Resetting Wireless Expectations

Another Telecom analyst has sobered up and come to the realization that the economy will have a significant negative impact on the wireless industry. JPMorgan analyst Mike McCormack reduced his net add estimates for AT&T, Sprint, and Verizon, in his latest note. But his statement that wireless is “less economically sensitive” indicates that his head is not entirely out of the sand yet. His view is shared by many but I believe that they will be proven wrong as customers curtail spending on wireless products rather significantly. Wireless handsets are extensively penetrated in the U.S. and other developed countries and I do not believe that customers are in a hurry for upgrades given the economic situation. A trip to the local Sprint and Verizon store will likely reveal just that from a sales associate – can someone say “channel checks”. Back in the day, that’s how we did our research on the Sell Side. There is growth in emerging markets but consumers there are starting to feel the pinch from this economic downdraft and will likely do without that wireless handset, much less an upgrade. So I will continue to look for more downward net add estimate revisions from these analysts for these three companies.

From JPMorgan Analyst Mike McCormack:
We are resetting our wireless expectations ahead of fourth-quarter results, lowering our net add estimate for the top three carriers while slightly improving the margin outlook. While wireless may be less economically sensitive, it is by no means immune. We believe consumer sentiment toward spending for new handsets as well as discretionary wireless data spending in addition to overall wireless penetration provide potential for downside and, accordingly, we are reducing our expectations.

• Cutting 4Q net add estimate at AT&T by 700K. We are lowering our 4Q08 net add estimate from 2.9M to 2.2M, lowering all add segments – reseller, prepaid, and postpaid. While we expect iPhone sales to remain strong, we expect a sequential decline. Further, we believe consumer appetite for higher-priced integrated “smart” devices has been meaningfully impacted by economic weakness. In conjunction with our lower add expectation, we are raising our EBITDA service margin forecast from 33.0% to 34.0%.

• Anticipated pension expense reduces our 2009 EPS estimates. Although management intends to issue guidance in January, we believe the company could see $0.15 of incremental EPS pressure versus our prior estimate, or roughly $1.4B of expense. We expect AT&T’s recent workforce reductions to modestly offset the higher pension expense; however, due to the timing of the reductions, the total benefit is unlikely to be realized until 2010. We are lowering our 2009 EPS from $2.82 to $2.72.

• Lowering Sprint wireless outlook for 4Q08, 2009. We are reducing our 4Q08 postpaid net add estimate from a loss of 1.1M to a loss of 1.25M and reducing gross adds accordingly. In addition, we are lowering our 2009 postpaid estimate from a loss of 2.3M subscribers to a loss of 3.2M customers. We expect benefits from Sprint’s new value-based messaging to take more time to bear fruit and see little letup in the competitive and economic environment.

• Raising Verizon postpaid adds, lowering total adds. We have lowered our 4Q08 net add estimate by 115K to 1.61M and readjusted our subscriber mix to favor slightly more postpaid adds (now 1.45M). We have lowered our 2009 net add estimate from 7.0M to 6.7M, which includes ~1.3M adds from the acquired Alltel subscriber base. Given expectations for lower adds, we have modestly increased margin expectations, though aggressive advertising and a higher mix of smartphone sales are likely to dampen more meaningful improvement.