From FBR’s David Dixon:
“Verizon has a sustainable industry leading (wireless) network, an excellent spectrum position, and surging growth opportunities in mobile video, Internet of Things, and telematics.”
“We expect T-Mobile US to continue affecting AT&T to a greater extent than it effects Verizon. Sprint will remain weak as it delays spending amid a network strategy, driven by a weak balance sheet.”
Editor’s Note: Verizon is the first big telecom company to report its earnings for the 2nd quarter. It has faced tougher competition as such rivals as T-Mobile USInc. and Sprint Corp. have offered generous deals to subscribers to switch.
1. Aside from being well positioned on spectrum for the macro network, how should investors assess the small cell opportunity as an alternative to more macro network spectrum going forward?
A change in the industry network engineering business model is underway toward using small cells on dedicated spectrum to manage more of the heavy lifting associated with data congestion. Verizon demonstrated this shift during the AWS3 auction: It modeled a lower-cost small cell network for Chicago and New York. We expect VZ CEO Lowell McAdam to manage this shift from the top down to mitigate execution risk due to cultural resistance from legacy outdoor RF design engineers, whose roles are at risk as the macro network is de-emphasized.
Enablers include the advent of LTE, increased spectrum supply across multiple spectrum bands including LTE licensed, unlicensed (e.g., 500 MHz of 5 GHz spectrum) and shared frequencies (e.g., 150 MHz of 3.5 GHz spectrum, amid a fundamental FCC spectrum policy shift from exclusive spectrum rights to usage-based spectrum rights, which should dramatically increase LTE spectrum utilization similarly to WiFi.
Previously, outdoor small cells co-channeled with the macro network proved challenging: While they can carry substantial load, they also destroy equivalent capacity on the macro network due to mis-coordination and interference. So the macro network carries less traffic, but still looks fully loaded. AT&T discovered this in its St. Louis trials that in part steered it toward buying $20 billion of AWS3 spectrum. However, the industry trend is toward LTE underlay networks, where small cells are put in other shared or unlicensed spectrum with supervision from and/or carrier aggregation with the macro network.
It still requires good coordination across all cells for this to work; while Verizon s initial proposals for 5 GHz are downlink only, we think uplink will also be used longer term because the uplink needs more spectrum resources for a given throughput and we are seeing higher uplink usage trends in the Asian enterprise segment and from Internet of Things (security cameras).
2. Does Verizon have sufficient spectrum depth to drive revenue growth longer term? Or does it need to aggressively acquire spectrum in future spectrum auctions or in the secondary market (e.g., DISH)?
The short answer is yes. Verizon carries 80% of data traffic on 40% of its spectrum portfolio; its combined nationwide CDMA and LTE spectrum depth is 115 MHz, ranging from 88 MHz (Denver) to 127 MHz (NYC). We expect AWS3 capacity spectrum to be deployed in 2017/18.
Investors may not be crediting Verizon with potential to source more LTE spectrum from refarming of CDMA to LTE (22 MHz to 25 MHz) used today for CDMA data (22 MHz to 25 MHz). Critically, network performance data show Verizon network close to the required performance threshold for a VoLTE-only service, suggesting there is additional refarming potential for the 850 MHz band (25 MHz) used today for CDMA voice and text. This band is likely to be transitioned in 5 MHz x 5 MHz LTE slivers to run parallel with the expected linear (voluntary) ramp, versus exponential (forced) ramp in VoLTE service. More low-band spectrum is key for the surging IoT and M2M segments, which are proving to be more thirsty than “bursty.
Verizon’s CFO Shammo talks up mobile-first video service
Verizon Communications plans to offer a limited menu of content when it initially launches its mobile-first streaming video service late this summer, Chief Financial Officer Fran Shammo said after the telecom announced earnings Tuesday. The service is expected to use LTE Multicast technology. RCR Wireless News (7/21), CNET (7/21)
Shammo added that interest in Verizon’s FiOS skinny TV channel bundles exceeded the company’s expectations as one-third of gross customer additions chose the skinny bundle and some existing customers migrated to it as well. Verizon added a net 26,000 FiOS video subscribers in the three months ended June 30, and a net 72,000 subscribers to its FiOS Internet service.
Verizon’s 2Q 2015 Earnings Report: