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Get ready for a Q2 like no other

As the second quarter of 2020 draws to a close, network operators, vendors and others are putting the final touches on their quarterly financial reports. As those reports hit the market in the coming weeks, it's safe to assume that the second-quarter reporting season will play out unlike any other in recent memory.

"While the term 'unprecedented' has become cliché when used in reference to the COVID-19 pandemic, that doesn't make it any less apt," warned the Wall Street analysts from research firm Evercore in a recent note to investors on the second-quarter results.

Among the topics that companies in the US and elsewhere will likely address in their financial reports: the ongoing global pandemic, a potentially massive economic recession, the upcoming US presidential election, and the potential for a "new normal" in the way that humanity behaves when it comes to all things digital.

Consider: The CFOs of most public companies probably compiled and calculated their forthcoming earnings reports at home. And for some, that change might become permanent. For example, Verizon's Visible prepaid business recently announced it will shift to a permanent "work-from-home" model starting in October (a move that would undoubtedly reduce the operation's real estate expenses).

Thus, here are six things to watch for this month as public companies like AT&T, Ericsson, Verizon, Comcast, Charter and others begin reporting their second-quarter results:

1. Slower sales in wireless. T-Mobile recently announced it expects total postpaid net customer additions in the second quarter of between 800,000 and 900,000. That's way up from the company's previous expectation of between zero and 150,000.

However, it's way off T-Mobile's normal quarterly performances.

Indeed, the analysts at Wall Street research firm Cowen are forecasting dramatic declines in the number of postpaid phone customers that US wireless network operators report for the second quarter, compared with the same quarter a year ago. For example, they expect AT&T to add just 25,000 postpaid phone customers in the quarter, down from the 72,000 it added in the same quarter last year. Similarly, they expect T-Mobile to add 143,000 (vs. 710,000 last year) and Verizon to add 101,000 (vs. 245,000 last year). To be clear, Cowen's figures cover postpaid phone customers specifically, while T-Mobile's own figures cover all postpaid customers, not just phone customers.

Two big reasons for the second-quarter declines are stay-at-home orders – and resulting store closures – that stretched throughout much of the second quarter. Americans widely decided to avoid that new phone purchase as a result.

2. The impacts of the recession. With unemployment numbers rising and layoffs widening, analysts expect the situation to push a growing number of telecom customers to have another look at their expenses. "We believe that 2H20 could see increasing subscriber pressure, due to continued high unemployment and household consolidation, which would lower the TAM [total addressable market] for broadband and video services," wrote the analysts at Evercore.

US network operators will first see the impact of this trend via their "Keep America Connected" pledge, which was designed by the FCC at the outset of the pandemic to retain Americans' Internet connections despite the financial hardships imposed by COVID-19 lockdown orders. However, the pledge ended for most operators on July 1.

"As such, we could see a surge in non-pay disconnect activity in 3Q, combined with pressure on household formation from job-loss-related household consolidation," the Evercore analysts wrote.

It's unclear how much "bad debt" operators ultimately took on due to the pledge, but the situation is such that some have already begun lobbying Congress for some potential financial relief.

3. The implications of the US presidential election. Wall Street investors are increasingly contemplating the prospect of Joe Biden winning the contest in November. For corporate CFOs, that will likely mean additional corporate taxes and a stiffer regulatory environment, analysts argue.

For example, reports indicate a Biden administration could reignite the net neutrality debate at the FCC – an issue that Trump's FCC appointee, Ajit Pai, squashed as one of his first acts at the agency.

"A Democratic administration would likely pursue a somewhat more regulatory approach when it came to broadband, but we doubt we'd see an aggressive push toward price regulation," wrote the analysts at Evercore.

4. A rise in cord cutting. The analysts at Evercore said they expect traditional pay TV providers in the US to report the collective loss of 2.5 million customers in the second quarter, up from the 1.5 million they lost during the same quarter a year ago.

The losses will be "driven by a combination of economic pressures (leading to household belt-tightening), promotional activity that primarily focused on broadband-only offers, and a lack of sports content, one of the two key drivers of traditional pay TV subscribership (along with news)," they analysts wrote.

5. A rise in broadband subscribers. The shift away from traditional pay-TV services likely coincided with an acceleration in the purchase of broadband Internet access. "Demands for remote learning and work from home drove accelerated broadband subscriber growth in 2Q20," forecast the Evercore analysts. They predicted that the total number of new customers signing up for broadband in the US grew to 670,000 in the second quarter, up from 420,000 in the second quarter of 2019.

Importantly, the analysts expect that cable operators captured just about all of that growth. However, that's not necessarily a surprise given the dramatic gains that cable operators like Comcast and Charter have enjoyed recently against telco rivals like AT&T and Verizon in the market for broadband Internet access.

6. Clarity on operators' network spending. Some analysts are predicting a significant rise in the amount of money that network operators will spend on their networks, partly to stay on top of an increase in customers' connectivity demands driven by pandemic-related lockdown orders. For example, the Wall Street analysts at Deutsche Bank Research recently predicted that US wireless carriers collectively will spend $35 billion on capital expenditures (capex) in 2021, an increase of fully 11%.

Indeed, some companies are already cheering a rise in 5G spending among US operators. "I think we've seen customers that actually have decided to accelerate 5G, because they think it's so critical. And again, I'll restate Verizon and AT&T," said Philippe Morin, the CEO of network testing vendor Exfo, during his company's quarterly conference call with investors this week, according to a Seeking Alpha transcript of the event. He said that European interest in 5G may be slowing amid spectrum auction delays, while interest in China is rising.

However, other analysts have warned that operators' overall network investments could be tempered by the effects of what appears to be a widening global recession. For example: "Most rural telecommunications operators signed the FCC’s Keep Americans Connected pledge, which includes not disconnecting service for customers who cannot pay their bill due to COVID-19-related economic stress. Offering free service has strained rural operators’ cash flow, which could impact future network build plans," wrote the analysts at CoBank, which studies economic issues in rural areas of the US.

Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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