Verizon (NYSE:VZ) is set to announce its Q2 FY2012 earnings on July 19th. During the earnings call, we will take a close look at subscriber additions to see how the carrier is performing amid the industry-wide saturation in wireless growth. Increasing smartphone penetration should however enable the company to post a sequential increase in postpaid ARPU levels, bolstered by data ARPU. In addition to the company’s financials, we will also take special interest in the uptake in LTE subscriber numbers as Verizon looks to promote LTE widely this year, challenging AT&T (NYSE:T) and Sprint (NYSE:S) in the wireless market.
Saturated wireless market
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The U.S. wireless market has become increasingly saturated with wireless connections having exceeded the population in mid-2011. This has made the acquisition of new subscribers, especially those that pay for the higher-margin data plans, very tough for the wireless carriers. In the last quarter, for example, Verizon added only about 500,000 postpaid subscribers in all, down by more than 40% over the same period last year. The story at AT&T was also similar with postpaid net adds declining from 331,000 in the year ago quarter to only about 187,000 last quarter.
With the wireless industry getting more saturated, the focus has shifted from acquiring new subscribers to converting more of their existing base to smartphones. At the same time, new growth areas in other non-smartphone connected devices such as M2M, telematics, tablets, e-readers are being explored. The last quarter numbers showed that tablets accounted for more than half of Verizon’s net adds and almost all of AT&T’s. Verizon, with its acquisition of Hughes Telematics this quarter, has made its connected device ambitions clear. (See Verizon Picks Up Hughes Telematics For Connected Devices Push)
Share Everything Plans
Furthermore, Verizon launched the Share Everything plans this quarter to get users to add more of these connected devices to the carrier’s wireless network. While this might decrease the average revenue per device seeing as these connected data-only devices consume much less data, as users connect more devices to the wireless network, Verizon will be able to draw more revenues from each individual subscriber. Moreover, since their data consumption is low, it will help shore up the service margins for Verizon.
The focus on margins is also evident from the fact that Verizon has prohibited its unlimited plan users from availing smartphone subsidies in case they want to continue using their plans. (see Verizon’s Share Everything Plans Could Kill The Last Unlimited Plans) This, we believe, is a step in the right direction since it will help Verizon more efficiently manage network resources that are not exactly unlimited in nature and monetize every bit of data transferred through its pipes. The limited nature of spectrum is evident from the spectrum crunch that the industry is currently facing, and we believe that Verizon is likely to get its cable spectrum purchase approved by the FCC and will be able to use it to augment its LTE buildout. (see Verizon Likely To Receive FCC Approval For Cable Spectrum Purchase)
With Verizon maintaining an enviable lead over rivals AT&T and Sprint in terms of LTE coverage, we will be looking for numbers that suggest that LTE adoption is picking up. As of last quarter, Verizon converted only 9% of its postpaid subscriber base to LTE. While LTE adoption has so far been sluggish, we expect the launch of the iPhone 5 later this year will be the tipping point with Verizon’s leading LTE coverage, providing it with a good marketing ploy to drive LTE adoption rates further.
The increased adoption of 4G will reduce dependence on Verizon’s 3G networks, which are under great strain due to heavy data usage by smartphone users. Also, LTE as a network technology not only supports higher speeds but is also more efficient than the current 3G networks at handling data, reducing maintenance and handling costs. Further, higher LTE speeds will see subscribers increasingly use data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPU levels for Verizon over the coming years.