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As we indicated in yesterday’s TSB, here’s the last iPhone availability update we will be publishing. All data is taken from the carrier websites as of Nov 10. If there is a range given for a ship date, we chose the latest date. Here are the takeaways from the latest data:
All iPhone issues have cleared up for Verizon. In a handful of instances, Verizon has better availability than Apple’s online site. As you can see from the above slide, it’s generally a good inventory situation for AT&T as well unless you really want the color yellow.
The iPhone Pro availability is a little bit better for T-Mobile and worse overall for AT&T. Silver seems to be the color issue this week (it was previously midnight green).
The iPhone 11 Pro Max continues to be an issue for T-Mobile, except for the 64GB model (which is likely the least ordered model under the logic of “If you are going to buy the iPhone 11 Pro Max, get 256 or 512GB”). Again, Midnight Green colors have been solved, but to have half of the colors out of stock until (as late as) December 10 is pretty severe. In each of the availability cases described above, customers could go to the local Apple store and activate service on T-Mobile in lieu of waiting a month (the Apple site is showing no backorder of any iPhone 11 Pro Max model).
The bottom line here is that both AT&T and T-Mobile are seeing strong demand for the iPhone 11 and most of this is coming from upgrades and promotional offers. Verizon’s availability likely has something to do with their 5G messaging (the iPhone 11 lineup is not compatible with Verizon’s latest network).
Hope that this information is useful. You can download the information here: iPhone availability as of Nov 10
Greetings from our nation’s capital (now home to the World Series champion Washington Nationals) and Lake Norman, NC. This was a very busy week for earnings with Apple, AT&T and T-Mobile all announcing earnings. We are going to start with AT&T given their 3-year guidance but will also devote time to both Apple and T-Mobile earnings.
Given the level of earnings-related news, we will not have a TSB Follow-Ups section this week but will resume this section in an upcoming Brief. First up – AT&T.
AT&T’s Multiple Headlines: Legacy Bottom Within Sight, New Wireless Pricing Plans, Fiber Penetration Coming, and Renewed Reseller Focus
AT&T led this week’s earnings with a detailed assessment and lengthy earnings call hosted by CEO Randall Stephenson and CFO John Stevens. At the end of the earnings presentation, they showed the following waterfall chart outlining how they would improve earnings per share:
There are many important things to note in this slide. First, the 2.0% (200 basis point) improvement in overall margins. AT&T’s reported 3Q EBITDA was ~ $15.4 billion when you exclude Puerto Rico operations (entire PR and US Virgin Islands P&L is held in Corporate & Other) on a base of $44.6 billion in 3Q operating revenues (34.5% EBITDA margin).
To improve 200 basis points, AT&T will need to remove ~$890 million in quarterly costs or about 5.5-6.0% of their total expense base across the corporation AND replace each lost dollar of EBITDA (e.g., from premium video or DSL or legacy business voice) with a dollar of EBITDA from new sources (higher value-added fiber subscribers, mobility ARPU increases from service upgrades, higher revenues from smartphone insurance).
On top of this, AT&T will need to cut an additional $350 million in quarterly costs ($1.4 billion annually) to cover the HBO Max investment (which will not significantly impact revenues and EBITDA until early 2Q 2020). Roughly speaking, the operating expense net improvement will need to be ~$1.24 billion per quarter or about $5 billion per year (again, some of this improvement may come from the differential between higher new product and lower legacy product margin differentials, as we will explain below with fiber).
Highlighted throughout the earnings call was the need to penetrate more households with fiber. On the residential side (small business and enterprise were not reported), AT&T ended 3Q with 3.7 million fiber customers on a total base of 20 million fiber homes and businesses passed. This equates to a 19% penetration. Assuming 10% of the 20 million represent business locations passed, the residential penetration rate comes out at 21%, within the 20-25% range mentioned by Randall Stephenson on the earnings call.
Assuming the fiber penetration in the chart above is achievable, AT&T is targeting growing the 3.7 million base to ~ 9 million (on an 18 million homes passed with fiber base) over the 2020-2022 period. An incremental 5.3 million broadband customers (at a $55 ARPU – 10% higher than current) represents 440,000 net additions every quarter for the next 12 quarters and would generate $3.5 billion in incremental annual revenues and $1.8-2.0 billion in annual incremental EBITDA by the end of 2022. Bottom line: Increased fiber penetration to homes is a big part of AT&T’s profitability improvement plan.
To put this in context, Comcast’s rolling four quarter High Speed Internet additions quarterly average is 304,000 and Charter’s metric is around 350,000. Assuming that Comcast and Charter are ~100% share of decisions (including DSL migrations), the 440,000 net additions figure assumes that AT&T reverses that trend nearly overnight AND take some legacy share from cable (!). All this in light of the DOCSIS 4.0 rollout of cable to multi-Gigabit speeds at very low incremental capex costs.
To reemphasize, AT&T’s average growth in the fiber base (much of it from fiber-fed DSL, also called IP broadband) over the last several quarters has been between 300,000-320,000. Assuming growth comes from net new growth (not DSL conversions), the operation will need to grow 30-40% overnight.
More to come here, as we have assumed a 10% premium and cable is either matching or 10% lower than AT&T pricing, and we have not begun to talk about T-Mobile’s plan to acquire wireless high speed data customers using their combined spectrum holdings. Bottom line: There’s little reason to believe that AT&T will be able to materially move the share of decisions needle and grow 20-30% market share points in Los Angeles (Charter), Dallas (Charter), Chicago (Comcast), Atlanta (Comcast), or Miami (Comcast) at a market premium in light of T-Mobile’s (and others) market entry. As a duopoly, it’s a stretch – with three or four players, it’s a pipe dream.
Another source of growth mentioned on the call was Reseller. As we noted in other blog posts, Reseller losses were almost perfectly offset by Cricket (Prepaid) gains. As AT&T explained on the call, this was largely by design due to spectrum capacity constraints. Asked in the earnings call Q&A whether AT&T would consider an MVNO relationship with cable, Randall Stephenson replied:
Yes. We would actually be open to that. So you should assume that, that’s something we’d be open to. And not just cable guys, but there are a number of people in the reseller space that are reaching out. And it’s just as John said, we got a lot of capacity now in this network, and we’re at the point of evolution in this industry where we ask, how do you monetize most efficiently, capacity? And so we’re going to look at all those channels.
As we discussed in last week’s TSB, the cable operators want more call control. Would AT&T really offer that? At what cost? At what margin? Could Altice convert their new T-Mobile core + AT&T roaming relationship into a true wireless least cost route mechanism which would only use AT&T in areas where their own (CBRS, C-Band, other) network and new T-Mobile could not reach?
This was a surprising comment to say the least. AT&T has not courted large wholesale customers since Tracfone in 2009. A simple glance of the Wikipedia AT&T MVNO list includes a number of smaller players as well as AT&T-primary providers such as Consumer Cellular, PureTalk USA, and h2o. It’s very hard to imagine a major MVNO play that would not harm Cricket (which grew 700,000 net additions over the last four quarters) or the core business.
Lastly, the mobility business, even in the “golden era” of relative price stability, video compression, and low device upgrades, did not improve adjusted earnings much in Q3. Here’s their income statement:
Unlike Verizon, who still has a large base of traditional subsidy-oriented plans (for every dollar of equipment revenue, Verizon has $1.06 in equipment costs) AT&T has minor if any equipment subsidies. The implication is that for every dollar in reduced equipment revenues, operations and support costs should decrease a dollar. This did not happen on a sequential basis (equipment costs +$303 million, operations costs +$426 million) and the 3Q to 3Q reduction is negligible (equipment revenues down $136 million, costs down $156 million). If incremental scale is driving incremental profitability, it’s being offset by other spending.
Embedded in these numbers is FirstNet, now with close to 900,000 connections across 9,800 agencies per the most recent Investor Handbook. In the second quarter, the same figures were “over 700,000” connections. Given our understanding of the public space, let’s assume this translates into 175,000 net additions from FirstNet in 3Q with 125,000 (70%) of these coming from phones. Bottom Line: AT&T reported 101,000 postpaid phone net adds in the quarter, and without FirstNet, it’s very likely they would have been negative.
Bottom line: AT&T continues to integrate into an end-to-end premium content and network communications provider. They made a big three-year earnings promise that depends on new and different execution (particularly broadband growth and reseller market penetration) that has not been seen from AT&T in decades. We are confident that AT&T can cut costs but equally skeptical that they can grow share.
Apple Card Launches, and 0% a.p.r Financing is Announced. The First Impact is Device Financing.
On Wednesday, the Cupertino hardware (and now services) giant announced strong, broad, and expectations-beating earnings. iPhone sales, while down 9% from last year’s quarter, were still strong and Apple CEO Tim Cook gave very bullish guidance on this quarter’s device sales. In this light, Apple announced that trade-in volumes were more than 5x greater than they were a year ago (recall that Apple highlighted lower monthly payments and device values with trade-in starting with last September’s announcement. The 5x figure is therefore based on a few weeks – this figure could be much higher after a full quarter is measured).
The big announcement came through Tim Cook’s discussion of Apple Card performance:
… I am very pleased to announce today that later this year, we are adding another great feature to Apple Card. Customers will be able to purchase their new iPhone and pay for it over it over 24 months with zero interest. And they will continue to enjoy all the benefits of Apple Card, including 3% cash back on the total cost of their iPhone with absolutely no fees and the ability to simply manage their payments right in the Apple Wallet app on iPhone. We think these features appeal broadly to all iPhone customers, and we believe this has been the most successful launch of a credit card in United States ever.
A customer purchasing an iPhone 11 (64 GB) with their Apple Card would pay $21 less using this plan than purchasing through Verizon or AT&T (T-Mobile offers the 3% cash back Apple Card feature) or $28.25 per month prior to trade-in. This represents a $71 reduction ($2.96/ month) from what a customer would have paid for the iPhone XR (64 GB) in 2018 and produces an optically significant sub-$30/ month price point.
On top of this, Apple is offering slightly better than average trade-ins per our comments with analysts who follow store activity (hence the 5x increase described earlier). If customers believe that using Apple directly delivers a better financial outcome, they will go direct.
The 0% a.p.r, 24-month term mirrors the offer Best Buy currently gives to their My Best Buy Visa Credit Card customers (more on that offer here). While unlocked Android devices are currently covered (including the Samsung Galaxy S10 and Note 10), it remains to be seen if/ how the interest-free offer might be extended to Best Buy.
As we have discussed in previous Sunday Briefs, Best Buy and Apple recently extended their service relationship (more on that here), and Apple announced that their Authorized Service Provider locations had grown to over 5,000 globally. Extending this relationship into financing is not a slam dunk, especially given the current success Apple experienced last quarter without Best Buy, but the option exists to tie Apple Card promotions to Best Buy distribution. If this were to happen, the wireless carriers would need to demonstrate more value (financial, bundling, services) than both Apple and Best Buy.
As Apple disclosed on the call, this was the best quarter for Apple Care revenues on record. As was also disclosed on the AT&T and Verizon calls, device protection was a driver for their wireless service ARPUs in the quarter. This business is profitable to the carriers ($5-7/ mo. in incremental EBITDA for every device protection plan is material to customer lifetime values), and the consequence of the loss of this profit stream should not be ignored. There’s more to this than the loss of revenues – service margins will be impacted by any move to Apple Card.
In the August 25 Sunday Brief, we suggested an enhancement that would significantly accelerate Apple Card usage and iPhone upgrades: Multiply the Daily Cash savings (we suggest 2x) when it’s applied to your iPhone 0% a.p.r plan. This would shift marginal purchases (especially for multi-line accounts) to the Apple Card (driving up transaction fees and potentially interest charges) while providing the benefit of potentially paying off the device faster. Fully paid devices could encourage additional upgrades and improve customer satisfaction. This would also be more difficult for the wireless carriers (or Samsung) to duplicate.
Five-fold increases in trade-ins with only a partial quarter of measurement… best-ever Apple Care revenues… now Apple Card 0% a.p.r financing and 3% daily cash for 24-months. That would be a lot to digest even if iPhone sales were missing expectations. But, as we will show in a TSB online post in a few days, the iPhone 11/ Pro/ Pro Max inventory levels are still tight heading into the Holiday season. This may not be the time to push the idea of Daily Cash sweeteners. The opportunity, however, is almost too good to pass up.
T-Mobile’s Stellar Quarter – Only Treats from Bellevue
Caught between AT&T’s earnings, the HBO Max announcement, and Apple’s surprise financing offer was the continued strong performance of T-Mobile. They reported the following:
- 754,000 branded postpaid phone net additions (versus 101,000 for AT&T – see above – and 239,000 for Verizon). Most importantly, T-Mobile’s net additions beat Comcast + Charter’s combined figure of 453,000.
- Branded postpaid monthly phone churn of 0.89% (versus 0.95% at AT&T and 0.79% at Verizon)
- Service revenue growth of 6% (versus 0.7% total mobility services growth at AT&T and 1.83% at Verizon)
We were very close to our early September estimates of 205 million POPs covered by 600 MHz (200 million actual) and 235 million POPs cleared (231 million actual). T-Mobile also updated their estimate of POPs cleared by the end of 2019 to 275 million, slightly down from previous guidance of 280 million.
We think that the addition of 100-110 million new POPs in the second half of 2019 provides plenty of room to grow even without Sprint. Also, T-Mobile’s total debt (including debt to Deutsche Telekom) is down to $25.5 billion from $27.5 billion at the end of 2019, and the resulting debt to EBITDA ratio stands at 2.0x, down from 2.3x in 3Q 2019.
We will have a full readout of T-Mobile’s earnings in next week’s TSB (which should be viewed against Sprint’s earnings due Monday and T-Mobile’s special Uncarrier announcement this Thursday).
Bottom line: T-Mobile had a spectacular quarter, outpacing AT&T and Verizon in nearly all consumer metrics and is well prepared to thrive in a post-merger environment. We still anticipate a settlement of the AG lawsuit in the next month or so, but believe that a trial outcome is likely to be found in T-Mobile’s favor for reasons stated in previous TSBs.
That’s it for this week. As mentioned earlier, we will be posting the latest Apple inventory charts to www.sundaybrief.com in the next day or so. Next week, we have Sprint and CenturyLink earnings as well as the T-Mobile Uncarrier announcement to cover. Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a terrific week… and GO CHIEFS!
Greetings from Charlotte/Davidson, Norfolk/ Virginia Beach, Washington DC/ N Virginia, and Dallas/ Ft. Worth (picture is yours truly with Federated Wireless BoD member Tim McDonald). This week’s TSB will focus on several start-ups that we think deserve attention. We will also have several TSB Follow-Ups.
Three Up and Comers
Identifying disruptive telecom start-ups is a challenging topic to say the least, and we recently covered one, Federated Wireless, with its $51 million C-round raise. Given high infrastructure barriers to entry, new fiber and service providers are scarce. We will highlight a few companies who are bucking the trend and could challenge incumbents:
- Starry Internet (Boston, MA). Total Capital Raised = $300 million (4 rounds). Principal funders include Tiger Global Management, Quantum Strategic Partners, KKR, IAC, HLVP, and FirstMark Capital.
Starry was the brainchild of Chet Kanojia, who was also the lead for TV-streaming service Aereo which sold to Tivo in a fire sale after losing a court case (relive that 2014 moment through this Ars Technica article). Starry currently uses 37 GHz (LMDS) spectrum to offer their service and uses a Starry Point rooftop connection and existing inside wiring to bring connectivity to individual customers (see pic below).
Their service is focused on Multi-Dwelling Units (think fewer users per Wi-Fi Access Point); customers must use the Starry-provided router (Starry Station). $50 covers 200 Mbps symmetric service as well as all taxes and fees (roughly $30/ mo. less expensive than traditional cable costs).
Per their website, Starry is currently offered in New York, Los Angeles, Boston, Denver, and Washington DC. Starry announced plans to expand to 13 additional LMDS-based markets including Chicago, Cleveland, Seattle and Indianapolis (total of 18) but there have been no public announcements of new launches.
Starry did participate, however, in the recently completed 24 GHz license auction (see their announcement here) and obtained additional licenses covering 25 million new homes passed (40 million population new from auction; 60 million total population across 40 million homes). New markets include Cincinnati, Las Vegas, San Antonio, Nashville, Charlotte, Rochester, Buffalo, and Louisville. Interestingly, many of the new markets are not traditionally home to dense multi-dwelling unit concentration (this implies a point-to-multipoint strategy that involves many more points).
Bottom line: Starry is an intriguing company and using 802.11ax (Wi-Fi 6) is an extremely wise technology choice. Their focus on gaining ~ 20 million total customers through Multi-Dwelling Units keeps them focused. Oppenheimer recently conducted an analysis which indicated that Starry should be able to keep to their $20/ home passed capital number. The company becomes even more valuable as 5G stand-alone radios emerge at lower price points.
However, Google is slowly but surely entering this market through their Webpass subsidiary (see Austin expansion announcement here). The very early reaction to T-Mobile Home has been nothing short of ecstatic (see Light Reading article here), and Verizon and AT&T will be increasing their speeds and associated offerings. The market is about to get very crowded for fixed wireless and bundling with mobile services is likely to be the norm. This may make a $50 for 200 Mbps stand-alone offering more difficult to stomach.
- Cologix (Denver, CO). Total capital raised = $500 million+. Principal funders are now Stonepeak Infrastructure Partners and Mubadala Investment Company, an Abu Dhabi sovereign fund with nearly $230 billion in assets under management.
Cologix is a neutral-host data center company operating across 10 North American markets (32 total data centers). Per their website, half of the 32 are located in Montreal, Toronto and Vancouver.
As the map shows (note; an updated version of this map would include Ashburn, VA), they have a relatively unique focus, with presence in Dallas but not Houston/ Austin/ San Antonio, Minneapolis but not Chicago, Jacksonville/ Lakeland but not Miami, Tampa or Atlanta. And no Phoenix, Los Angeles, Seattle/ Portland, or Silicon Valley. A good way to summarize their market footprint is “deep over wide.” Stonepeak, who also owns Vertical Bridge (wireless infrastructure) and Extenet (in-building and small cell infrastructure provider) is a very large infrastructure fund with top-tier management.
Their Sept 23rd announcement resonated across the data center industry: $500 million to expand, and Stonepeak would not lose their ownership stake in Cologix. Having grown considerably through acquisition, Cologix now has the capital to add several more markets to its footprint.
The biggest question at this point is “What price?” Public valuations in the data center space have widely recovered from 2017/2018 levels, and Stonepeak is not an “at any costs” private equity firm. To gain scale, they could go smaller market (taking a stake in a company like EdgeConnex who has a complementary global footprint) or focus on a few leading data center assets such as Switch (a large acquisition), Tierpoint or Flexential (both easier to stomach acquisitions).
Bottom line: Cologix is a compelling story with a good management team and dense second-tier locations. Acquisition selection and integration determine whether they rise to the level of global mega-players such as Equinix and Digital Realty Trust.
- The Helium Network (San Francisco, CA). Total capital raised = $54 million. Main funders include Google Ventures, Union Square Ventures, Khosla Ventures, Mark Benioff, Munich RE/ HSB, FirstMark Capital and Multicoin Capital.
One of the most interesting start-ups to challenge the status quo in the last decade is Helium. I first got to know the company about a year ago while I was doing some research on low-powered networks. The company was still in pre-launch and going through capital like mad, so I basically left them for Silicon Valley dead even through they had powerful founders (Shawn Fanning of Napster fame) and investors (see above).
The company asks current broadband customers to plug something called a Helium Hotspot into their current wireless router (it also requires AC power, but its website claims the Hotspots consume as much power as a lightbulb). Each Heluim Hotspot costs $495 and customers are paid for their value added via a cryptocurrency called Helium (more on this in the Helium blogpost here which includes a revaluing of the currency).
Approximately 100-200 well-placed Hotspots are required to blanket most cities (Austin, Helium’s first fully launched market, required ~100, but there are another 110 active to make the network as robust as possible).
Helium uses the 900 MHz network in the United States. This network is open and available for low-power transmission (5 Kbps). There are many current device applications for Helium (Lime scooters, dog collars, water cooler levels, bikes, in-building air quality, and trackers of all shapes and sizes) and this list promises to grow.
Because of the low bandwidth requirements, Helium will not drive broadband users over a cap. But the value of the service (crypto is hard to explain) needs to be targeted. What’s most interesting about the service is that if Helium can achieve connectivity on a large scale (and it likely can do so very quickly after a few trials), new IoT inventions will not be constrained by high connectivity costs.
Bottom line: The 900 MHz spectrum band has been fallow for some time, and Helium (and Amazon Sidewalk) are now going after it in a big way. Helium has a first-class team and, according to early reviews of the service, has developed an easy to provision/ install, easy to track interface. While they have not raised as much money as the other companies discussed in this TSB, they may have the fastest path to market dominance.
There are dozens more companies to cover, but these three stuck out as ones that could alter the addressable markets of traditional infrastructure and communications companies. We welcome your thoughts and ideas for additional companies to cover in the future (using a $50 million minimum funding rule as the deciding factor for inclusion).
- T-Mobile/ Sprint Merger has their third vote, and a key state (Florida) signs on to the Department of Justice consent decree. Late last Friday, Bloomberg reported that a third commissioner (Carr) had voted for the merger, and that neither of the Democrat commissioners had yet cast a vote. It is likely that a formal vote will occur prior to October 16, though many associations have called for the Commission to delay their vote until allegations of Sprint’s wrongdoing with respect to subsidy payment violations have been fully vetted.
In addition to this good news heading into the weekend, the merger also received a boost from Florida Attorney General Ashley Moody, who announced that the Sunshine State had signed on to the terms of the DOJ consent decree. Kansas, Nebraska, Oklahoma, South Dakota, and Ohio were the original states to sign the July 26 decree, and Louisiana has also joined since then. It will be interesting to see which additional states join the DOJ or the 18 states (and District of Columbia) suing to block the merger.
- There was a major ruling upholding much of the Net Neutrality provisions this week, with additional activity likely pushed back to states. Here’s an excellent article summarizing the D.C. Court of Appeals decision from the New York Times. If you would like to read the decision in its entirety, it’s here. If you would like to read Roger Entner’s take on the decision (I agree with his take), it’s here. I have not read the full transcript of the Court’s decision, but promise to comment on it more this week.
- In a surprise move, Apple requested a 10% increase in iPhone 11 and iPhone 11 Pro production. A good article summarizing their decision is here. TSB readers who fully digested last week’s issues are not surprised. I have attached the latest changes in inventory to the TSB and will post more on this on the web version (sundaybrief.com). T-Mobile appears to have the greatest backlog, which, as we noted last week, is surprising given their upfront deposits on the iPhone 11 and iPhone 11 Pro Max.
Many thanks to those of you who suggested additional titles for the History of Technology. As of Saturday, October 5, we have the following 10 recommendations:
- The Deal of the Century: The Breakup of AT&T by Steve Coll (1986)
- Disconnecting Parties: Managing the Bell System Breakup – An Inside View by W. Brooke Tunstall (1985)
- The Master Switch: The Rise and Fall of Information Empires by Tim Wu (2010)
- The Intel Trinity: How Robert Noyce, Gordon Moore, and Andy Grove Built the World’s Most Important Company by Michael S. Malone (2014)
- Cable Cowboy: John Malone and the Rise of the Modern Cable Business by Mark Robichaux (2002)
- How the Internet Became Commercial: Innovation, Privatization, and the Birth of a New Network by Shane Greenstein (2015)
- Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age by Michael Hiltzik (1999)
- Wireless Nation: The Frenzied Launch of the Cellular Revolution in America by James Murray (2001)
- Engines That Move Markets: Technology Investing from Railroads to the Internet and Beyond by Alasdair Nairn (2018 2nd edition)
- The Innovators Dilemma: When New Technologies Cause Great Firms to Fail by Clayton Christensen (updated version 2016). While technically not a history, it had a substantive impact on both Steve Jobs (the only book mentioned in his biography) and Jeff Bezos so we are including it in this list.
Next week we will cover additional industry events and news of the week. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Have a terrific week… and GO CHIEFS!