Telecom stocks took a beating yesterday after leading wireless carriers, AT&T Inc (NYSE:T) and Verizon Communications Inc. , hinted at expectations of lower profits in the ensuing fourth quarter owing to intense competition.
Yesterday, AT&T’s chief financial officer expressed fears of facing considerably wider fourth-quarter churn rate than the year-ago quarter. However, the company expects to add customers in spite of this. AT&T also expects higher promotional expenses to hurt wireless service margins in the said quarter. Nevertheless, the company expects full-year 2014 wireless service margins to remain flat or show an uptick in comparison to 2013.
On Dec 8, 2014, Verizon Communications announced expectations of lower earnings in the final quarter of 2014 owing to higher promotional expenses and price cuts. These strategies are likely to impact the company’s wireless segment EBITDA and EBITDA service margin as well.
Following these developments, investors’ apprehensions surrounding the fourth quarter earnings of telecom companies have increased considerably. This is evident from the consequent share price slump of 2.9%, 4.1%, 3.8% and 8.3% for AT&T, Verizon Communications, Sprint Corp (NYSE:S) and T-Mobile US Inc (NYSE:TMUS), Inc, respectively.
Pricing War Intensifies
In an effort to expand customer base, telecom companies are spending heavily on promotion and are also offering lucrative discounts. For a limited period, AT&T offered its Mobile Share Value customers a 15 GB shareable data plan for $100. Before this, AT&T customers could avail only 10 GB of data for the same amount. This marks the second data plan price cut by the company in two months.
In the beginning of December this year, Sprint Corporation further intensified the wireless pricing war in the U.S. after the company claimed that it will reduce the phone bills of AT&T and Verizon Communications customers by 50% if they switch to Sprint’s network.
On Dec 9, 2014, T-Mobile unveiled a new family plan – Simple Choice. Under this new scheme, the company is offering unlimited 4G LTE data at only $100 a month on a shared basis for two people. It also includes the option of adding a maximum of 10 users for charges of $40 for each extra line.
Our Take
We believe earnings and wireless service margins of telecom companies will be affected in the coming quarter owing to increased marketing expenses and higher churn rate. Moreover, lucrative discount will intensify competition among carriers as retail customers will have more options to choose from. However, the continuous shift of customers to high-margin 4G LTE network and availability of more bandwidth after the completion of AWS-3 spectrum are some positives for big telecom operators.