AT&T, Verizon Brace for More Wireline Losses

"Unfortunately, trends in the wireline [segment] are nothing short of dismal," writes Craig Moffett, an analyst with Sanford Bernstein, in a research note. "As telco performance erodes, margin expectations for the whole wireline business will need to come down, in our view. Access line losses are accelerating. The rate of incremental broadband penetration is slowing. [Average revenue per subscriber] growth is therefore decelerating."

Fear over what Verizon and AT&T will say about wireline losses has prompted analysts to cut estimates for their second-quarter profit, especially given current macroeconomic conditions. According to Thomson Reuters, analysts have reduced estimates for earnings per share and revenue for both companies over the last month.

Credit Suisse analyst Chris Larsen is among those ratcheting back estimates, citing the weakening macroeconomic environment and more aggressive wireless competition.

"We believe these factors drove greater wireless and technology substitution than we had anticipated," Larsen writes in an earnings preview. He expects total access line losses to be 7.9% year-over-year at AT&T and 8.6% at Verizon, adding that loss rates for both may not improve to 2007 levels "until mid-2010."

However, Moffett notes two important differences emerging from state-by-state trends at AT&T relative to Verizon. "Access line declines at AT&T have been somewhat less severe," he says. "Access line declines at AT&T have, at least thus far, had a much less severe impact on margins."

On the positive side, the average revenue per subscriber, or ARPU, has been rising each quarter, which Moffett attributes to increased broadband penetration and price hikes. In the first quarter, Verizon said that wireline consumer ARPU rose nearly 10%, with FiOS service ARPU of $129. In the same quarter, AT&T's average revenue per primary line rose 5.4%, an increase that was "driven by growth in broadband and bundled video," the company said.