AT&T, Verizon Earnings On Tap With The 5G Era In Sight

With the next two weeks marking the heart of earnings season, investors keeping tabs on the telecom industry can look for reports from two major companies with diverging strategies – AT&T Inc. T and Verizon Communications Inc. VZ.

VZ and T are the two largest wireless carriers in the U.S. by subscribers. T is scheduled to report Q2 earnings before the market open July 24, and competitor VZ is scheduled to report Q2 earnings before the market opens on Aug. 1.

These companies have roles in communications and media, where the landscape is changing rapidly with new competition, mergers and changing consumer demands, among many other factors. (T and VZ are technically part of the newly formed Communication Services sector, which combined Telecom and Communications.) This quarter, investors can watch for any news of progress on the 5G front from either company, as well as other highlights in business development strategies, among other key data.

Some Wall Street analysts see risks in the wireless industry in an increasingly competitive environment, which could lead to lower pricing and pinch margins. We’ll have to see how those suspicions shake out this quarter.

Verizon Targeting 5G

Lately, Verizon’s main effort has been in getting started in the 5G game. It’s recently been building out its 5G network, which claimed a large chunk of its $4.3 billion expenditures. It’s planning to launch the 5G network in 30 major cities this year. For consumers who can tap into it, 5G can offer speeds of about 10 times faster than they might normally get.

So far, the rollout has been largely symbolic because most consumers don’t have the Motorola phone for the clip-on modem that will upgrade the service, nor is the infrastructure build out completed. However it offers potential for revenue growth for a number of companies in the communications sector besides VZ, including T. Verizon has said it will not likely see revenue from 5G upgrades until 2020.

Last quarter, VZ reported earnings of $1.22 per share, up from $1.17 per share the same quarter the year prior and well ahead of the analyst estimate. Revenue was $32.1 billion, up from $31.8 billion the year prior, about on par with expectations. It had 61,000 net new additions to its postpaid retail wireless business in Q1.

VZ shares are essentially flat so far this year, as of July 22, versus the S&P 500’s (SPX) rise of 19%.

VZ is expected to report adjusted EPS of $1.20, right on par with the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $32.4 billion, up 0.6% from $32.2 billion a year ago.

Verizon Options Activity

The options market has priced in about a 1.6% stock move in either direction around the coming earnings release.

Put option volume has been light, but most active at the 55 and 56 strike. Calls have been more active, with volume concentrated at the 58 and 59 strikes. Implied volatility was at the 34th percentile.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

AT&T Targeting Streaming

AT&T is the second-largest U.S. wireless carrier by subscriber numbers. Like VZ, it’s getting in the 5G game with a planned rollout of 5G networks, where it’s still laying a foundation.

In another move that analysts believe has the potential to pay off in the long-term, T has announced a partnership with IBM IBM that should help modernize its internal software applications. Under the multi-year agreement, IBM will provide infrastructure to support T’s business applications.

AT&T also seems to be more focused on its media business. Recently, it unveiled plans for HBO Max, a streaming service launching next spring that will compete with the likes of Netflix Inc. NFLX and Amazon.com, Inc.’s AMZN Amazon Prime. It will have the exclusive rights to popular shows like Friends, The Fresh Prince of Bel Air, Big Little Lies, among others.

T’s debt load, which many analysts say is significantly high, is also likely to continue to be on investors’ radars again this quarter. It held $169 billion in debt at the end of last quarter, and investors will soon learn whether its efforts to pare back its debt are continuing to have any impact. In the first quarter, it said it deleveraged $2.3 billion.

Last quarter, T shares fell for the fifth consecutive quarter as revenue missed guidance in part on lower-than-expected sales in its WarnerMedia unit, which holds premium channel HBO and Turner as well as the upcoming HBO Max.

T is expected to report adjusted EPS of $0.89, up from $0.91 per share in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $44.83 billion, up 15% from $38.99 billion a year ago.

So far this year, shares of T have made substantial strides compared to VZ, with the stock up about 14% as of July 22.

AT&T Options Activity

The options market has priced in an expected share price move of about 3.9% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 34 strikes while put activity has concentrated at the 32 and 33 strikes. The implied volatility sits at the 37th percentile.

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