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AT&T, Verizon Facing Slower Earnings Growth

A weaker economy is forcing U.S. consumers to find ways to lower their telephone bills, likely limiting profit growth for phone companies like AT&T and Verizon Communications.

AP

While wireless growth should continue to boost earnings, U.S. carriers are suffering from people disconnecting home phones and from new mobile users opting to pay for calls in advance, usually meaning less revenue for the companies, analysts said.

All eyes will also be on struggling No. 3 U.S. mobile service Sprint Nextel for signs that it could spark a price war by becoming more aggressive on call prices.

"What you'll see is people trying to economize on their monthly plans," said Donna Jaegers, analyst at Janco Partners, noting higher gasoline and food prices, and unemployment.

Top mobile phone maker Nokia sent shivers through the market on Thursday when it partly blamed the U.S. economy for an estimated decline in the global mobile phone market in euro terms in 2008.

Setting a somber tone ahead of its first-quarter results next Tuesday, AT&T said on Friday it would cut its work force by 1.5 percent, or around 4,600 jobs, resulting in a charge of $374 million pretax.

Analysts are projecting AT&T to report a 23 percent rise in quarterly profit to $3.5 billion, or 58 cents per share, according to Reuters Estimates.

Verizon is expected to report a profit rise of 19 percent to $1.8 billion, or 61 cents per share, on April 28 and Sprint Nextel is seen posting a loss of $464 million, or 14 cents a share, on May 12, according to Reuters Estimates.

Verizon and AT&T are seen adding 1.4 million and 1.34 million wireless customers respectively in the first quarter, according to five analysts. Many of those customers likely came from Sprint, which warned of a loss of 1.2 million users.

"We need to be looking at whether or not Sprint would recover," said Bear Stearns analyst Michael McCormack. "In which case those very strong subscriber numbers at AT&T and Verizon in the first half could become more challenging in the second half of the year."

JPMorgan's Chaplin said a poor performance from Sprint could force the No. 3 wireless provider to cut prices, triggering a potentially industry-crippling price war.

"The easiest lever they have to pull is pricing," he said.

Less Revenue Per User

Wall Street expects an increasing portion of wireless subscriber growth in the first quarter to come from people who pay for calls in advance, who tend to be more fickle than post-paid subscribers, who are locked into monthly bills.

Some prepaid users also have poor credit, which can disqualify them from monthly plans. But with 85 percent of U.S. consumers already owning cell phones -- many of them on one- or two-year contracts -- prepaid is where the growth lies.

"It was noticeable last quarter and it's going to be more noticeable this quarter," said JPMorgan analyst Jonathan Chaplin, referring to the prepaid trend.

A weaker economy may also make it hard for wireless providers to make up some of the growth shortfall with second subscriptions, like data cards for laptops. And even monthly subscribers may try to lower their bills, for example moving to $59 monthly plans from $79 plans.

"I don't expect customers to give up their wireless phone because of the economy but perhaps not spend as much on a monthly basis as they once did," said Stanford Group analyst Michael Nelson.

The outlook is worse in the wireline segment, as more consumers are expected to switch to cable service providers' "bundled" packages of video, Internet and phone.

Housing foreclosures and job cuts may accelerate the trend of people disconnecting their home phones.

Consumer wireline accounts for around a quarter of revenue at AT&T and Verizon. With each wireline cancellation, these companies also lose an opportunity to sell higher-margin services like high-speed Internet and video.

Bear Stearns' McCormack forecast a 5.2 percent fall in residential primary line losses at AT&T, and an 8.3 percent fall at Verizon. Sanford Bernstein analyst Craig Moffett said he thought the situation was worse for Verizon than for AT&T, but wireline losses are likely to hurt both in the long run.

Janco's Jaegers said Denver-based Qwest Communications International may be particularly vulnerable since it operates in areas with high foreclosure rates. She sees Qwest's residential line losses increasing to around 10 percent.

Increasing bankruptcies and slower economic activity could hit corporate customers too, analysts said.

"There's going to be a lot of focus on the enterprise telecom business. A lot of people are waiting for that piece to be impacted by the economy," said Bear Stearns' McCormack.

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