Will LTE Expansion Help This Telecom Company?

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

AT&T recently announced that it would start selling the eagerly awaited  iPad mini before the holiday season. This addition will provide the company increased revenue in the upcoming quarters. While Verizon and AT&T have been competing for iPhone & iPad subscriptions, Sprint Nextel is also trying to increase market share by offering these lucrative products.

The table below shows the comparative figures of these companies

 Company Name

Operating Margin (Last 12 Months)

Gross Margin (Last 12 Months)

Sprint (NYSE: S)

- 4%

41%

Verizon (NYSE: VZ)

13%

60%

AT&T (NYSE: T)

13%

55%

Source: Yahoo finance

With the rapid shift in technology, the key for success for the carriers is LTE infrastructure. Let’s have a look at these companies’ current position in the industry and how these companies are currently performing.

Sprint Nextel is currently a small player in this field as compared to AT&T and Verizon. However, its current expansion plan of LTE network including its recent announcement of launching these services in 22 cities, the company can provide serious competition to its peers in the near future. Additionally, one of the important factors for consideration is Softbank’s plans of acquiring a 70% stake in Sprint. With this deal, Sprint would utilize Softbank’s experience of competing in a mobile duopoly, which Softbank gained in Japan against NTT Docomo and KKDI.

On the other hand, Verizon is the leader in the LTE network, with its services in ~440 markets and covering ~250 million people. The company is also planning to complete its LTE network expansion by 2013, which is ahead of its own target.  Verizon has a higher gross margin of 60% against that of AT&T’s 55%. The main reason behind this is AT&T’s higher subsidies for smartphones. Though AT&T has had a past record of selling higher iPhones than Verizon, this provides AT&T with an opportunity of targeting premium services to subscribers.

Although, some may feel that AT&T is still a laggard against Verizon, but looking at its growth plans especially it’s “Project VIP” I feel the company is making a perfect move.  Let’s have a look at the growth drivers.

Project VIP:

AT&T recently announced its Project VIP (Velocity IP) for expansion in the LTE network. The company will make an investment of ~$14 billion over the next three years.  Out of these, $6 billion will be invested in landline, and ~$8 billion will be utilized for improving the wireless network. The company is expected to add ~10K macro sites, ~1000 DAS (Distributed Antenna Systems) and ~40K small cells. This will improve its network coverage and the quality of its services in the upcoming time.  

Wireless Plan: With this investment, the company will broaden its LTE network and will cover ~300 million people by 2014. This will make AT&T’s LTE network available in ~99% of its service area.

Wireline Plan: The major constraint for AT&T U-Verse has been its speed. U-Verse has the highest speed plan of 24 mbps only against Verizon Fios that offers plans with speeds up to an impressive 300 mbps.  With this investment, AT&T is expected to offer U-Verse package having speeds up to 75 mbps.  The company is going to add ~8.5 million new customer locations for U-verse. Additionally, AT&T is also planning to increase its fiber cable network to 1 million new customer locations.

New Innovative Services:

With the expansion of the LTE network, the company is launching various new services. All of these services have a huge potential to become a multi-billion dollar segment.

  1. Digital Life: This remote monitoring and management platform provides the user with an option to monitor and customize the energy and security services. The company is currently running a test phase of this service in various markets, and is expected to launch it in 2013.
  2. Mobile Wallet: ISIS, a joint venture between T-Mobile, AT&T, and Verizon, recently test launched its Mobile Wallet Service in Austin and Salt Lake City. With the rapidly growing use of smartphones, this technology should become popular in the upcoming time.

Additionally, its other two services Mobile Premise and Connected Car would also be a boost to its revenue in future. AT&T has been working with Ford, Nissan and BMW for its Connected Car project. This service would provide the vehicle diagnostic and real time traffic updates.

iPhone Showing Strong Growth:

AT&T should continue to benefit from its strong relationship with Apple. The company had 4.7 million new subscriptions of iPhone in 3Q12 (vs. 2.7 million Y/Y). With the recent launch of iPhone 5 and also the addition of iPad mini, we can expect a better 4Q12 result, looking at the massive response for these products.

Apart from all the growth drivers, AT&T has a share repurchase plan for ~329 million shares. AT&T is expected to complete its share repurchase authorization of December 2010 for the remaining 29 million shares by the end of 2012. Also, the company announced in July its additional repurchase plan of 300 million shares.  I feel the company will continue to take advantage of a favorable debt market for these buybacks.  Furthermore, the company provides good dividend yield of 5.3% against Sprint’s 1.6%. Overall, I feel the company should continue to provide a good return to its shareholders in the future. I would recommend buying this stock.

 

 

 

 

 

 

 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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