Verizon Communications Inc. and AT&T Inc. shocked the investors with disappointing results last week. Verizon fell short of growth targets, and AT&T warned about the high costs involved with phone freebies.
The news triggered a selloff in the market, with three industry giants seeing their market capitalization wiped off by about $ 40 billion. Potential goldilocks in the current scenario is T-Mobile US Inc. assuming its second-quarter results are okay.
On Wednesday, before the market opens, T-Mobile will report its earnings.
Investors will wait to see if the results are due to a consumer spending slowdown. Considering the high inflation, it could be a reason or other self-inflicted reasons.
High Upfront Promotional Cost
For instance, AT&T reported a growth of 1.06 million customers, but it fueled phone giveaways. The promotion cost was $800, a big upfront expense by the carrier. The cost is designed to be recovered over time, but only if the customer stays long enough.
The free cash flow is affected when all operating expenses, including promotional costs, add up. This is why AT&T lowered its annual forecast last week. Its share price dropped 7.6%. The company, in a note, warned those who were watching the economy, saying that customers were feeling the pinch of inflation. The average delay in mobile bill payments was two days.
The largest US carrier, Verizon, tried to stay away from the mobile phone freebie until the last quarter but joined the bandwagon to boost growth with spending.
Verizon faced a different problem. Its mobile wireless mobile subscribers grew only by 12000 in the second quarter. This was below the analysts’ estimates of 167,200 new customers.
Saturated Mobile Market
The market is already saturated, with nearly everyone having a mobile phone. New customers are difficult to get unless they have a poor credit history with prepaid services. The idea is to migrate these customers to regular monthly plans. The growth of AT&T may be due to getting users with overdue bills.
Chief Financial Officer of Verizon, Matt Ellis, says they are comfortable with customer quality and selective about customer migrations.
Though Verizon has not seen an increase in customer defaults, CEO Hans Vestberg said inflation was affecting the company.
Maribel Lopez, a Lopez Research analyst, says the wireless spendings are essential, and spendings remain strong.
Wall Street estimates T-Mobile results on Wednesday will show nearly 1. 2 million new subscribers. The results of the second largest carrier in the US will put them on top of both AT&T and Verizon.
If T-Mobile posts growth in subscribers without dramatically affecting its free cash flow, estimated at $1.4 billion, the industry will avoid looking at economic challenges.
Walt Piecyk, an analyst with LighttShed Partners, says that T-Mobile cannot blame the economy if it suffers hiccups in the second quarter.
