One of the few areas tech investors have come to count on for an endlessly expanding market in recent years is wireless. As smartphones morphed from boring (if useful) business devices like Research In Motion‘s (NASDAQ:RIMM) BlackBerry to the current must-have, do-everything consumer gadget like Apple’s (NASDAQ:AAPL) iPhone, huge sales of mobile devices have been accompanied by big increases in wireless subscribers.
Market research firm ComScore says nearly 42% of American mobile subscribers are now packing smartphones, and the popularity of these devices helps to explain how the number of wireless subscribers in the U.S. rose from 93 million in 2000 to 293 million by 2010. That’s now topped 300 million (I’ve seen figures claiming well over 325 million), which brings up a crucial point: What’s the current population of the U.S.?
According to the Census Bureau, it’s about 313.4 million.
It doesn’t take a calculator to do that math. Sure, lots of people will end up with multiple wireless devices, and for some, this will mean multiple wireless plans. There’s also duplication through “work”-issued devices and personal devices. But the days of double-digit quarterly expansion in U.S. wireless subscribers appear to be numbered.
That means wireless providers will be eyeing each others’ customers. A quick look at the big wireless carriers’ most recent earnings reports provides the backdrop for the coming battle for the same customers.
First-quarter earnings at telecom giant AT&T (NYSE:T) beat expectations, at $31.8 billion (60 cents per share) on revenue of $3.6 billion (up $200 million year-over-year). Wireless revenue was up 5.5% compared to the previous year’s results, and AT&T says it added 726,000 mobile customers, bringing its total to 103.9 million. It activated 4.3 million iPhones during the quarter, with 21% of those being new customers. AT&T shares are up over 8% this year, reaching a new one-year intraday high on Friday of $32.75.
Verizon (NYSE:VZ) delivered earnings per share of 59 cents for the quarter, a 15.1% year-over-year increase, on $28.2 billion in revenue (up 4.6%). The company reported adding 734,000 new customers, for a total of 93 million wireless subscribers. Analysts are looking for the earnings growth to continue, slowing this quarter to around 11% but jumping again to 17% or more for the third quarter. Verizon shares are up 4% in April (but just fractionally on the year), currently around $40.25, also near a one-year high.
Sprint Nextel (NYSE:S) reported an operating loss of $255 million for the quarter (29 cents per share), despite strong wireless sales. It racked up nearly 1 million new subscribers and sold 1.5 million iPhones, with 44% of those being new Sprint customers. Still, analysts are calling for continued losses through 2012, likely totaling close to $1.49 per share over the year. Sprint stock has been on a five-year downward spiral (it traded at over $20 in 2007) and dropped to $2.39 after the earnings report, just above its all-time low of $1.83.
Flat-rate wireless provider Metro PCS Communications (NYSE:PCS) reported profit of $21 million for the quarter (6 cents per share), a 63% decline from last year’s $56 million profit (15 cents per share) showing. This significantly missed expectations of 17 cents per share. Although the company added over 131,000 new subscribers, that was a steep drop from the nearly 726,000 it added in first-quarter 2011 and the 198,000 in the previous quarter. PCS shares are down over 19% this year, now around $7, although analysts do see modest earnings growth in the 4% to 5% range through the rest of the year.
Forbes probably summed it up best when it wrote “Leap Wireless Leaps Backwards.” Prepaid wireless provider Leap Wireless (NASDAQ:LEAP) saw its shares drop 26% on first-quarter results that included a loss of $1.28 per share (even worse than last year’s $1.26 loss) on revenue that was up 6% year-over-year to $3.07 billion. Net new wireless subscribers were pegged at a less than expected 258,000. While analysts see LEAP’s losses slowing, the company isn’t expected to be out of the red this year — or next, for that matter. Down more than 35% this year, LEAP stock is currently trading not far from its 52-week low of $5.50.
There are a few key takeaways from these earnings reports. The big telcos — AT&T, Verizon and Sprint — are all claiming significant increases in net new wireless subscribers, but these impressive-sounding numbers are way down from the millions they could claim when wireless was in peak expansion mode. They’re also tying many of these to new iPhone or iPad activations, or to gains in prepaid cell phone sales.
Selling iPhones incurs costly subsidies, and they’re subject to declining demand as consumers wait for the latest and greatest model to arrive. And those prepaid devices (Sprint alone claimed 870,000 new prepaid activations) are less profitable than contract plans, with many coming at the expense of smaller carriers like LEAP.
When it comes down to the key metric — net new wireless subscribers on contracts — the numbers have slowed significantly. AT&T’s growth was its lowest in eight years. Verizon’s dropped from 1.78 million in first-quarter 2011. And the picture wasn’t any prettier for the smaller players.
Wireless growth is tapering off. To gain meaningful market share now means competing for customers through handset subsidies, investing in new infrastructure (such as 4G LTE) and chasing less profitable prepaid customers. Competition for existing customers almost always cuts the profitability of an industry. Inevitably, the deep pockets of market leaders like AT&T are going to result in tough times for the smaller players like LEAP and PCS.
As of this writing Brad Moon doesn’t own any securities mentioned here.