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Regulatory, weather-related storm clouds shadow Q3 communications earnings

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Regulatory, weather-related storm clouds shadow Q3 communications earnings

The third-quarter earnings season stands to be a big one for the communications industry, but not because of expected subscriber gains. Instead, all eyes are on an expected M&A announcement.

Citing people familiar with the matter, Bloomberg News reported recently that Sprint Corp. and T-Mobile US Inc. are finalizing the terms of a merger agreement and will likely announce a deal in tandem with their quarterly earnings results. While an exact date for the announcement remains unknown, the sources suggested the announcement would come toward the end of the month.

In his third-quarter outlook for the cable, satellite and telecommunications sector, Evercore ISI analyst Vijay Jayant said that while competitive pressures will play a role in wireless operators' quarterly earnings results, "M&A remains a key focus for investors."

An announced deal agreement between the third- and fourth-largest U.S. wireless operators would cap months of speculation. Since late spring, executives from Sprint, T-Mobile and their respective parent companies have been touting a tie-up as good for competition and consumers, seemingly in an effort to win over regulators.

However, recently Reuters cited three sources as saying the U.S. Department of Justice will likely oppose the combination over concerns the deal would hurt competition in the mobile market.

"Reports yesterday that DOJ staffers are likely to oppose a merger don't kill a deal … but they sure don't help the odds," MoffettNathanson analyst Craig Moffett wrote in an Oct. 12 research report, noting that shares in both T-Mobile and Sprint are continuing to trade at higher prices due to expectations around a deal. Both Moffett and Evercore's Jayant estimated the odds of approval to be 50%.

Undoubtedly, during Sprint's and T-Mobile's earnings calls, investors will want to know what the two companies have heard directly from their legal teams and from regulators.

As for September-quarter results, Jayant expects T-Mobile to lead its peers in growing its postpaid subscriber base. Postpaid subscribers receive a bill at the end of each month and are higher margin customers than prepaid subscribers, who must pay for their service upfront. But Jayant also believes Verizon Communications Inc.'s first-quarter launch of unlimited data plans will "help its share performance in 3Q."

An analysis by S&P Global Market Intelligence covering nine major communications companies, found analysts on average expect T-Mobile and Verizon to record a year-over-year revenue increase, while AT&T Inc. and Sprint are expected to record a revenue decline. Three of the four major wireless operators — AT&T, Sprint and T-Mobile — are expected to report year-over-year growth in earnings per share, while Verizon is expected to see a year-over-year drop.

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An analysis by Kensho Technologies Inc. that estimates a company's stock movement after removing the impact of broad market factors showed communications stocks do not always go up or down in line with earnings beats or misses. Nevertheless, Sprint beat estimates in the June quarter and recorded strong positive stock movement the day it reported results, but missed estimates in the March quarter and saw a steep drop in its stock.

Looking beyond the wireless sector at pay TV providers, Jayant expects the industry to see a relatively steep drop in video subscribers, due in part to continued cord-cutting trends but also because of the major hurricanes that hit the U.S. in the third quarter.

"Major hurricanes in 3Q17 are clearly going to be a contributor to subscriber losses," Jayant said, predicting an industrywide loss of roughly 848,000 subscribers, as compared to a loss of 438,000 subscribers in the third quarter of 2016.

In September, Matthew Strauss, Comcast Corp.'s executive vice president of Xfinity Services, said the company expects to see a net loss of 100,000 to 150,000 video subscribers during the third quarter. Strauss attributed the decline to increased competition but also in part to "the terrible storms that we're seeing."

Jeffrey Wlodarczak, principal and senior analyst at Pivotal Research Group, noted in a research report that while investors initially reacted negatively to Comcast's forecast, with the stock dropping roughly 9% in the week after the announcement, he believes the company is ultimately well-positioned for future growth given its superior broadband offering.

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This article is part of an ongoing series analyzing earnings expectations. To read about expectations for the media industry, click here.