The Health of Telecoms: AT&T and Verizon to Release Q1 Earnings

Telecom companies AT&T and Verizon release their Q1 earnings. Investors should expect to hear about how networks are handling increased bandwidth as a result of COVID-19 pandemic and if supply chain disruptions may cause delays in infrastructure buildout.
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Key Takeaways

  • Verizon and AT&T release earnings this Wednesday and Friday

  • As essential service providers, investors should be listening for how well the two companies are coping with the impact of COVID-19

  • Both companies have expanded their infrastructure to handle increased demand

We go through many life changing events but not too many shift the dynamics of the general global population as much as the COVID-19 pandemic. With businesses and schools closed, events cancelled, and “shelter-in-place” orders, there’s been a significant uptick in the dependence on telecom services. We’re pretty much doing everything from home—working, shopping, communicating, and entertaining ourselves. So it becomes especially critical that our internet and phone services remain solid and uninterrupted.

This puts pressure on telecom companies to ramp up their services to keep the networks humming. This affects not just homes and businesses but health care and basically anything happening. Two stocks to watch in this sector are AT&T (T) and Verizon Communications (VZ).

T and VZ provide an essential service and when they announce their Q1 earnings, outside the numbers, they will be asked questions about how the companies are helping their employees and consumers during the pandemic. It’s a fine balance—to ensure consumers receive uninterrupted service at home it’ll be necessary to have employees out in the field. Both companies have closed many of their retail outlets and those that remain open are there to provide essential services, not necessarily to sell phones or data plans. Measures are being taken to ensure the safety and health of employees and customers. Plus, T and VZ announced plans to provide flexibility in monthly payments for those facing financial difficulties. 

T opens its books on Wednesday, April 22, ahead of the market open and VZ on Friday, April 24, at 8:30 AM ET.

What Can Investors Expect?

It’s likely T and VZ have seen changes in social patterns. As a result of these changes it’ll be interesting to see if customers have been upgrading to faster connection speeds or if churn rates have reduced.

Another topic analysts and investors could be listening for is supply chain disruptions. Considering that most of the hardware is made in China, there could be delays in receiving equipment for expanding infrastructure, a necessity when it comes to 5G deployment.

And post-COVID we could see more people work from home, businesses hold more meetings virtually, and people shopping online for essentials. With demand increases and a more competitive landscape—the T-Mobile (TMUS) and Sprint merger closed this month and satellite-TV provider Dish Network (DISH) could enter the field—2020 could see changes in the industry. 

Telecoms are considered a defensive sector but that didn’t make T and VZ’s stock immune to the stock market selloff. But relative to the broader index such as the S&P 500 Index (SPX), they may not have done so badly.

FIGURE 1: VERIZON VS. THE BROADER MARKET. No sector may have been immune to the stock market fall but compared to the S&P 500 Index (SPX–candlestick) shares of Verizon (VZ–purple line) didn’t take as hard of a hit. Data source: S&P Dow Jones Indices, NYSE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

What to Listen For

T and VZ have not communicated any plans on slowing down their 5G network deployment. The implementation and adaptation of 5G will expand beyond phones to Internet of Things devices—everything from toothbrushes to self-driving cars. Also, keep in mind 5G signals cover a shorter distance so to get better coverage could mean more antennas and base stations. Installation could be a long and expensive process since it involves building new infrastructure.

For T in particular, investors may want to know about their capital structure. Investors should also pay attention to how the company plans to pay down its debt, a result of the company’s aggressive acquisitions. 

You might consider analyzing such companies in terms of four key components: Infrastructure, 5G rollout, competition in streaming content, and financial condition. See below.

It’s About Telecom, Media, and Advertising For AT&T

T is still predominantly a telecommunications company even though its reach into the media space seems to be increasing. The company has extensive broadband networks, which may be a plus during the shelter-at-home period. T’s fiber buildout provides broadband to homes and they’ve expanded their wireless network, including operations in Mexico. According to company statements, T’s longer-term objective is to marry content and connectivity. It believes consumers will want to consume services in a bundle—wireless, data, and entertainment. But during the COVID-19 crisis, priorities have shifted.

Infrastructure stress test. In a recent CNN interview, Randall Stephenson, Chairman & CEO of AT&T mentioned that the company’s focus is on meeting the needs of first responders and health care workers via its FirstNet network, a nationwide network to ensure all first responders are connected. Wireless and broadband traffic patterns changed when people started working from home. Mobile volume was up 40% and Wi-Fi calling went up 100%. In spite of increased usage, the network appears to be holding up well. The infrastructure is allowing people to work from home and communicate with people. Networks are being monitored and if there’s any sign of stress, Stephenson mentioned that T sends people out into the field to augment it.

T has introduced some flexibility for those unable to pay their bills. For example, during the coronavirus crisis, customers with difficulties won’t be charged for data, text, or talk overages, and will considering waiving late fees.

5G Rollout. T hasn’t lost sight of its longer-term goals. At the Deutsche Bank Media, Internet & Telecom Conference last month, John Joseph Stephens, Senior EVP & CFO commented that 5G is going to be the focus in 2020. He expects T to continue to see revenue growth from wireless customers similar to the past two quarters. In Q3 and Q4 last year, T saw its best customer adds, most of which can be attributed to FirstNet.

T has plans to increase 5G deployment in 2020. This includes locations within cities such as hospitals, sports arenas, businesses, and factories. That’s a big spend and any supply chain disruptions could cause delays. There may be delays in 5G devices as well but the impact may not be felt much in Q1 numbers since the devices aren’t in factories yet.

Streaming wars. On the entertainment side, T could be experiencing some growing pains. It's seen declines in its DirecTV subscriber base. But it's moved into the streaming service with the launch of AT&T TV in early March and will soon be launching HBO Max. Last week, WarnerMedia announced a distribution arrangement of HBO Max with Charter Communications. It’s too early to tell how the streaming services will add to T’s revenues but if we hunker down in our homes for many months to come, streaming could give T a boost.

Ad spend cutbacks could be a focal point in earnings this time round. The WarnerMedia segment could be vulnerable to this. Remember T owns TBS and TNT and with no March Madness or NBA games, T could experience ad revenue losses. But, the impact of the loss may not be felt until Q2.

Another point to listen for is how T plans to leverage their media products in their wireless business. This could give some insight into how they compare with competitors who partner with third-party streaming services providers.  

Financial management. T’s share price may be off its highs but is supported by the stock’s current 7% dividend yield. T announced they will suspend their stock-buyback plan in late March.

Last quarter T earnings came in above consensus estimates, but revenues missed mainly due to loss of DirecTV subscriptions.

Verizon: Focus on 5G Continues

While T continues to move into the media business, VZ remains focused on its network. In a CNBC interview a couple of weeks ago, CEO Hans Vestberg mentioned the importance of monitoring their networks 24/7 to see if there are any indications of significant changes. There have been pattern changes—call volumes were as high as around 800 million per day (that’s higher than the number of calls on Mother’s Day), call durations were 33% longer, and up to nine billion text messages per day (more than what’s usually seen on New Year’s Eve). There’s also a significant uptick in gaming activity.

Infrastructure stress test. In response to this behavior shift, VZ has increased its infrastructure investment. This will increase the capex but at this point the priority, according to Vestberg, is to ensure networks are running smoothly with no interruption in services especially for first responders. While most of VZ employees are working from home, there are about 20,000 people in the front lines to provide necessary support. As Vestberg stated in his CNBC interview, the health and safety of employees and citizens is a priority for VZ, so front-line employees are required to follow appropriate guidelines provided by the government and Center for Disease Control.

While there has been a surge in network usage, the unemployment rate is also high. VZ has indicated it won’t disconnect services for those unable to pay their monthly fees. They’ve offered discounts to doctors and frontline workers as well.

Even though VZ might feel some of the negative effects of the pandemic, their operations and balance sheet appear to remain healthy, so far. One positive sign is that it may be highly unlikely customers will shop around for better wireless carriers during this time of crisis. For V, a big chunk of revenues—we’re talking about 85%—comes from its 120 million wireless subscribers.

5G Rollout. According to company statements, VZ wants to focus on strengthening its existing business (consumer and business wireless), have a strong network, and invest in 5G and One Fiber buildout. In 2019, Q4 gross and net adds were the highest in the last five to six years. Those customers will start to be billed in Q1 2020, so that could provide somewhat of a boost to VZ’s revenues.

For VZ, a lot may depend on the rollout of the next generation wireless networks, 5G and One Fiber. Both are big spends and any supply chain disruptions could delay deployment. The same can be said about devices. VZ wants to see 20+ 5G devices in 2020 but again, that’s dependent on the stability of its supply chain. It’s likely the effects of any supply chain disruptions won’t be felt in Q1 but it’s something to watch for going forward.

Streaming wars. VZ appears to use different strategies to get an uplift in its average revenue per user (ARPU). They leverage partnerships with third-party media providers such as Disney (DIS) and Apple (AAPL). VZ, like most firms, wants to extend its relationship with existing customers. Offering DIS+ to customers who are on unlimited plans could act as an incentive for those on limited plans to step up. According to a recent report in Barron’s, when DIS announced earnings in February, of the 28.6 million Disney+ users, about six million were from VZ. Within unlimited plans, VZ has different tiers, each with different values. So it might look to incentivize customers to move up those tiers as another way to increase ARPU.

The most recent move by VZ is buying video conferencing platform BlueJeans, announced just last week and expected to close in Q2. According to Vestberg, VZ plans to integrate video conferencing into its 5G services.

Financial management. The company plans to continue paying out dividends of around 4%. In a low yield environment, that 4% can be considered an attractive yield.

Last quarter VZ earnings came in below consensus but revenues came in above.

AT&T Earnings and Options Data

T is expected to report adjusted EPS of $0.85, unchanged from prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $44.21 billion, down 1.4% from a year ago.

The options market has priced in an expected share price move of 3.9% in either direction around the earnings release. Implied volatility was at the 47th percentile as of Tuesday morning.

Looking at the April 24 expiration date, option activity has been highest at the 32 strikes for calls and the 29 and 30 strikes for puts.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Verizon Earnings and Options Data

VZ is expected to report adjusted EPS of $1.23, up from $1.20 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $32.45 billion, up 1% from a year ago.

The options market has priced in an expected share price move of 2.8% in either direction around the earnings release. Implied volatility was at the 30th percentile as of Tuesday morning.

Looking at the April 24 expiration, activity has been light overall but highest at the 59- and 60-strike calls and 57-strike puts. 

Good Trading,

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    Key Takeaways

    • Verizon and AT&T release earnings this Wednesday and Friday

    • As essential service providers, investors should be listening for how well the two companies are coping with the impact of COVID-19

    • Both companies have expanded their infrastructure to handle increased demand

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