(By Mani) The reporting season of telecom companies kicks off this Thursday with Verizon Communications, Inc.
) reporting its second quarter results, followed by AT&T, Inc.
) on July 24.
Continued robust growth is expected in high-end wireless and the cloud space, and wireless names in the sector to continue to outperform behind strong pricing power and the attractive dividend yields, especially AT&T and Verizon versus 10-year treasuries.
On the wireless front, Verizon and AT&T once again set to report higher share in the postpaid space, while the prepaid carriers are entering high churn period.
"For the quarter, we believe total industry net adds will be 1.855M, which is down 50% YoY as the industry is at 105% penetration," Oppenheimer analyst Timothy Horan wrote in a note to clients.
Both Verizon and AT&T are expected to capture more than 100 percent of incremental market share combined as both carriers continue to dominate. The dominant theme for them this quarter and most likely next will be lower handset upgrades which will drive margins.
"We believe the industry will add just under 500K postpaid net adds, which is a step-up from the 115K added in 1Q12," Horan added.
AT&T and Verizon's outsized market share should continue to come from its weakened, smaller competitors. Still, given market saturation, net additions for the quarter will be less than half the adds in the year-ago quarter.
On the downside, Leap Wireless International Inc
) and MetroPCS Communications, Inc.
) should go negative in terms of net additions for the quarter due to higher churn and competition.
"Positively for MetroPCS, the company's margins should slightly recover; however, we believe LEAP's margins will continue to bear the brunt of its out-of-region strategy," said Horan adding that he expects wireless industry revenues to grow 6 percent on increasing pricing power and the lack of an iPhone launch.
Meanwhile, wireline results will see some seasonal weakness in volumes, but this is expected and margins should offset this somewhat. However, the biggest weakness will be evident at prepaid wireless and regional carriers.
Though, the lower net additions due to higher seasonal churn should result in decent wireline margins, the multiple system operators (MSO's) are expected to capture outsized broadband market share. In the wireline sector, cable providers continue to look the strongest.
Horan expects 370,000 broadband net adds in the quarter, which remains flat with last year, with the number of computer households now expanding, and cable should continue to be dominant.
"We expect low-end wireless and regional wireline carriers to continue to underperform, with low-end wireless carriers (mainly LEAP and PCS) facing scale and now LTE service disadvantages," the analyst noted.
Meanwhile, rural telcos are seeing uncertain subsidy reforms and secular technology pressures. This said, CenturyLink, Inc.
) should continue to be the best dividend play in that market segment, and Windstream Corp.
) may rebound after recent pressures.
In addition, international exposure may hurt certain telecom stocks, given stocks with higher exposure to the Eurozone have been recently punished by the market.
"We believe carriers in our group with international exposure have underperformed recently; therefore, the two stocks most at risk this quarter would be LVLT and EQIX," Horan added.
Following are the key companies to watch:
Verizon, the nation's largest wireless carrier, is expected to earn 64 cents a share on revenue of $28.56 billion, compared with earnings of 57 cents a share on revenue of $27.54 billion in the same quarter last year.
AT&T's earnings are expected to increase 3 cents from last year to 63 cents with a marginal increase in revenue at $31.75 billion, according to analysts polled by Thomson Reuters. The company is the second largest wireless operator in the U.S.
Sprint Nextel Corp
) is expected to lose 40 cents a share for the second quarter despite 5.1 percent rise in revenue to $8.73 billion. In the second quarter of last year, Sprint lost 28 cents a share on revenue of $8.31 billion.
Leap Wireless is also estimated to report a loss of 51 cents a share, narrower than a loss of 85 cents a share a year-earlier. However, revenue is projected to grow 10.1 percent to $837.56 million.
MetroPCS earnings are expected to fell 2 cents from last year to 21 cents a share, while revenue is estimated to increase 4 percent to $1.26 billion.
CenturyLink, the third-largest landline provider in the U.S., is expected to earn 62 cents a share on revenue of $4.57 billion. In the year-ago quarter, it earned 68 cents a share on revenue of $4.41 billion.