Last week was a busy one for American telcos, as Verizon, AT&T and Sprint released their Q1 2012 financial results.
As usual, the iPhone sales numbers dominated the results, and make no mistake, an awful lot of iPhones were sold. Without getting too excited, savvy analysts (that’s us!) must look past the numbers and focus on the impact iPhone sales have on wireless service margins, customer behavior, strategic initiatives and policy changes. Digging a little deeper, we can try to understand what lies ahead for the remainder of 2012 as the the big three prepare for the next and highly anticipated iPhone launch.
Let’s start at the bottom: Sprint
The underdog of the American telco industry is turning out to be simply a dog in general. Although, Sprint hit a new record of 56 million subscribers, many of its customers are on prepaid accounts. This means the lion share of Sprints revenue base does not bring in the high ARPU required to float the books of an aggressive iPhone reseller.
It’s therefore no surprise that Sprint gained higher ground this quarter to post a disappointing net loss of $863 million. Even with 1.5 million iPhones sold (44% to new Sprint customers), it’s likely that with every fantastic iPhone sales quarter, Sprint is putting another nail in its coffin.
The losses posted this quarter and last by Sprint illustrate that the company struggles to balance the costs associated to providing the iPhone in its device lineup. As a remedy, Sprint has confirmed its launch of unlimited data plans available even on the iPhone. Sprint is doing everything it can to go after subscribers, but it’s not adding the kind that bring in revenue, and initiatives like this only further jeopardize its wireless service margins (which are remarkably lower than AT&T and Verizon.)
This is a point of concern for industry analysts, considering Sprint has committed to purchasing $15.5 billion in iPhone inventory from Apple over the next 4 years. Sprint comforted its shareholders at the time of the agreement with Apple with promises that ROI would pick up the iPhone by 2015.
Selling 1.5 million iPhones is nothing to laugh at for a carrier half the size of AT&T and Verizon, but even at that run rate Sprint will struggle to hit its target. I believe this is why Sprint is throwing the baby out with the bath water and launching a profitless unlimited data plan option: Sprint is in deep and needs to hit its $15.5 billion inventory commitment. Regardless, the question weighing on everyone’s mind is whether Sprint is in over its head (a question I asked a few months ago)? Sprint’s posted losses and unlimited data plans are not going to generate the resources necessary to upgrade its LTE network to stay relevant amongst the bigger players.
AT&T is the iPhone carrier, for better or worse
Verizon has come a long way in the past 3 years, and is giving AT&T a run for its money, but not necessarily a run for iPhone activations. AT&T is still king in that category, activating 4.3 million iPhones, compared to 3.2 million by Verizon, last quarter. With AT&T selling 5.5 million total smartphones last quarter , it is easy to see what its customers like: the iPhone!
You would think AT&T would happy be about its iPhone sales numbers, but the sentiment on last week’s analyst call was the opposite of joy. It seems that AT&T has had about enough of the iPhone and that’s why most analysts were keen to discuss the recent changes to AT&T’s hardware upgrade policies, which extend the lapse in upgrades subsidized by the carrier. AT&T is optimistic that any negative impact will be balanced by the financial benefits derived from stronger wireless service margins and hardware costs. It goes without saying that the changes being implemented are an effort to harness AT&T’s iPhone obsessed customer base come the next iPhone launch.
Sprint should be paying attention here, as even though AT&T has the largest base of customers at 103.9 million, it brings in highest ARPU of $64.46 (up 1.7%) and still has enough sense to know its wireless service margin of 41.6% needs protection. AT&T also demonstrated that having strong metrics doesn’t mean more revenue, as AT&T brought in less revenue at $16.1 billion compared to $18.3 billion by Verizon. Why? The cost of selling the expensive iPhone has a huge impact on margins and stands in the way of running a profitable business.
Verizon is all about the LTE
Verizon has been smart with its device management strategy. Earlier this year, the carrier demanded hardware manufactures provide them with LTE choices or simply not bother at all. While it’s selling less iPhones than AT&T, Verizon still managed to bring in more net subscribers – 734,000 verses 726,000, respectively – and activated more total smartphones, with 6.3 million.
Despite the iPhone sales, Verizon continued to focus on Android customers. More importantly, Verizon came through on its LTE promise and activated 2.1 million customers on 4G devices, up 30% from Q4 2011. Verizon did not confirm if data consumption for its LTE customers is higher, but you can see this in the numbers.
Compared to AT&T, Verizon has a smaller subscriber base of 93 million customers, less ARPU at $55.43 (up 3.6%) and a smaller percentage of its customer base on smartphones, 47% verses 59.3%, respectively. However, Verizon still posted greater data revenue returns of $6.6 billion, compared to AT&T’s $6.1 billion. Arguably data revenue is the main influence on Verizon’s ability to post higher service revenue growth, which was up 7.7% compared to AT&T’s 4.3% increase from Q4 2011. Verizon’s data revenue accounts for 43% of its total service revenue, and is driving its business in the right direction as voice ARPU continues to decline.
Who is iPhone 5 ready?
It’s clear that Verizon is the most ready for the next iPhone launch. Its customers may be Android hungry today, but they have been led to 4G LTE water by Verizon, and if the iPhone 5 launches LTE ready (which is highly likely), rest assured these customers will choose Verizon as their wireless carrier.
AT&T has implemented hardware upgrade policy changes to help stabilize the costs associated to the inevitable flood of iPhone 5 upgrades. Most importantly, it has ensured the protection of its wireless service margins so it can deliver top line growth to shareholders.
So what about Sprint? We’ve been here before. There’s nothing more to say other than it’s the carrier that should most fear the day when the iPhone 5 becomes available.