(By Mani) Telecom giants Verizon Communications, Inc. (NYSE: VZ) and AT&T, Inc. (NYSE: T) are expected to report earnings on Jan.22 and Jan.24 respectively.
Both firms would feel margin pressure in wireless as well as wireline business. Since iPhone and other smartphones form the majority of the sales mix, both firms would experience margin pressures due to increases in subsidies. In Wireline unit, the companies are struggling to cut costs that in turn could result in margin compression.
[Related -AT&T Inc. (NYSE:T): T-Mobile-Style Plans Should Drive Margins]
Investors should watch the companies' subscriber trends, including gross and net additions, churn rate, upgrade rates. They should also watch how the shared data plans are performing and their impact on the quarterly results. Service revenue is another key area to watch due to increase in number of smartphone activations and penetration of Mi-Fi hotspots and tablets.
For the wireless carriers, shared data plans are expected to sustain data revenue growth over the long term. Shared data plans are intended to generate greater adoption of data-only devices and, in turn, data usage on carriers' wireless networks.
The wireline EBITDA margins are a key measure in light of expected savings from the new labor contract and potential offsets from pension expense.
In addition, investors should also be looking to the companies near and long-term targets for growth in connections, average revenue per unit and number of accounts given pricing based on shared data plans. Meanwhile, capex guidance would give an idea about company's allocation of cash in the future.
[Related -Sprint Corporation (S): Sprinting To $10?]
Wall Street expects Verizon to earn 52 cents a share on revenue of $29.75 billion, according to analysts polled by Thomson Reuters. The consensus estimate implies flat earnings, with 4.6 percent growth in revenues from $28.44 billion sales generated last year.
Verizon earnings have managed to top Street view only once in the past four quarters, and the consensus estimate declined from 60 cents three-months ago. In the past one month, 12 analysts have cut their earnings view on Verizon.
In the third quarter, Verizon reported net income attributable to the company of $1.59 billion, up from $1.38 billion in the previous year. On a per share basis, earnings were 56 cents, higher than 49 cents a year-ago. Excluding items, it earned 64 cents a share. Operating revenues grew 3.9 percent to $29.01 billion.
New York-based Verizon expects to incur up to $10 billion of one-time charges in the fourth quarter, due to pension obligations, debt-restructuring costs and Superstorm Sandy-relayed costs, which is expected to total about $1 billion.
The company expects to add 2.1 million retail postpaid wireless subscribers, with 87 percent of postpaid phone sales being smartphones. The company also projects customer net additions to its FiOS service to be more than 130,000 for the fourth quarter of 2012, despite dedication of its resources to Superstorm Sandy restoration efforts. For the full year 2012, Verizon said smartphone activations increased more than 15 percent from last year.
AT&T is expected to earn 47 cents a share on revenue of $32.15 billion, implying a 12 percent increase in earnings despite a 1.1 percent drop in sales from last year when it earned 42 cents a share on revenue of $32.5 billion.
The earnings of AT&T, the second-largest wireless carrier, have beat estimates thrice in the past four quarters, while, during the past 90 days, consensus estimate has dropped from 51 cents. In the past 30 days, 11 analysts have revised down their earnings estimate for AT&T.
AT&T's third-quarter net income was $3.64 billion or 63 cents per share, up from $3.62 billion or 61 cents per share in the year-ago period. Adjusted for the divested advertising solutions unit, earnings per share were 62 cents for the quarter. Revenues for the third quarter declined slightly to $31.46 billion from $31.48 billion in the previous-year quarter.
Dallas, Texas-based AT&T recently said it anticipates taking a hefty charge of about $10 billion in the fourth quarter related to its pension and post-employment benefit plans, besides seeing near-term earnings and margin pressure due to high subsidies on smartphones. It sold 10.2 million smartphones during the fourth-quarter. In addition, Superstorm Sandy is estimated to cut AT&T's operating income by about $175 million, primarily impacting its Wireless segment.