Wireless carriers aren’t due to report their second quarter results for another couple weeks, but financial analysts already are preparing their watch lists, which increasingly include the words “inflation” and “recession.”
In fact, analysts at LightShed are keeping a count of how many times these words pop up during earnings calls. The firm now tracks the earnings calls of 67 companies ranging from AMC Entertainment to UScellular/TDS.
In the first quarter of 2022, they counted 158 mentions of the word “inflation” during the calls, up from 68 during the third quarter of 2021 and 85 in the fourth quarter, according to a blog post. The term “recession” was mentioned 29 times on 12 calls in the first quarter of 2022, up from two times on two calls in the fourth quarter.
1. Inflation & price hikes
Of course, carriers’ reaction to inflation is one of the things analysts are tracking. In wireless, that’s first and foremost – mostly – seen in price increases by the carriers.
“Focus at the industry level continues to be centered upon the inflationary environment and the subsequent impacts to consumers,” wrote Cowen analysts in a recent report. “That said, we have already seen each of the Big 3 pass on inflation to customers (to a degree): AT&T increased prices on legacy plans in order to incentivize customers to move up to higher tier plans (and on the recent conference circuit suggested potential further price hikes to come.)”
T-Mobile recently increased “non-digital activation/upgrade fees by $5 for new/upgrading customers (a strategy to move customers to digital), and Verizon increased administrative fees for Consumer/Biz customers to the tune of ~$100MM/month tailwind starting in 3Q22,” said the Cowen team led by Greg Williams.
AT&T has been consistently aggressive on the promotional front in the last 18+ months, they said, while Verizon has been more tactical with promotions, coming in and out of market with offers – or as UScellular President and CEO Laurent “LT” Therivel put it, “pulsing” in and out with promotions.
T-Mobile continues to be the maverick in the space, generally priced lower than AT&T and Verizon and continuing to take share, Cowen noted.
Morgan Stanley analyst Simon Flannery expects the Big 3 wireless carriers – plus cable – to add about 1.8 million postpaid phone subscribers this quarter versus 2.2 million a year ago.
“We expect T-Mobile and AT&T to compete for top spot, while we are lowering our Verizon net add forecast from +201k to +65k as soft gross adds continue and churn normalizes post Covid,” he wrote.
2. Cable gets more competitive
Like others, the analysts at Cowen noted an increasingly competitive postpaid phone environment fueled by cable companies.
In a report published in May, analyst Craig Moffett of MoffettNathanson wrote that the competitive pressure from cable – and the share loss to cable – is unlikely to abate. Until the first quarter of 2022, cable’s gains were almost exclusively from Comcast and Charter Communications. But Altice, after having renegotiated a contract with T-Mobile, has moved to pricing that’s even more aggressive than the other two.
Interestingly, Moffett noted, Altice’s contract with T-Mobile actually allows Altice to identify T-Mobile as the underlying network provider in its advertising, something that had not been seen before in these kinds of MVNO contracts.
Cox Communications also is expected to join cable’s ranks in offering wireless; it won an important Delaware Supreme Court decision. No launch date has yet been announced, but it’s only going to compound the pressure from cable.
3. ‘Unsustainable’ growth rate
Another thing Moffett noted – and this also was raised during the recent round of investor conferences – is the industry’s unsustainably high subscriber growth rate. After all, who doesn’t already have a phone?
“We’ve puzzled for years in these pages over the durability of the industry’s unsustainably high subscriber growth rate, warning that, in a saturated industry, growth eventually has to revert to population growth rate, plus or minus the changes in the age of first-time phone ownership (small in any one year) and the change in the number of subscribers with more than one phone,” Moffett wrote.
“The explanation for why growth has been so high almost certainly lies in promotional activity that incentivizes customers to take additional lines they don’t need in order to receive free handsets they desperately want,” he added.
4. Wireless answers back with FWA
While no more easy answers seem to be forthcoming on that score, wireless carriers are treading on traditional cable territory in the form of fixed wireless access (FWA), which is mostly a T-Mobile and Verizon development as AT&T reiterated last month how it’s “a physics” thing and it’s putting its money into fiber.
For the second quarter, Cowen expects fixed wireless adds of 345,000 from T-Mobile and 225,000 from Verizon. In FWA, T-Mobile has led the way in the consumer space, while Verizon has a more split base between consumer and business customers. In the first quarter of 2022, for example, Verizon reported 112,000 consumer and 82,000 business FWA net adds.
“FWA providers generally continue to see good demand across many customer segments, including cable subs, rural subs (largely DSL areas),” the Cowen analysts wrote. “Both T-Mobile and Verizon have set ambitious targets for their FWA offerings, seeking to reach 7-8MM and 4-5MM subs by 2025, respectively.”
All said, while the long-term viability of the FWA product remains to be seen, it is still a viable threat to the broadband industry, namely cable, they said.
Morgan Stanley’s Flannery said wireless pricing moves and churn/switching behavior will be important as the second quarter earnings approach, although the bulk of the price impacts will be felt in the third quarter of 2022 and beyond.
5. Dish as No. 4 carrier
A wild card in all of this is Dish. Its initial launch got off to a rocky start and it’s not clear how fast it will get up to speed – or coverage, for that matter.
Flannery said Dish’s analyst day in May left a number of questions around the network rollout and go-to-market strategy as well as funding needs.
“The company has launched service in the required 20% of the country but remains on track to have a broader based commercial launch later this year. We will be interested to learn more about their new $3.3B minimum wholesale contract with T-Mobile as well as the impact of the 3G shutdown on Boost subscribers,” Flannery wrote.