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Apple iPhone 5 May Hit AT&T, Verizon Earnings

NEW YORK ( TheStreet) - Although Verizon's (VZ - Get Report) stronger-than-expected third quarter earnings proved some telecom sector skeptics wrong on the impact of Apple's (AAPL - Get Report) iPhone 5 to profits, some analysts are still bracing for the smartphone to cut into earnings by year-end.

In reacting to Verizon's third quarter, which was bolstered by higher-than-expected wireless margins and subscriber additions, Shing Yin of Guggenheim Securities highlights that competitor AT&T (T - Get Report) is likely to see a greater iPhone 5 earnings hit this quarter. The analyst also suspects carriers will face margin pressures headed into 2013 as the iPhone 5 goes global.

According to a Friday analysis by Yin, AT&T is still poised to show large iPhone 5 subsidy payments to Apple in its third-quarter results, due on Wednesday, which could hit margins. That's because Yin estimates AT&T took more iPhone 5 handsets for delivery in the quarter than Verizon, and its customers are nearly twice as likely to be due for a subsidized smartphone upgrade.

"[We] believe lower-than-expected iPhone 5 volumes (650k, compared to our expectation of ~1 million) and a lower upgrade rate (6.8%, in line with our expectation but lower sequentially from an already-low 7% rate in 2Q12) were positive factors," wrote Yin, in a note that highlighted impressive operating trends, like the activation of 6.8 million new smartphones in the quarter.

While Verizon earnings indicated near-5% dividend yielding telecom sector leaders like it and AT&T may continue to benefit from strong smartphone-based earnings, handset subsidy risks may yet materialize. "Verizon's strong 3Q12 margins may lead some investors to expect AT&T to similarly beat wireless margin expectations, but we believe such a conclusion is unwarranted," notes Yin.

In an analysis of what Verizon's earnings mean for the telecom sector, Yin also highlights that strong subscriber additions are likely the result of market share losses by industry also-rans like Sprint (S), T-Mobile and MetroPCS (PCS). In particular, as Sprint retires its iDEN network, some customers aren't switching onto its CDMA network, according to Yin. In addition, Yin sees Verizon's subscriber gains as an indication T-Mobile lost post-paid market share in the quarter, calculating up to 400,000 network switchers.

Regardless of whether the iPhone 5 will hit AT&T when it reports earnings, operating trends through the first nine months of the year are adding to conviction that large carriers are poised for an earnings renaissance as they try and profit from increasing smartphone data loads coming from Apple iPhones and Google (GOOG)-Android powered devices.

On Monday, Credit Suisse initiated Verizon and AT&T with 'neutral' and 'outperform' ratings respectively, citing price increases on data plans, lower subsidies for the iPhone 5 in contrast to earlier models like the 4S and overall margin improvements for the wireless business.

"We believe AT&T and Verizon will continue to report solid results for 2H12, with wireless churn continuing to improve y/y and margins significantly better," writes Credit Suisse analyst Stefan Anninger, in a Monday initiation that gives price targets of $36.50 and $45 for AT&T and Verizon respectively.
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AAPL $93.74 0.00%
S $3.43 0.00%
T $38.82 0.00%
VZ $50.94 0.00%


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