Wireless Supports Growth at Both AT & T and Verizon

Both AT&T and Verizon’s earnings results were supported by strong wireless growth and margins compared to the wireline businesses. At AT&T, the mobile division reported 2,095k net additions, driven by strong iPhone sales. EBITDA margins were a healthy 35.9%, helped by a 400bps impact from iPhone sales and a higher ARPU. At Verizon, wireless net additions were not as strong, however, ARPU growth was stronger than what mosts analysts were expecting and margins were a high of 47.2%, though helped by a few non-recurring items. Ex-cluding those items, margins were within the company's 43-45% long-term goal.

AT&T's wireline EBITDA margins were down 100bps sequentially to 33.6%, as enterprise revenue declined 3.7% and consumer revenue declined 5.3%, due to higher line losses. DSL subscribers continued to weaken, falling by an estimated 30,000, while consumer primary lines fell 11.4% YoY and retail lines dropped 4.3% YoY. The company provided guidance that was below Street expectations on EPS mainly due to weakness in the wireline business while the wireless business guidance was reassuring. Management is also pulling back on capex spend to the tune of 10-15%, so free cash flow should show stable growth despite the weak outlook for the wireline business.

Verizon's wireline businesses relfected a mix of weak DSL numbers while FiOS Internet additons were strong. Overall wireline margins declined 200bps sequentially to 25.4% due to increased marketing and bad debt expenses, and lower revenues. The company announced more layoffs as the economic environment proves challenging particularly for the wireline business.

Of the two, I prefer Verizon as the business is not dependent on iPhone sales. Further, Verizon's lower multiple of 4.5x '09 EBITDA appears to have already reflected the economic uncertainities, relative to the 5.5x '09 EBITDA multipe for AT&T. Thus, any improvement in Verizon's business is likely to be rewarded with multiple expansion.