iPhone’s Quarter One vs. Quarter Four and Wireless Margins
Simon Flannery – Morgan Stanley asked: Very strong result obviously from Apple’s (NASDAQ:AAPL) iPhone. We’ve seen it across the industry. You talked about a very strong December.
How should we think about Q1 versus Q4? Is this a product that’s going to continue to have legs into the first quarter of the year or do you think the first quarter is going to be a more normal quarter as we’ve had in, say, the first nine months of the year, I’m including this sort of original iPhone launch.
Concerning any trends, how we should be thinking about wireless margins in Q1? Staying on wireless, you noted that there was some pressure on other service revenues from wholesale and roaming. I think that you lost a Telematics customer.
Can you just give us a little bit more color around that, and what’s going to make that better in 2012?
Francis J. Shammo – EVP and CFO responded: From a wireless margin perspective here, look at it this way. You talked about one product; I talked about a whole portfolio of products.
So if you look at our LTE lineup, we sold almost 15 million android-based products (NASDAQ:GOOG) and if you do the math for the quarter, it’s about 10.8 million iPhone products. So they’re both extremely significant to our portfolio.
If you look at LTE, we’re coming out of the year with almost 18 devices on our network and we will add six more in the first quarter of this year, leading us to 24. I think that the way we look at it is, our momentum coming out of the fourth quarter into the first quarter and obviously, the first quarter will be more of what we saw in the first three quarters because the fourth quarter is always a much higher volume quarter just because of seasonality.
I would say is this: we have a proven track record in wireless that we both drive profitability and growth. I would expect that in 2012, we will get back to and continue to improve on the wireless margin.
If you look at what we did in the third quarter, we had an iPhone in our portfolio; we had three quarters under our belt with a very real large lineup of 4G LTE devices and we produced the highest margin in wireless in the history of the wireless business of 47.8 percent margins.
I guess I would say to you is that we will strive to continue to improve on the wireless margins, not only on the top line growth perspective, but we also in the last two years trimmed out almost $3 billion of cost in our wireless business. Again, I think the focus will be to prove and continue to grow, as well as improve on the profitability of the wireless margins.
On the wholesale side, there are two things happening. I reported out at the third quarter that with the sale of the Alltel properties, we knew that AT&T (NYSE:T) would be moving that traffic off of our network, which they did and in the reseller base, I think it very important to note that the resellers that we have contracts with are mainly prepaid resellers …
As I said in the past, this has declined in the last couple of quarters. We have an issue with us which is, I will only enter into agreements that are win-win for both, and right now the market is a point where I’m not going to compete on the wholesale rates that are in the marketplace.
Although this is an extremely important channel for us and we continue to work with highest resellers, we do have a shift mix in the reseller base. We added 371,000 net reseller adds, but some of this is a mix change going into lower, what I would call, live source type offerings and more universal service fund types offering. They carry a lower ARPU than some of our historical prepaid voice resellers would.
Overall, the profitability of this is still very substantial but I also think it’s important to note that as we attack the prepaid market, we performed and launched our unleashed product, which coming out of the third quarter. I was very optimistic that this would be the first quarter that we showed positive net adds in that product space, and we actually did.
From a net perspective, we had net adds in prepaid for the first time in at least the past two years. We are starting to gain momentum in the prepaid market, both through the reseller channel, but also through our unleashed channel.
I think that’s what you can continue to see. That’s for the wholesale roaming side.
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