This earnings season will be marked by three areas of focus: 1) the impact of tax reform and ASC 606; 2) a changing competitive landscape reignited by cable’s entry and 5G; and 3) video as a source of differentiation. T-Mobile is the clear winner as it captures upside from all three, Verizon/AT&T benefit from at least two, while Sprint falls behind due to its financial picture.
T-Mobile and Verizon gave us a sneak peek into earnings: 1) T-Mobile was likely the share gainer once again this quarter with 891k postpaid phone net adds; on the back of this, we lower our Sprint total postpaid net adds to 306k; and 2) per Verizon’s recent 8K, we tweak our Q4 numbers to reflect the US$4.10 tax impact. Our AT&T/Verizon/T-Mobile/Sprint TPs are US$41/US$52/US$77/US$5.
#1 The gift of tax reform finally comes while ASC adds to the confusion
AT&T/Verizon will likely be the biggest beneficiaries as both are cash tax payers and take advantage of bonus depreciation. We see a 16%/24% potential bump to ’19E EPS for the pair while the value of Sprint’s ~US$20bn in NOLs could be revised.
The transition to ASC 606 starts in Q1: 1) more revenue will be allocated to equipment vs service, with earlier recognition of some equipment revenue; and 2) sales commissions timing will be impacted as a portion will be capitalized/amortized over a longer period of time vs expensed immediately. Our Q1/’18 ARPU estimates should go lower post the adoption of ASC 606 with more clarity coming soon.
#2 A quiet Q4 but not for long with T-Mobile/cable as the biggest X-factors
T-Mobile should emerge as the share winner in Q4, likely sustaining the momentum through ’18. This month, T-Mobile launched a BOGO including the new iPhones while Sprint unearthed its 1 year of free unlimited promo, both aimed at Verizon. The targeting of Verizon subs comes as we near the anniversary of its leap to unlimited (February 13). Though we haven’t seen retaliation, Verizon is offering US$450 off for new unlimited subs. Finally, AT&T has been quiet with an iPhone 8 BOGO for new Next subs and discounts for DirecTV/DirecTV Now and wireless bundles.
We expect a step up in promos in ’18, as Comcast gains wireless steam and Charter enters in 2H. Combined, we expect they will gain 1.5-2.0m wireless net adds in ’18. Verizon is hedged given its MVNO agreement and an emerging 5G offering (fixed wireless service coming to 3-5 cities in ’18). Meanwhile, Sprint is likely in the worst position to fight back (unless its Cox/Altice agreements bear fruit); its strategy seems unclear to us and is likely in flux with new execs and tight financial capacity.
#3 The ability to increase subs’ lifetime value and disrupt cable is unclear
1) AT&T’s DirecTV Now is in focus likely ending ’17 with ~1.1m subs; OTT was likely the biggest beneficiary of Q4 linear Pay TV losses, which we model at 351k; 2) as it races to integrate Oath, Verizon recently invested US$4-5bn on content deals including the NBA (~US$400m), NFL (~US$1.5bn) and A&E Networks; 3) T-Mobile recently acquired Layer3 TV to launch its own service, in addition to its free Netflix offering; and 4) Sprint has a comparable offering with Hulu.
By Amy Yong, Associate Director Equity Research Analyst at Macquarie Bank
January 24, 2018