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Smartphones Increasingly Critical For Carriers

Posted on Monday, Dec 19th 2011

AT&T (NYSE:T), the second-largest carrier in the U.S., is facing problems with its plans to acquire T-Mobile, the fourth-largest carrier. Meanwhile, Verizon (NYSE:VZ), the largest carrier in the country announced its plans to buy spectrum from Cox Communications for $315 million.

AT&T announced in March plans to acquire T-Mobile for $39 billion. However, that deal looks more than likely to fail after the Federal Communications Commission’s (FCC) decision to oppose the acquisition. The FCC allowed AT&T to withdraw its merger application. Last week, AT&T and Deutsche Telekom were granted their request to stay any further court proceedings until January 18, 2012, to allow the two companies time to evaluate all options.

If the deal fails, AT&T will have to pay T-Mobile a $3 billion break-up fee as well as another $3 billion worth of wireless spectrum. Analysts note that the outlook for T-Mobile’s going alone is not very bright.

“If T-Mobile goes with a standalone strategy in the U.S., it will have AT&T’s cash and spectrum but still face operating and competitive issues that could put pressure on Deutsche Telekom’s credit strength.”

Another option for it is to consider partnership or a network sharing deal with another operator. Yinka Adegoke and Liana B. Baker on Reuters report that Dish Network is considering a partnership with T-Mobile if the AT&T deal fails. Dish chief executive Joe Clayton told Reuters that Dish is serious about its ambitions to get into the wireless space, but said the company first needs to be awarded a wireless license by the FCC.

Last week, Verizon announced plans to buy spectrum from Cox Communications for $315 million. Earlier in the year, cable television provider Cox Communications had started building its wireless network. However, it decided to discontinue its efforts to provide wireless service owing to its inability to compete with the larger wireless carriers that roll out faster networks and slicker phones. The deal with Verizon allows Cox and Verizon to use their stores and other sales channels to sell each others’ services.

AT&T
AT&T reported third-quarter revenue of$31.5 billion, down 0.3% y-o-y. Net income was $3.6 billion or $0.61 per share compared with $12.3 billion or $2.07 per share last year. Wireless revenue was up 2.8% to $15.6 billion. During the quarter, AT&T added 2.1 million subscribers, and its total wireless subscriber base reached 100.7 million. Postpaid churn was 1.15, unchanged from last year.

At the end of the quarter, 52.6% of AT&T’s 68.6 million postpaid subscribers had smartphones, up from 39.1% last year. AT&T sold 4.8 million smartphones, accounting for nearly two-thirds of its postpaid sales. Sales of Android devices more than doubled year over year, and almost half of all smartphone sales were non-iPhone devices. During the quarter, 2.7 million iPhones were activated. AT&T is trading around $29 with market cap of about $171 billion. It hit a 52-week high of $31.94 on May 3.

Chart forAT&T, Inc. (T)

In the third quarter, T-Mobile reported revenue of $5.2 billion and net income of $332 million, up 57% q-o-q and 4% y-o-y. Net customer additions were 126,000 compared to 137,000 net additions last year and 50,000 losses last quarter driven by the introduction of unlimited Value plans and growth of prepaid unlimited Monthly 4G plans. The company added that this growth may be impacted in the fourth quarter of 2011 due to competitor launches of the iPhone 4S. T-Mobile now has a subscriber base of 33.7 million, compared to 33.8 million last year and 33.6 million last year.

Verizon
Verizon reported third quarter revenue of $27.9 billion, up 5.4%. Wireless revenue increased 9.1% y-o-y to $17.7 billion. EPS was $0.49 compared with $0.52 per share last quarter. During the quarter, Verizon added 1.3 million net subscribers, including 882,000 retail postpaid customers, and its total wireless subscriber base reached 107.6 million. Verizon continues to have the lowest churn in the industry at 0.94%.

Verizon reported that smartphone penetration in its retail postpaid customer phone base was 39%, up from 36% at the end of the second quarter. It sold 5.6 million smartphones in the quarter accounting for 60% of its post paid phone sales. More than half of the total smartphones sold this quarter were Android phones, either 3G or 4G. Another 35% or 2 million were iPhones, bringing the year-to-date total to 6.5 million. Verizon sold a total of 1.4 million 4G LTE devices in the quarter with over 50% of smartphones. Verizon is trading around $39 with market cap of about $110 billion. It hit a 52-week high of $38.95 on March 30.

Chart forVerizon Communications Inc. (VZ)

Sprint
Sprint (NYSE:S), the third largest carrier, reported third quarter revenue of $8.3 billion, up 2%. Wireless revenue was up 5% to $7.5 billion. Net loss was $301 million or $0.10 per share, compared to a loss of 911 million or $0.30 per share last year. Postpaid churn was 1.91% compared with 1.75% last quarter and 1.93% last year. During the quarter, Sprint gained nearly 1.1 million net subscribers to reach a total base of over 53 million subscribers. The company said the growth in net additions was achieved without the benefit of Apple’s iPhone 4S and iPhone 4, which launched on October 14. The iPhone launch resulted in Sprint’s best-ever day of sales and has surpassed initial expectations. The iPhone is expected to be accretive for Sprint, and iPhone users are expected to be among Sprint’s most profitable customers. The stock is trading around $2 with market cap of about $7 billion. It hit a 52-week high of $5.37 on May 10.

Chart forSprint Nextel Corp. (S)

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