For telecom companies, this year is all about 5G, the next generation of mobile broadband that promises exponentially faster upload and download speeds. Companies in this sector all want a slice of the 5G pie, making the race to 5G a competitive playing field. It’s much more than phones and internet. We’re talking major applications that could transform the future across different industries such as medicine, education, and manufacturing.

What Can Investors Expect?

With 5G networks expected to roll out in many countries and telecom companies diversifying into the streaming services, this defensive sector’s playing field could see many changes. But keep in mind new technology could take time for consumers to adopt to the need for higher speed, lower latency, and overall better performance.

Countries such as China and South Korea have invested heavily in 5G technology. But there are skeptics, as evident from a recent Wall Street Journal report that said 5G smartphones were “underwhelming” in their first big test in South Korea. Consumers felt the technology wasn’t much different from the previous 4G generation of smartphones. The tepid initial response to 5G could become a risk since companies rely on consumers for revenue.

Listening In

Going into the two company’s earnings calls, keep in mind people may own T and VZ at least partly for their dividends, which have historically paid a relatively high dividend yield. So consider for any news on that front. For T in particular, one question might be how management plans to reduce its high debt load so it can continue paying dividends to its shareholders.

Last year, remember, management came under pressure from an influential activist investor that criticized the company’s aggressive acquisition strategy, and the accompanying rise in its debt. So, anyone on the T call might want to keep their ears open for comments about potential acquisition plans.

AT&T: Keeping Customers Close

At Warner Media day last year, Randall Stephenson, CEO of AT&T commented, “We spend our waking hours in pursuit of three things around here: How do we create greater content to drive more engagement, how do we acquire more customers, and how do we reduce customer churn.” These would be the three things to look for on the earnings call.

But management sounds optimistic about the company’s streaming content services. T’s Time Warner Media expects to launch its streaming services—HBO Max—this spring. T had some big expenses in the recent past—the DirecTV and Time Warner acquisitions come to mind. Another event that had a toll was a court battle with the Department of Justice. Still, 2019 ended up being relatively positive for T. Its stock price was up about 37% for the year.

Subscriber adds for mobile could be an important consideration when looking at T’s Q4 earnings. Another would be Warner Brothers’ theater revenues. Revenues from the entertainment segment are the second largest revenue source.

AT&T Earnings And Options Data

T is expected to report adjusted EPS of $0.87, up from $0.86 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $46.95 billion, down 2.2% from a year ago.

The options market has priced in an expected share price move of 2.9% in either direction around the earnings release. Implied volatility was at the 48th percentile as of Friday morning.  

Looking at the Jan. 31 expiration date, option activity has been highest near the at-the-money strikes, with concentrations between the 38 and 39 strikes.

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.

Verizon: Focused On 5G

VZ has also started launching 5G smartphones in an effort to get customers prepared for the 5G transition, although the phones are capable of working on a 4G network.

At the Consumer Electronics Show in Las Vegas earlier this month, VZ had a big presence, emphasizing its intention to build out and speed up 5G deployment. The company also plans to participate in the home environment and bring services that depend on the 5G network infrastructure. It’s a matter of how quickly consumers embrace the new technology. From a financial standpoint, it may take a few years before seeing revenue growth from 5G.

Then of course, there’s the partnerships with content providers to build customer loyalty. Management sees value in the investment with Disney (DIS), even though it may take time to pay off. CEO Vestberg believes that in a 5G network it’s necessary to combine cloud services, which is why VZ is teaming up with AWS. In a recent Bloomberg interview, Vestberg said, “We’re in a brave new world. We need to give customers optionality.”

Verizon Earnings And Options Data

VZ is expected to report adjusted EPS of $1.14, up from $1.12 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $34.6 billion, up 1% from a year ago.

The options market has priced in an expected share price move of 2% in either direction around the earnings release. Implied volatility was at the 29th percentile as of Friday morning.

Looking at the January 31 expiration, call activity has been higher at the 61 strike while puts have been active at the 59 strike.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy.

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