third-quarter earnings report on Monday is expected to follow rival
latest profit release, which highlighted strong wireless growth and continued erosion of its wireline business.
But AT&T had
new iPhone 3G -- Verizon might be stuck with slower growth in both its wireless and business-customer segments.
takeaway from AT&T is that the report was mostly black clouds and one silver lining with the iPhone," says Craig Moffett, analyst with Sanford Bernstein. "Verizon could be a mirror image of that report, but without the sliver of good news."
Verizon is expected to notch a profit of 66 cents a share on revenue of $24.5 billion, according to a Thomson Reuters poll of analysts. That revenue target marks an increase of 1.6% sequentially and 3% from the same quarter a year ago.
On Wednesday, AT&T said its third-quarter profit fell short of Wall Street's forecast on a per-share basis, as earnings were hit by higher subsidies related to greater-than-expected sales of Apple's new iPhone 3G, a product for which it is the exclusive authorized U.S. provider. AT&T's pretax third-quarter earnings were cut by about $900 million, or 10 cents a share, as a result.
But he new iPhone helped AT&T realize a net gain of 2 million wireless subscribers, much more than analysts expected to see. Moffett says Verizon doesn't have the luxury of a hot handset device like the iPhone, meaning that it might see a slight slowdown in subscriber growth.
"Unless you believe that the market suddenly re-expanded, which is improbable at the extreme, then AT&T had to have been taking share from somebody," he says. "Most likely, it was taking share from
. You have to believe that everybody ceded share to AT&T in the third quarter, including Verizon."
Unfortunately, even any wireless gains that Verizon ekes out is expected to be offset by the company's wireline business as a result of significant weakness in landline connections. Cash-pinched customers have continued to drop landlines and stick with wireless-only service. AT&T lost more than 1 million residential lines during its third quarter.
Such a dropoff wouldn't be anything new for Verizon. Its core business suffered in the second quarter as its landline revenue fell 1.8%. Total landlines fell 8.5%, with a large amount of that decline coming from the residential segment. Verizon's operating income margin was 8.8% in the second quarter, unchanged from the same period a year earlier.
"Wireline business has seen increased competition and price compression when customers renew contracts but as new contracts going forward, less discounting and selective price increases within the business product line is expected," writes Greg Miller, research analyst with Deutsche Bank, in a research note. "The turmoil in financial service sector could start to have some impact on
The enterprise segment is also worrisome to analysts. AT&T's enterprise revenue shrank 1.4%, falling short of estimates for an increase of 1%. Those results contradict comments made by Ron Spears, group president for AT&T's Enterprise business, who said the division was in good shape" just a month ago.
Moffett says that Spears' remarks are a stark contrast to comments from Verizon about price competition and margin compression in the enterprise segment. Not long before Spears made his comments, Verizon's management said during a tech conference that stresses existed in its enterprise business.
"For AT&T to report weak results was troubling, because, through the third quarter, they said the business was holding up very well," Moffett says. "Meanwhile, Verizon already told you it was going to be a weak number. It makes you wonder if their numbers could be even worse."
UBS analyst John Hodulik says the turmoil in the financial sector could continue to pressure enterprise revenue trends into the fourth quarter. "We believe our estimates for 1% enterprise revenue growth in
the third quarter and 1.2% in
the fourth quarter, up from a 0.7% decline posted in
the second quarter is too optimistic," Hodulik wrote in an earnings preview.
Analysts also are expecting clarity on Verizon's pending acquisition of privately held
. Verizon Wireless, the joint venture between Verizon and
, will buy the equity of Alltel, the fifth-largest U.S. wireless carrier with 13 million subscribers, for approximately $5.9 billion. Based on Alltel's projected net debt at closing of $22.2 billion, the total value of the transaction is $28.1 billion. The deal is the biggest telecom merger since SBC and AT&T joined in March 2006.
However, doubt has surfaced over whether the transaction will actually be completed, as macroeconomic and credit market conditions have worsened considerably, with Fridays' global market selloff not helping matters. Verizon shares, which have fallen by nearly one-third in the past eight weeks, were recently down 5.5% to $24.81.
Verizon had expected to issue new debt to repay Alltel's term loans, and is now faced with higher interest rates.
The Wall Street Journal
reported this week that speculation exists on Wall Street that Verizon may try to back out, although CEO Ivan Seidenburg was quoted as saying the higher-than-anticipated borrowing costs won't derail the deal.
"You'll get a reassurance on no uncertain terms that they're proceeding with the deal," says Moffett. "I think they're scratching their heads, wondering why people think they haven't already been clear. The risk that Verizon is going to walk away from the Alltel deal is very, very small."