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Glimmer of Recovery for Wireless Services Sector

Analysts are fairly positive about earnings from AT&T Wireless, Verizon Wireless and Sprint PCS.
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Fourth-quarter earnings for wireless services companies are expected to point to a muted recovery, but looming issues are likely to impede any full-blown turnaround in 2003, analysts say.

AT&T Wireless

(AWE)

,

Verizon Wireless

and

Sprint PCS

(PCS)

are due to report earnings this week and next, and Wall Street has become moderately optimistic, even as investors have dialed back expectations.

When years of stellar growth screeched to a halt in 2002, wireless shares plunged to all-time lows at the end of the third quarter. But since then, shares in publicly traded wireless services companies have rebounded strongly. By the end of 2002, wireless stocks were up 20%, outpacing the

S&P 500's

rise of 5%. Since October, wireless stocks have grown about 132%.

"In contrast to 4Q01, we believe December quarter results were in line to slightly better than carrier expectations," said J.P. Morgan wireless services analyst Thomas Lee in a note to clients. "In other words,

there was no miscalibration of growth expectations." J.P. Morgan has an investment banking relationship to AT&T Wireless and

Verizon

(VZ) - Get Verizon Communications Inc. Report

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, which owns a stake in Verizon Wireless. Lee added, "We believe the wireless industry will see a gradual improvement in structure in 2003."

Cingular remains the lone exception to the fourth-quarter recovery trend. The wireless carrier, co-owned by

SBC Communications

(SBC)

and

BellSouth

(BLS)

, kicked off earnings season on a down note last week, when it reported its second consecutive quarter of customer defections. Cingular lost 121,000 customers during the holiday quarter. Company watchers said Cingular continued to suffer from the fallout of WorldCom, after that company shuttered its wireless division last fall. Cingular and AT&T Wireless had resold services to WorldCom customers.

But while analysts are expecting net additional subscribers -- a closely tracked barometer of growth -- to improve at the nation's largest carriers, industry watchers question whether that may be offset by weakness in other key areas, including sales and declining prices for wireless voice services. "Net adds are still pretty healthy," said Thomas Weisel Partners telecom analyst Ned Zachar. "It'll be interesting to see what happens to

average revenue per user and usage. Can

carriers maintain revenues in the face of lower prices?"

J.P. Morgan's Lee added in a note, "Trends in pricing remain a primary concern, given the fierce competition in the marketplace. The real issue, in our view, will be whether pricing deflates faster than margin cost

of a minute."

Stiff competition among the carriers is expected to continue to weigh heavily on wireless shares, as six major competitors wrestle for a declining slice of new customers. Currently, a little more than 50% of the U.S. population subscribes to wireless services, and further expansion is expected to be slow. Moreover, wireless companies are expected to let consumers keep their phone numbers when they switch carriers starting in November, and that is expected to drive up customer defections.

For the time being, analysts say the sector is largely expected to meet or slightly beat reduced expectations, on the heels of aggressive holiday promotions.

AT&T Wireless, which reports Tuesday morning, is expected to emerge as one of the strongest carriers in the fourth quarter. A previously disclosed 2002 tax refund helped boost its coffers to the tune of $436 million. The company is also seeking another refund for 2003, estimated to be about $525 million.

The company is expected to report a net loss of 2 cents a share on revenue of $4.01 billion in the quarter, compared with a loss of 48 cents and revenue of $3.52 billion in the year-ago period. For the full year, it is expected to earn a penny a share on sales of $15.6 billion, compared with a net loss of 38 cents a share on sales of $13.6 billion last year.

Meanwhile, Sprint PCS, which suffered a bloody adjustment period in the third quarter in order to rid itself of deadbeat customers, is expected to add new customers. Lee expects Sprint PCS to report 172,000 net new customers next week.

Sprint PCS is expected to lose 22 cents a share on revenue of $3 billion, compared with a loss of 32 cents a share on sales of $2.7 billion in the year-ago period. For the full year, it is expected to lose 67 cents a share on revenue of $12 billion, compared with a loss of 14 cents a share on sales of $9.7 billion last year.