Nomura Securities on U.S. Telecom, Media and Internet - Conclusion: The iPhone Isn't Good For Wireless Carriers

January 30, 2012 12:05 PM EST
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Nomura Securities on U.S. Telecom, Media and Internet

Analysts Mike McCormack and Mike Liddell, said, "With the results of Verizon (NYSE: VZ) and AT&T (NYSE: T) in hand, and Sprint (NYSE: S) expected to post over 800bps of margin contraction when they report 4Q earnings in two weeks, we think a logical conclusion is that the iPhone (Nasdaq: AAPL) is not good for wireless carriers. In our view, the margin dynamics of the iPhone will remain very challenging, unless of course you are Apple or Uncle Sam (or a carrier willing to change the financial relationship)."

"The benefits to Apple fundamentals have been undeniable, and we hear that the stock has been no slouch either. When we look at the direct and indirect economics that Apple has managed to extract from the telco carriers, the carrier-level value destruction is quite evident."

"To help frame the margin destruction, we start with the direct impact of the iPhone. For the eight-quarter period spanning 2009 and 2010, Verizon averaged 55% incremental wireless service margins with a 1,600bps standard deviation, implying that even in “bad” (minus 1 standard deviation) margin quarters, incremental margins were above 40%. As analysts, it was hard for us not to be encouraged by this performance. However, once the iPhone was launched on Verizon’s network in 2011, incremental margins fell to 15% in 1H11, and to a sobering negative 40% in 4Q11."

"As comparison, AT&T delivered an average incremental margin of ~45% over the 2009-2010 period, with a 3,300bps standard deviation accentuated by the iPhone-launch quarters. With the entry of the Verizon iPhone in 1H11, AT&T’s competitive response delivered an incremental margin profile in the low teens, and was an astounding negative 195% in 4Q11. How can the 4Q data be true? The math is simple and painful: margins contracted ~$1.07bn Y/Y while revenue expanded by only ~$550mn."

However the wireless companies usually ask analysts to focus on better ARPU profiles and how iPhones extend the life of paying subscribers, but Nomura analysts figure that for AT&T (between 2009-2011) post-paid churn increased 5bps.

"When compiling puts and takes to the iPhone investment opportunity, the evidence observed to date seems to affirm our long-term belief that the iPhones are really good for Apple, probably good for most people, and terrible for the carriers. As we move forward into 2012, and approach the annual iPhone re-fresh rite, we wonder how much longer investors will seemingly look past the dilution embedded in the model...iPain indeed!"

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