Friday, December 1, 2023
HomeTelecomIdentical because it ever was (3Q earnings preview)—half 3

Identical because it ever was (3Q earnings preview)—half 3

Greetings from Florida (pictured) and Missouri.  The final two weeks have been full of reports, and we could have a bigger than common market commentary in consequence.  Our Sunday Temporary evaluation will likely be centered on Verizon as we discover how they emerge from a multi-year rut. 

For these of you who’re following third quarter earnings releases, right here’s a useful quick-reference information:

(All listings Japanese Daylight Time.)  As we indicated beforehand, we will likely be posting our preliminary insights for every Telco High 5 firm on the day of their convention name.  Per the October 1st Temporary (right here), we anticipate that cable will submit sturdy wi-fi outcomes, and that AT&T’s broadband beneficial properties will exceed expectations.  We predict that greater rates of interest have suppressed strikes and can dampen cable and telco broadband gross additions. 

The iPhone 15 launch will likely be thought of at or barely above expectations, and the year-over-year advantage of this to AT&T and T-Cell will likely be extra noticeable in fourth quarter metrics.  For extra on the present iPhone gross sales/ backlog progress, please go to the supply posts on

The fortnight that was

The quarter began sturdy for the Fab 5, with a complete improve month-to-date of $358 billion.  The beneficial properties are broad for the group with Apple main the best way (+$119 billion).  The Telco High 5 has misplaced $11 billion over the identical interval. With losses in AT&T, Verizon, and Comcast offsetting marginal beneficial properties for T-Cell and Constitution. 

The most important information of the week broke on Friday when the Competitors and Markets Authority of Nice Britian gave their approval to Microsoft’s $69 billion acquisition of Activision Blizzard (see this New York Instances abstract for full particulars).  The acquisition closed on Friday (New York Instances protection right here).  Per the Instances, there have been a number of concessions: 

“Microsoft made quite a few concessions to win approval. The corporate stated it could not block Activision titles from being accessible for rival consoles akin to Sony’s PlayStation.  To assuage considerations from British authorities, the corporate agreed to switch the cloud streaming licensing rights for all present and new Activision Blizzard video games to Ubisoft Leisure, a rival sport writer in France.”

The cloud streaming concession received over the British authorities as a result of it represents a considerable quantity of the online game ecosystem progress.  Permitting video games to be offered on rival consoles is a reasonably vital concession as effectively.  Was the deal price it after the entire trials and negotiations? 

The straightforward reply is “completely.”  Microsoft wants to maneuver past X-Field and Floor revenues, and the gaming trade offers a useful platform into the house that few others have.  It is also a development-intensive section of the leisure trade, leaving ever-higher obstacles of entry as video games turn out to be extra clever and as Digital Actuality headsets take maintain.  We’d not be stunned to see Microsoft’s subsequent transfer be to accumulate HTC’s digital headset enterprise (see extra on the HTC Vive XR Elite from CNET right here) to realize an additional benefit in opposition to Meta and Apple (who lack the end-to-end interplay between {hardware} and software program).  

In the meantime, the DOJ v. Google trial continued during the last two weeks. One notably damning unredacted memo launched on Friday options now-Google CEO Sundar Pachai expressing reservations over Apple’s plans to function each Yahoo and Google search outcomes (see first article right here from the day by day protection by The Verge) .  Pachai states in his e mail:

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Whereas Google’s present CEO might need had reservations in 2007 about insisting on default standing, that’s what Google obtained.  What’s fascinating is that Apple was really contemplating distributing two units of browsers, however pulled again on this proposition, most likely as a result of the financial advantages of Google’s funds outweighed the prices of offering alternative.  As we said within the final Temporary, the mere considered Apple being pressured by the DOJ to revamp the consumer expertise is weird, however the “multi-browser” treatment would possibly work (though supporting a number of browsers may turn out to be unwieldy). 

We predict that permitting Apple to offer their present treatment (see Macworld article right here) really offers a pro-competitive resolution sooner or later.  It will be tough for us to ponder a treatment right here outdoors of a reasonable monetary penalty, however we aren’t precisely positive that the settlement between Google and Apple is against the law.  It actually is not any extra egregious than AT&T insisting on iPhone exclusivity for 3+ years (article right here), or for Apple’s iPhone calls for (which included comparatively excessive minimal purchases over the lifetime of the time period) from Verizon, Dash and T-Cell.   How this trial deters future dangerous conduct is a thriller, and we eagerly await the decide’s reasoning and ruling. 

Since our final Temporary, AT&T introduced that they have been exploring choices for his or her DirecTV three way partnership with TPG (Bloomberg article right here).  That the exploratory discussions started after the switch of the NFL Sunday Ticket rights to YouTube TV is not any shock.  Per the Bloomberg article, the Leichtman Analysis Group estimates that the DirecTV subscriber base was roughly 12.4 million subscribers as of the top of June.  We predict that determine decreased under 11 million after the NFL season started in September, and this drop is inflicting a variety of concern with AT&T.  For extra on the present three way partnership construction, right here’s AT&T’s authentic SEC submitting.  We anticipate that the corporate is not going to pursue a “fireplace sale”. however does have a way of urgency to redeploy the potential proceeds into fiber and wi-fi. 

Within the final Temporary, we mentioned the brand new Xumo TV lineup that can start to be distributed via Greatest Purchase beginning subsequent month.  Along with embedding the Xumo working system into televisions, each Comcast and Constitution will likely be introducing a Xumo “puck” to chose clients.  Constitution lately introduced the next promotion:

This extends and enhances the present Spectrum One promotion.  We discover the Spectrum TV/ Xumo bundle to be an intriguing supply (Spectrum TV is priced at $60/ mo. + $21-24/ mo. broadcast price for the primary 12 months, rising to $80/ mo. + the printed price beginning in month 13).  Often, any streaming field can be positioned to be an various to conventional video companies (as Comcast positioned Flex previous to Xumo – a free service to all Xfinity Web clients).  This isn’t the case with this promotion – clients have to decide to an $80-85/ mo. rising to $100-105/ mo. to obtain a free piece of apparatus that Xumo opponents promote on the native Greatest Purchase for a one-time price of $30-50. 

Whereas that is the primary take a look at of Xumo positioning, we predict that “free Xumo field with 1 Gbps improve” would have been more practical and positively extra in step with administration’s feedback in the course of the Disney dispute in regards to the relative unimportance of video going ahead.  Additionally, it could have stored the deal with cellular additions, which is a extra vital long-term measure of Constitution’s general attractiveness.  This inaugural Xumo supply is an actual head scratcher, and, in our opinion, needs to be shelved in lieu of extra emphasis on Spectrum One. 

Conserving with the 2 themes described above, our closing merchandise for this Temporary entails a head scratching and now failed merger.  On Wednesday, telecom tools maker Ericsson introduced that they have been writing down 50% of the goodwill worth from their Vonage acquisition.  This equates to about $3 billion. 

We re-read the unique November 2021 announcement (right here) to find clues regarding Ericsson’s reasoning behind the acquisition worth (which was a hefty 4.4x Vonage’s trailing 12-month gross sales).  Right here’s the assertion from Ericsson’s CEO, Borge Ekholm:

“The core of our technique is to construct main cellular networks via expertise management. This offers the muse to construct an enterprise enterprise. The acquisition of Vonage is the subsequent step in delivering on that strategic precedence. Vonage provides us a platform to assist our clients monetize the investments within the community, benefitting builders and companies. Think about placing the ability and capabilities of 5G, the most important world innovation platform, on the fingertips of builders. Then again it with Vonage’s superior capabilities, in a world of 8 billion related units. As we speak we’re making that potential.”

We paraphrase above rationale as  “The Vonage acquisition extends our wi-fi community experience to enterprises.” This could be appropriate and buying Vonage could be essential to create worth for Ericsson’s shareholders, however why pay 4.4x gross sales to accumulate an excellent however not “greatest at school” API developer?  What dynamics are shaping the entire addressable market measurement? Which mega-cap expertise shares even have their eyes on these interfaces (particularly Microsoft, who bought Metaswitch for $270 million and Affirmed Networks for barely greater than $1 billion)?  There have been a variety of clouded assumptions throughout COVID and we predict Ericsson was poorly suggested on this transaction.  It will likely be fascinating to see how they proceed to develop their enterprise section – utilizing acquisitions won’t be as palatable to their Board after the Vonage saga. 

Identical Because it Ever Was (3Q Earnings Preview – Half 3)?     

We’re ending our 3Q earnings preview with an evaluation of Verizon.  Particularly, we’re difficult this typical knowledge:

Identical because it Ever Was #4:  Verizon will have the ability to stability its shopper wi-fi postpaid telephone acquisition technique, rising each their retail and wholesale bases.  This two-pronged technique will create optimum monetary outcomes for the corporate.  Verizon’s provides will lure AT&T and T-Cell clients whereas not disturbing the ever-growing wholesale cable subscriber base.  

Verizon is a big firm dealing with challenges throughout many stakeholders.  Fairness buyers proceed to anticipate progress and elevated dividends.  Bondholders anticipate to be paid curiosity and principal on time.  Clients anticipate a “greatest in USA” community.  Workers anticipate administration transperancy and management in an more and more aggressive setting. 

To proceed to fund a “greatest in USA” community (e.g., their $45+billion funding in C-Band spectrum) and improve dividend funds, Verizon wanted a unique kind of investor.  The cable firms leveraged Verizon’s community power to create a worthwhile MVNO competitor.  (Developments in bit prioritization additionally helped Verizon’s profitability and cable’s value construction).  Their long-term dedication created a money circulation stream that’s funding the curiosity and principal funds for spectrum and protection. 

The cable MVNOs are actually rising properly with a broadening lineup of plans and pricing.  A few of these plans are engaging to present Verizon retail clients (notably these with 1-2 strains of their family).   Others (particularly the “by the Gig” provides) are going to be engaging to Verizon’s present Tracfone base. 

The next desk from Verizon’s 2Q earnings launch helps us perceive what number of retail customers use the Verizon community at present: 

Whereas the patron retail unit has misplaced barely greater than 1 million retail connections because the starting of 2022, cable has greater than made up for the distinction.  Right here is the expansion of cable (Comcast and Constitution solely) because the starting of 2022: 

Cable internet additions of 5+ million (sum of the final six quarters of progress) have greater than offset the wi-fi retail losses at Verizon and leaves the corporate with greater than 119 million retail and wholesale connections (be aware – whereas there are some small enterprise clients on the cable MVNO, the overwhelming majority are residential and the entire cable wholesale revenues are booked via Verizon’s shopper unit).  Add a rising Verizon Enterprise to this determine and the community general now helps ~150 million connections.  That’s a variety of radios, towers, and circuits. 

Regardless of the entire subscriber progress, revenues haven’t stored tempo.  Wi-fi service revenues (which embrace wholesale) have grown a mere $545 million during the last six quarters and EBITDA is flat for the patron unit over the interval.  The main points under are from Verizon’s 2Q earnings launch:

The Shopper unit’s working revenue has barely budged (a beneficiant remark contemplating the outstanding turnaround from Q1 to Q2 2023) and EBITDA is up lower than 1%, but cable’s wholesale buyer base over the identical interval has grown by greater than 5 million customers.  This profitability malaise can’t be attribured to FiOS video or telephone losses.  Was the cable MVNO worthwhile to Verizon’s shareholders?  Did the cable “hedge” masks retail errors in 2022 and early 2023?  What’s the true postpaid retail wi-fi profitability?  Many questions on Verizon CEO Hans Vestberg’s administration should be requested by disgruntled shareholders. 

Verizon’s two-pronged retail strategy to accumulate wi-fi telephone share is as follows:

Prong #1:  Use new C-Band capability to launch a worth struggle on the low finish (as we’re at present seeing with the Seen model – see YouTube advert right here).  Goal Metro by T-Cell however perceive that there will likely be some motion again to Verizon from some Comcast and Spectrum price-sensitive customers. 

Prong #2:  Use the iPhone launch and Vacation season to run phone-centric provides (maybe with beneficiant trade-in allowances) and lure away T-Cell and AT&T households the place Verizon’s community is considerably superior.  Verizon has described at a number of investor conferences how they’re decentralizing advertising and promotion.  The influence of that course of change has not been felt but, however there are nonetheless 9 weeks remaining within the Vacation promoting season. 

It’s exhausting to think about Verizon will likely be profitable on both entrance.  Pay as you go requires a degree of buyer consideration (particularly with respect to older units and billing/ collections) not seen within the wi-fi postpaid telephone enterprise.  And iPhone promotions are often rapidly matched by opponents even when their community in that market is subpar. 

In the meantime, every of those actions reduces cable’s addressable gross additions market and drives up their buyer acquisition prices.  Backside line:  Our guess is that we find yourself with a bleak This fall and Q1 readout and Verizon adjustments their funding technique to “much less retail, extra wholesale.”  This helps profitability however shines a brighter highlight on the expansion and long-term sustainability of the cable relationship  And murmurs regarding administration’s ways flip into full-throttled requires heads.  The image is bleak except efficiency is remarkably improved by the top of 2023.

That’s it for this week’s Temporary.  Beginning this Thursday, search for “brief takes” on the Sunday Temporary web site.  Additionally, we could have the traditional interim Temporary and the Apple iPhone 15 Professional and Professional Max updates subsequent weekend.  And in two weeks, we could have a variety of earnings to digest.  Till then, you probably have associates who wish to be on the e-mail distribution, please have them ship an e mail to [email protected] and we’ll embrace them on the checklist (or they will enroll instantly via the web site).

Go Chiefs



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