post-WarnerMedia, post-Xander, post-Vrio AT&T looks a lot like Verizon. Nothing could be further from the truth. The challenges facing AT&T through 2022 are different: residential fiber deployments (and in-territory share recapture), establishing a relationship with Dish, and absorbing debt from M&A mistakes places Ma Bell with a much higher degree of execution risk against emboldened cable and T-Mobile.
Because of space constraints, we missed several topics (Tracfone’s dismal quarter, for one – see here) and hope to address these in our late August “earnings cleanup” issue. In two weeks, we will address cable, T-Mobile and the Fab Five earnings – no small feat. We might even post some intermediate observations on the website, so sign up for email notifications at www.sundaybrief.com if you have not done so already. 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 Royals and Go Sporting KC!