5G networks will likely be a major topic at investor days this week for the three largest U.S. telecoms.
Angel Garcia/Bloomberg
With a record-breaking wireless spectrum auction completed and 5G rollouts underway, the three largest U.S. telecom companies will all speak with investors this week to lay out their future strategies and capital allocation priorities. Expect plenty of 5G network-related hyperbole, big spending plans, and some new financial guidance and operating targets.
Verizon Communications ’ (ticker: VZ) investor day is on Wednesday evening, followed by T-Mobile US ’ (TMUS) on Thursday afternoon. AT&T (T) management will get the last word on Friday morning. Here’s what Wall Street will be looking for from each of the events.
Verizon (Wednesday at 6 p.m. ET)
Verizon was the biggest spender in the recently completed C-Band wireless spectrum auction, dropping $53 billion after clearing costs. The licenses up for auction count as mid-band spectrum, which offers an attractive trade-off between capacity and range for 5G networks. Management will likely make its expanded portfolio the centerpiece of their pitch to investors on Wednesday, as a step toward its future network goals.
“Verizon needs to help investors draw a line from where they were last year to where they say they’re heading over the next five and 10 years,” says Bernstein analyst Peter Supino. “The stock has remained more of a function of what Verizon is today than what it might be tomorrow.”
That long-term vision includes an integrated wireless and wired footprint that serves all of Verizon’s customers on one seamless network. Expect to hear the terms “network-as-a-service” and “Intelligent Edge Network” many times at the investor day.
Supino would like to see some tangible operating metrics or milestones that investors can use to judge Verizon’s network progress in the coming years, and shift attention from its slow-growth present—although with industry-leading margins—in a saturated U.S. wireless market. He sees the biggest opportunities in 5G home broadband and business mobile. Sales growth at Verizon lately has come more from nudging consumer subscribers to more expensive monthly plans than from growing its subscriber base.
Verizon management will also likely detail their plans to reduce debt after the C-Band splurge, which will likely keep buybacks off the table through 2023. Options prices imply about a 2% move in Verizon stock this week, according to data from Bloomberg. The shares have lost about 3% since the start of 2020, versus a 21% return for the S&P 500 and 14% for the Dow Jones Industrial Average.
T-Mobile (Thursday at 2 p.m. ET)
T-Mobile’s investor day will likely be more of an update on its Sprint merger integration progress. T-Mobile spent about $11 billion in the C-Band auction, but got the bulk of its mid-band spectrum portfolio from Sprint. It has been almost a year since the companies combined last April, but T-Mobile’s management hasn’t updated merger-related financial targets since the spring of 2018, when the deal was first announced.
Back then, they expected to achieve more than $6 billion of annual cost savings within four years of the merger—thanks to combining the two networks, economies of scale, and eliminating redundant marketing, sales, and back office functions and expenses. At the end of 2020, T-Mobile had already achieved $1.3 billion in annual cost savings and last month the company guided to $2.7 billion to $3 billion in annual synergies in 2021.
Other 2018 targets included growing its service revenues by 2% to 4% annually and an adjusted Ebitda—or earnings before interest, taxes, depreciation, and amortization—margin of 54% to 57% over time, from about 41% at the time of the announcement. And in 2018, T-Mobile management also guided to $16 billion to $18 billion in annual free cash flow (FCF) over the long term, up from about $11.5 billion combined before the merger.
“FCF is the key bogey and how the sausage gets made (subscribers, ARPU, margins, capex) is generally less important and there is no hard and fast consensus that has gelled around these numbers that we can detect,” wrote BofA Securities analyst David Barden on Tuesday. “The FCF outlook will also speak to deleveraging and when TMUS might re-launch its buyback program.”
The Wall Street consensus estimate is for T-Mobile to hit $17 billion in free cash flow in 2025, up from $3 billion in 2020 and guidance from February of $4.9 billion to $5.4 billion this year.
Also expect to see plenty of T-Mobile’s characteristic magenta-hued marketing materials on Thursday, and pronouncements from management about leaving competitors weeping, or the like. The company recently announced an expanded enterprise and business service, called T-Mobile WFX, targeted at companies’ work-from-home employees. T-Mobile lags far behind Verizon and AT&T in market share among business customers, so management is likely to point to that as a key new avenue for growth.
Options pricing implies the largest move in T-Mobile stock this week, at about 4.5% in either direction. The shares have climbed 61% since the start of 2020.
AT&T (Friday at 10 a.m.)
AT&T’s latest move was a spinoff of DirecTV and its other pay-TV assets, which will bring in close to $8 billion in cash but also take that business’ profits off of AT&T’s income statement. Perhaps ironically, the result is a higher net-debt-to-Ebitda ratio than before the deal. AT&T’s leverage and dividend demands have been contentious topics among investors and analysts since the company’s blockbuster acquisition of Time Warner in 2018.
AT&T management is likely to underline their commitment to the dividend, which currently yields about 7% annually, and may give an update on their debt-reduction plans or long-term leverage target. AT&T’s C-Band bill is about $28 billion including clearing costs.
The company has no shortage of investment priorities either: CEO John Stankey has identified fiber-optic cable spending, 5G network upgrades, and content for HBO Max as key investment areas in recent remarks.
“We expect management focus to be on 1) Customer growth (Wireless, Broadband, HBO Max—with revised subscriber targets), 2) Connectivity (capex plans for fiber and spectrum deployment) and 3) Content (investment to support HBO Max growth),” wrote UBS analyst John Hodulik in a recent report.
Speaking at an investor conference last week, WarnerMedia CEO Jason Kilar suggested that there would be a new subscriber target for HBO Max on Friday as well. The company ended 2020 with more than 41 million subscribers on HBO and HBO Max, versus a goal of 50 million by 2025 (offered in late 2019). Recent ambitious streaming subscriber targets from ViacomCBS (VIAC) and Discovery (DISCA) have sent those stocks soaring, but investors might not give AT&T as much credit for such a move, given its conglomerate structure.
Options pricing implies a move of about 2.5% in either direction for AT&T stock this week, according to Bloomberg data. AT&T stock has lost 17% after dividends since the start of 2020.
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