There is a mysterious phenomenon afoot in the U.S. wireless industry. The competition has never been fiercer, yet the two big incumbents are poised to report record third-quarter wireless margins.
The secret to how Verizon Communications VZ 0.00 % and AT&T T -0.59 % are pulling this off lies in the way they account for new plans that separate the cost of a phone from that of service. The carriers book more revenue for devices upfront. That gives them a powerful tool, at least on paper, to rise above the competitive fray spurred by an aggressive T-Mobile US TMUS 1.65 % and a highly promotional Sprint. S 2.80 %
Analysts expect Verizon on Tuesday to report third-quarter earnings per share of $ 1.02, up from 89 cents a year ago. On the wireless front, the carrier is expected to add a net 1.2 million postpaid subscribers versus 1.5 million a year ago.
Under the installment plans for devices, new phone subscribers do more to boost margins. UBS Group estimates Verizon sold about 9.1 million smartphones in the quarter, about 60% of which were on the new plans. That is up from 49% in the second quarter and 12% a year ago.
As a result, UBS expects third-quarter wireless-service margins on the basis of earnings before interest, taxes, depreciation and amortization to widen by 6.9 percentage points, to 56.4%.
Still, Wall Street is already wise to the accounting boost. And investors would do well to look beneath the surface.
Verizon has been cutting prices to retain and attract subscribers. UBS estimates average revenue per postpaid account fell 5.8% year over year in the quarter and service revenue dropped 4.3%. The latter compares with the second quarter’s 2.2% decline and with 4.8% growth a year ago.
Then there is the future: At a Sept. 17 investor conference, Verizon said its full-year 2016 earnings may “plateau at 2015 levels” as installment-plan uptake apparently won’t be strong enough to offset the dilutive sale of wireline properties in California, Texas and Florida to Frontier Communications Corp. FTR 0.57 % Verizon’s June acquisition of AOL and investments in its go90 mobile video app will also weigh.
For investors, Verizon’s headline numbers will only tell part of the competitive story.
Write to Miriam Gottfried at [email protected]