Entries in AT&T:T (23)


Six Degrees of Separation: Windstream and CenturyLink Top Profitability

Windstream and CenturyLink Grade Out as Most Profitable ILECs

On a daily basis we at JSI Capital Advisors monitor the public ILECs on a real-time basis, keeping tabs on business and growth strategies, industry trends and developments, and LEC mergers and acquisitions. Once a year however, we like to take a step back and analyze the public LECs based on a series of their financial ratios in an analysis we call “Six Degrees of Separation.” The series of measurements in Six Degrees evolved from the once-annual “Ten Part Test” which we created in 2002.

Using twenty-one financial tests, which we group into six broader categories, we compare the investment, financial, management and stock market performance of the publics LECs as of calendar year end. For each test, we rank the companies from 1 to 18 (1 being the best, 18 the worst) then calculate an average ranking in each category (Profitability, Growth, Financial Condition, Efficiency, Return to Shareholders, and Long-Term Performance). Based on these averages, we assign corresponding letter grades for each of the six categories based on a bell curve. After the companies are evaluated across the six degrees, a weighted composite score is generated, overall grades are assigned, and the Six Degrees of Separation winner is crowned.

This year in the third annual "ILEC Six Degrees of Separation," we will breakdown each of the six categories individually in Phone Numbers, revealing the top rated ILEC once all six degrees have been vetted. As a reminder, we are not suggesting that you go out and purchase the "ILEC Six Degrees of Separation" winner and short the loser, but the results should tell you that a closer look at the companies is warranted.

Without further ado, let’s crunch some numbers. First up: profitability. The four tests we use to measure profitability are return on equity, return on assets, OIBDA margin and free cash flow margin.

This year, two LECs—Windstream (Nasdaq:WIN) and CenturyLink (NYSE:CTL)—finished in a dead heat for first place in profitability, averaging a rank of 3.5 out of 18 in the four tests. Windstream posted the strongest ROE at 57%, while CenturyLink’s 50% OIBDA margin topped all ILECs. Rounding out the individual test winners were Otelco (Nasdaq:OTT) in free cash flow margin, and AT&T (NYSE:T) in return on assets. Using Windstream’s top three placements in 3 of 4 categories as a tiebreaker, we ranked it slightly higher than CenturyLink, good for first place and an A+ grade. 

A year ago, Windstream also graded out best in profitability with an identical score of 3.5, while CenturyLink improved on its average test rank of 7.0 in 2009. CenturyLink’s most notable improvement was in the OIBDA margin test, as its 2010 results included a full year of Embarq operations and the related cost synergies it gained after acquiring Embarq in 3Q09.

On the opposite end of the spectrum, Fairpoint (Nasdaq:FRP) and SureWest Communications (Nasdaq:SURW) both received F’s. Fairpoint—in bankruptcy throughout 2010—repeated its 2009 last place showing after finishing in the basement of the ROE and ROA tests. SureWest earned its F with consistency, finishing in the bottom third in all four profitability measures.

Last year’s overall Six Degrees winner, Shenandoah Communications (Nasdaq:SHEN), fell six spots in profitability rank this year, as its OIBDA margins eroded from 47% to 38% YoY. The decline was related to cash spent on upgrades to its acquired cable systems, and an amendment to its wireless agreement with Sprint that increased its payments from 8.8% of postpaid revenues in 2009, to 12% in 2010 (note: in 2011 the Sprint agreement updated Shenandoah’s payment to 20% of wireless revenues, further cutting into its margins).

On the upside, Consolidated Communications (Nasdaq:CNSL) jumped from ninth to third place in profitability YoY, as it improved its rank in all four tests and earned itself an A. Consolidated successfully trimmed expenses in 2010, reducing its number of customer care centers from six to two, which more than offset revenue declines.

While Windstream and CenturyLink tested as the most profitable public LECs in 2010, a shakeup in the category can be expected next year. Most notably, CenturyLink completed its acquisition of Qwest (#14 in profitability) in 2011 and has watched its OIBDA margins contract 20% in six months.

In closing, a few notes on the return on equity test: Qwest, Alaska Communications (Nasdaq:ALSK) and Fairpoint had negative net income in 2010 and were ranked below Otelco and Cincinnati Bell (NYSE:CBB) which had negative equity balances, but positive net income in 2010. Consistent with our historical methodology, negative net income was penalized more than negative equity.


Linear Obiter Dictum 2011: Access Lines 2000 - 2010

Excluding the RBOCs, Access Lines Fell 6.6% in 2010

For each of the past seven years following the July release of Phone Lines, our annual publication detailing the results of our annual survey of ILECs nationwide, we publish an annual feature dubbed “Linear Obiter Dictum.”  Obiter Dictum is Latin for “Something said in passing;” and our “Linear Obiter Dictum” feature includes detailed discussion of the most important trends in access lines: the change in total access lines, changes by state, the “Ins and Outs” of identified ILECs, and so on. We also examine the percentage changes based on the size of the ILECs—not surprisingly, smaller ILECs generally lose lines at a slower pace than the remaining RBOCs.  That said, the sheer size of AT&T, Verizon and Qwest relative to other ILECs have historically meant that the double-digit losses incurred by these behemoths have driven the overall change in access lines nationwide.

This was the case again in 2010.  Based on our exhaustive survey and analysis, JSI Capital Advisors estimates that total U.S. access lines fell by 11.5% in 2010, to a total of 101,978,948. That compares to a total of 115,229,695 at the end of 2009, for total lost lines of 13,250,747. Of those, 11,585,701 were lost by the three RBOCs:  AT&T’s access lines fell by 11.6% to 43,678,000; Verizon’s fell 12.9% to 26,001,000 (adjusted for the sale of 4m lines to Frontier Communications) and Qwest lost 1,411,000 for a 13.7% decline.  Excluding the top three, the remaining 763 ILECs lost 1.7m lines, for a 6.6% decline. 

Since 2000, when we began our annual Phone Lines survey, we’ve witnessed the number of access lines cut nearly in half.  We counted 194m lines in 2000; since that time 92m, or more than 47%, have been lost to the Internet and email (lost fax lines), broadband connections replacing second lines for dial-up Internet access, and cord-cutting due to the advent of affordable, unlimited wireless services.

Today some ILECs have embraced cannibalization of their own lines with VoIP strategies, based on the knowledge that if they don’t, someone else will.  Others are working to develop better bundles of services, including faster broadband service and video offerings. But the writing is on the wall and we expect the percentage declines in total access lines to climb again in 2011.


Wireless 2Q11 Results: The "Also Rans"

Stocks Tank on Market Share Miseries and Rising Costs

Last week I commented on the similarities in results and management comments regarding strategy between AT&T and Verizon.  Since then, all of the major wireless service providers, with the exception of United States Cellular, have reported their results. And to a one, the stocks in those publicly traded operators have since plummeted--between 25%-44%. Ouch!

Granted, it's a tough market out there in general this week (as I write this, the Dow Jones Industrial Average is down 300 points), but what really boggles my mind is, What were the Wall Street folks expecting? Is it really such a surprise that AT&T and Verizon added millions of customers while everyone else struggled?  Hello?

While executives from Sprint, MetroPCS, Leap Wireless and Clearwire have all tried to focus on how “their businesses are executing according to plan,” I don’t buy it—and obviously investors don’t either. They’re all working on improving margins, bulking up on their smartphone offerings, figuring out their LTE deployments, etc. But the bottom line is that Verizon and AT&T are running away with the market and they both reported record low churn levels in the second quarter. Their customers aren’t leaving.

Sprint, which was a turnaround story for most of the past three years, did manage to add more than a million new customers in the quarter—but they were lower value prepaid or wholesale customers. Sprint lost more than 100k of the more valuable postpaid contract customers.

Of the seven major wireless service providers who have already reported their second quarter results, Verizon and AT&T accounted for more than half of reported net additions—and if you consider that Sprint’s 1.1m net adds can largely be attributed to Clearwire’s 1.5m net adds, then those customers are actually double counted in my chart. Pull Clearwire out of the mix and the duopolists accounted for 75% of net adds reported to date.  And considering that United States Cellular has lost customers in each of the past four quarters, it’s unlikely that adding its results into the mix will change the overriding fact that the wireless market in the U.S. has become a clear duopoly.

The even bigger problem for the ‘also rans’, and what I believe investors are reacting so violently to, is the rapidly growing cost of providing data service to wireless customers.  Even AT&T and Verizon have acknowledged the problem by instituting tiered plans—it’s just too costly to provide unlimited data service over 3G, or even 4G, networks in the YouTube era. And it’s only going to get tougher. But AT&T and Verizon have the bulk and scale to weather the changing economics of the business.  Heavily leveraged MetroPCS, Leap and Clearwire may not. And Sprint is really just treading water…

Notably, I really don’t believe the pending merger between T-Mobile and AT&T changes much. Yes, it will make AT&T that much bigger, but T-Mobile has also been struggling to maintain its 33.6m subscriber base for some time.  It’s competing largely with Sprint and the smaller carriers for budget-conscious customers, while Verizon and AT&T dominate in the postpaid category.  So maybe AT&T does a little better in that category after (if) the deal closes—but maybe AT&T just increases its prices for the T-Mobile subscribers (in a slow, creeping manner).  That could actually be a good thing for Sprint/MetroPCS/Leap—but in the long run, those rising network costs combined with a falling net present value per subscriber may make the economics untenable.  It's 'back to the future' and the duopoly wireless business of 1984 is where we're headed.


Goliath vs. Goliath: Comparing AT&T’s and Verizon’s 2Q11 Results

The Chosen Path of the Duopolists

As I reviewed the transcripts for the 2Q11 investor conference calls held last week for both AT&T (NYSE:T) and Verizon (NYSE:VZ), the first thing that struck me is just how similar the comments were! The two 800-pound gorillas in the industry are clearly taking virtually the same path in terms of their growth strategies—whether in wireless, wireline, consumer services or enterprise services—and their results in the latest period were, in many respects, eerily alike. There are differences in the details, but compare these comments from their respective conference calls:

1) Verizon:

“We had strong top-line growth in the second quarter, with consolidated revenue increasing to $27.5 billion, up $1.6 billion or 6.3% year-over-year. By capitalizing on the growth opportunities in Wireless, FiOS, and Enterprise strategic services, together with improving our Wholesale business, our consolidated revenue trends continue to be very positive.”

1) AT&T:

"Consolidated revenues totaled $31.5 billion, up $687 million versus the second quarter a year ago due to continued strong mobile broadband growth, U-verse revenue growth of more than 50% and increasing stability in Wireline business revenues with strategic business service revenues growing almost 20%."

2) Verizon:

“About 77% of our revenues are in strategic areas of higher growth, up from about 70% two years ago.”

2) AT&T:

“76% of our revenues came from these next-generation services. That's up from 71% a year ago and 66% just 2 years ago.”

3) Verizon:

“In terms of capital expenditures, while we have had a higher level of spending in the first half compared with last year, our additional investments are in support of increased customer volumes and higher revenue growth in Wireless. First-half CapEx this year totaled $8.9 billion, of which $5.4 billion was Wireless. To date, our network spending on 3G is well ahead of our capacity requirements for the full year, and we have also spent a bit more on 4G LTE, consistent with our deployment plans.”

3) AT&T:

“Capital expenditures were $9.5 billion, with a 29% year-over-year increase in Wireless capital to reach $4.4 billion. Wireless capital includes work with our LTE build, which is on track to be launched later this summer. And as noted in our earnings release, we're slightly increasing our guidance for full year capital investments. We now anticipate capital expenditures in the $20 billion range as we continue to invest in our wireless network.”

4) Verizon:

“In Wireless, we had an outstanding quarter of customer growth, with strong demand for smartphones and Internet data devices and increasing service revenue, driving total revenue growth of 10.2%.”

4) AT&T:

“Our focus on mobile broadband continues to drive impressive revenue growth. Total Wireless revenues were up $1.4 billion or 9.5%.”

5) Verizon:

"Total quarterly data revenue grew to $5.8 billion, up $1.1 billion or 22.2% year-over-year. Data revenue now represents 39.5% of our total service revenue. As you know, a key driver of data growth has been the increased penetration of smartphones. We continue to make good progress on that front, increasing penetration of our retail postpaid phone base from 32% last quarter to 36% this quarter. Just one year ago, smartphone penetration was 21%.”

5) AT&T:

“We grew data revenues more than 23%. That's up more than $1 billion year-over-year. We had another record quarter with smartphone sales, 5.6 million units, both upgrades and new subscribers, our best second quarter ever. The smartphone subscribers now make up half of our postpaid subscriber base, up from just 36% a year ago.”

6) Verizon:

“With regard to Apple iPhone 4, we activated 2.3 million units this quarter, bringing our total to 4.5 million since we started selling the phone in early February.”

6) AT&T:

“We had 3.6 million iPhone activations during the quarter, up about 11% from the second quarter a year ago when the iPhone 4 was first introduced near the end of June.”

7) Verizon:

“Within the postpaid category the significant unit growth in Internet data devices, while adding total service revenue growth and expansion of the category, is having a dilutive effect on the total postpaid ARPU rate of growth at this point in time. Within the Internet data device category, we are seeing strong demand for our Mobile Hotspot or MiFi devices, dongles, and tablets. While the unit growth is very strong and a key area of focus for us in expanding this category, the average ARPU on these devices is less than $54 and is declining on a year-over-year basis.”

7) AT&T:

“But specifically, with our tiered [wireless data] pricing and our $15 and $25 plans that we have out there, as well as our new emphasis on postpaid computing devices, we are getting into a segment of the market that has somewhat lower ARPUs than are standard but are still very profitable for us. We're not going to turn away those sales. Those are very good, profitable sales. But they do have some slight impact on the postpaid ARPU [growth] percentages.”

8) Verizon:

“Finally, I am pleased with the evolution of our partnership with Vodafone. We are clearly moving from a purely financial partnership to an operating partnership. We are now facing our largest multinational customers as one team. We have aligned our product and our technology roadmaps, and we are beginning to purchase infrastructure together. All of these actions will begin to enhance our revenue and our cost profiles.”

8) AT&T (on the pending T-Mobile acquisition):

“We remain comfortable with the process so far and the pace at which we're moving. The staffs at the Department of Justice and the FCC, the 2 federal agencies that must approve the transaction, are working extremely hard…In in response to questions, we have developed a very detailed engineering and economic analysis valuing the enormous efficiencies that will result from the combination of the AT&T and T-Mobile networks. We have revealed to the agencies the results of the analysis and the magnitude of the efficiencies…The facts also demonstrate that the consumer and public interest benefits are enormous. These include better service in the form of fewer dropped calls, faster speeds and a better overall customer experience, more mobile broadband access for more Americans. By expanding our 4G LTE deployment to more than 97% of the U.S. population, some 55 million more people will receive LTE coverage in America than would have occurred without this merger. And billions of dollars of increased investments in the U.S. economy, which drives more jobs and economic growth. “

9) Verizon:

“In Mass Markets, our FiOS broadband and video products continue to drive a positive shift in our revenue mix. FiOS now accounts for 57% of consumer revenue, up from 48% a year ago. FiOS revenue in the quarter grew 20.7% year-over-year, and FiOS ARPU is more than $146.”

9) AT&T:

“U-verse continues to be strong, adding subscribers, increasing triple-play ARPU and is now a $6.5 billion annualized revenue stream. In fact, fast-growing consumer IP data now represents about half of our total consumer revenues.  More than 3/4 of our U-verse video subscribers have a triple- or quad-play bundle with us. ARPU for these customers now reaches $170, up more than 8% year-over-year.”

10) Verizon:

“As we have said, strategic services are becoming a much larger portion of our revenue mix, now representing 48% of total Enterprise. Within this category, advanced services like managed network solutions, contact center solutions, IP communications, and our cloud offerings are growing very nicely.”

10) AT&T:

“And strategic business services had almost 20% revenue growth, its best performance in 6 quarters…In our global enterprise operation, there is strong growth in IP data, outsourcing and integration services...while businesses continue to work their way through the economic downturn, they are still investing in services that help drive productivity and efficiency. We see this in strong IP data growth. We also see it in continued strong growth of our strategic business services, which is now a $5 billion annual revenue stream.”

And so on...So, the big boys are counting on wireless broadband and FTTX initiatives, along with managed services for growth in enterprise revenues.  They're both looking to expand via acquisition or expansion of an existing relationship to broaden their reach.  They're investing heavily in 4G wireless.  And they're selling iPhones as fast as they can get them...

My point? These two companies are formidable players in the telecom world and smaller participants would be remiss not to take note of their efforts and areas of focus.

The only question I have now is when will AT&T start selling off its less profitable access lines, the way that Verizon has been doing for about six years now? And an even more interesting question, who will buy them?


1Q11 Connections: Wireless Broadband

Subs Rise Sharply with iPhone Sales and 4G Deployment

Wireless customers increasingly opted for connected phones and devices in 2010 and 1Q11, fueled by smartphone popularity and the deployment of faster 3G and 4G networks. Although not all providers break out wireless broadband sub totals, those with historical stats reported remarkable total subscription growth of 138% from 1Q10 to 1Q11.

Top provider AT&T (NYSE:T) added 4.8m wireless broadband subs from 1Q10 to 1Q11, an 83% YoY increase. In 1Q11 alone AT&T activated 3.6m iPhones, while 64% of its net wireless subscriber adds in the quarter utilized broadband services. AT&T’s growth however slowed somewhat in 1Q11, as its exclusive contract to offer the iPhone came to an end.

Verizon (NYSE:VZ)  took advantage of AT&T’s contract expiration, selling 2.2m Verizon iPhones in 1Q11 in under two months. Although Verizon does not report wireless broadband subs, its second quarter earnings press release noted that 7.5% of its postpaid wireless subscribers used connected devices during 2Q11—translating to 6.4m subs.  

The fastest growing provider, Clearwire (Nasdaq:CLWR), expanded its wireless broadband subs from under 1m in 1Q10 to 6m in 1Q11.  Clearwire derives most of its subscriber base from a wholesale agreement through which it sells 4G services to Sprint. In the past year, its wholesale subs ballooned to 4.8m from only 157k as Clearwire dropped its retail strategy and focused on wholesale growth.