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Wireless profit margins at AT&T ( T ) and Verizon Communications ( VZ ) should improve when they report first-quarter earnings — owing to fewer customers upgrading to new smartphones — a trend that might continue until Apple ( AAPL ) rolls out its iPhone 7 in the fall. The improving wireless margins at Verizon and AT&T has its roots in financing plans with monthly installment payments and accounting methods. Michael Rollins, an analyst at Citigroup, says upgrade rates are falling as wireless customers hang onto devices longer. “The longer device embrace by customers should help carrier financials for the first quarter,” Rollins said in a research report Friday. Apple’s iPhone 6S refresh was only a “marginal improvement” over the earlier iPhone 6, but the iPhone 7 should be different, Rollins says. “The iPhone 7 could lead to another industrywide upgrade cycle, as has been seen by each new ‘number’ of iPhone, and we await more details about the innovations it will contain,” he wrote. “Even with faster device sales in Q4, we are starting to see signs that the device cycle could eventually extend to 27 to 30 months, up from more traditional pacing of 24-26 months back in 2014-2015.” Jefferies analyst Mike McCormack has a similar view. “We expect lower volumes as upgrades hit record lows, supporting stronger industry margins,” McCormack said in a research note Thursday. “We expect this theme to prevail going forward, at least until the iPhone 7 launch this fall. We see opportunity for margin outperformance at both AT&T and Verizon, and continued positive momentum at T-Mobile US ( TMUS ).” Verizon kicks off the telecom Q1 earnings season on April 21, followed by AT&T on April 26. UBS analyst John Hodulik was ahead of the pack with a report out March 18. “The move to installment sales for handsets has been a big driver of improved industry profitability given the accounting treatment,” wrote Hodulik. “However, installment plans are also having more tangible effects on the industry by lengthening upgrade cycles for postpaid phones. “This is putting pressure on upgrade rates, which is in turn driving lower churn and fewer gross adds. We believe this will be a key theme for Q1 earnings, driving another quarter of strong sector profitability, especially at AT&T and Verizon.” Shares of both AT&T and Verizon were up a fraction in afternoon trading in the stock market today . Scalper1 News
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