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When people talk about domestic telecom service companies, you are likely to hear about either Verizon (VZ) or AT&T (T), maybe even both. Both rivaling companies are titans. Which stock has more potential?

Verizon Overview

In 2011, operating expenses increased each quarter.

  • Q1 2011 ($22.537 billion) to Q2 2011 ($22.644 billion), approximately .5% increase.
  • Q2 2011 ($22.644 billion) to Q3 2011 ($23.266 billion), approximately 3% increase.
  • Q3 2011 ($23.266 billion) to Q4 2011 ($29.548 billion), approximately 27% increase.

Although expenses increased every quarter in 2011, revenue also increased.

  • Q1 2011 ($26.990 billion) to Q2 2011 ($27.536 billion), approximately 2% increase.
  • Q2 2011 ($27.536 billion) to Q3 2011 ($27.913 billion), approximately 1% increase.
  • Q3 2011 ($27.913 billion) to Q4 2011 ($28.436 billion), approximately 2% increase.

However, in the first half of 2012, Verizon decreased their operating expenses.

  • Q4 2011 ($28.436 billion) to Q1 2012 ($23.047 billion), approximately 19% decrease.
  • Q1 2012 ($23.047 billion) to Q2 2012 ($22.901 billion), approximately .6% decrease.

Unlike 2011, the first half of 2012 did not have an obvious pattern for revenue.

  • Q4 2011 ($28.436 billion) to Q1 2012 ($28.242 billion), approximately .7% decrease. (click to enlarge)
  • Q1 2012 ($28.242 billion) to Q2 2012 ($28.552 billion), approximately 1% increase.

Q2 2011 net income attributed to common stock was $1.609 billion, while in Q2 2012 the net income attributed to common stock was $1.825 billion.

Part of the reason that revenue has continued to climb for Verizon is that customers are utilizing smartphones.

  • 50% of all retail phones sold by Verizon are smartphones.
  • 5.9 million smartphones were sold by Verizon in Q2 2012.
  • 73% of postpaid phones sold were smartphones.

The wireless business is very profitable. As the chart shows, the percentage of smartphone connections (as a percentage of all wireless phones) jumped 14% from the second quarter of 2011 to the second quarter of 2012. Meanwhile the average revenue per user (ARPU) for Verizon has jumped 15.4% Y/Y to approximately $24.53.

The EBITDA margin has also been increasing and Verizon announced that they are

on track to achieve $2 billion expense reduction in 2012.

However, while wireless has been profitable, another source of income is wireline. Two examples of wireline are cable and home phone. Wireline revenue as of Q2 2012 was approximately $9.9 billion. FiOS, which is a plan that Verizon offers which includes internet and television, contributes 65% of the wireline revenue.

Verizon has a substantial amount of debt ($51.701 billion). The debt consists of debt maturing within 12 months ($5.827 billion) and long-term debt ($45.874 billion). However, Verizon also has $10.001 billion in cash to service the $5.827 billion of short-term debt.

AT&T Overview:

From Q1 2011 to Q3 2011 AT&T's expenses were on a decline. However, in Q4 2011 they increased drastically.

  • Q1 2011 ($25.439 billion) to Q2 2011 ($25.330 billion), approximately .4% decrease.
  • Q2 2011($25.330 billion) to Q3 2011 ($25.243 billion), approximately .3% decrease.
  • Q3 2011 ($25.243 billion) to Q4 2011 ($41.493 billion), approximately 64% increase.

While there was a major spike in expenses for AT&T in Q4 2011, during the first half of 2012 expenses were cut.

  • Q4 2011 ($41.493 billion) to Q1 2012 ($25.721 billion), approximately 38% decrease.
  • Q1 2012 ($25.721 billion) to Q2 2012 ($24.758 billion), approximately 4% decrease.

AT&T's revenue for 2011 increased as follows.

  • Q1 2011 ($31.247 billion) to Q2 2011 ($31.495 billion), approximately .8% increase.
  • Q2 2011 ($31.495 billion) to Q3 2011 ($31.478 billion), approximately .05% decrease.
  • Q3 2011 ($31.478 billion) to Q4 2011 ($32.503 billion), approximately 3% increase.

During the first half of 2012 AT&T's revenue dropped.

  • Q4 2011 ($32.503 billion) to Q1 2012 ($31.822 billion), approximately 2% decrease.
  • Q1 2012 ($31.822 billion) to Q2 2012 ($31.575 billion), approximately .8% decrease.

For Q2 2011 net income attributed to common stock was $3.591 billion, while in Q2 2012 it was $3.902 billion.

AT&T's wireless data revenue has been steadily increasing. This can also be attributed to the increase in Smartphone sales.

In Q2 2012 AT&T sold 5.1 million Smartphones, which accounted for 77% of all postpaid phones sales for Q2. AT&T's Smartphone ARPU is approximately double the ARPU of non Smartphones. In addition, Smartphones are more profitable and the wireless EBITDA service margin was 45% in Q2 2012, which was a 3.4% increase over Q1 2012.

Another source of income for AT&T is wireline. Wireline expenses for Q2 2012 were $12.9 billion, which was 1.9% less then Q1 2012. The revenue for Q2 2012 was $14.9 billion and the wireline margin increased from Q1 2012 to Q2 2012 by 1.6%. U-verse makes up a significant part of AT&T's wireline business and has been a successful and profitable venture. Currently U-verse has approximately 7 million subscribers and counting. Y/Y revenues have grown approximately 38.3%.

AT&T has $2.151 billion in cash, which is approximately 80% less than Verizon's cash. AT&T also has more debt than Verizon at $64.534 billion. The total debt includes $3.402 billion coming due within one year and $61.132 billion in long-term debt.

Analysis:

The companies have similar business models. Both companies have a strong revenue stream, however Verizon's revenue has been steadily increasing and their expenses are steadily falling because of their penetration into the Smartphone market. On the other hand, AT&T's revenue has been falling.

The majority of wireless revenue from Verizon and AT&T comes from Smartphones. In Q2 2012 Verizon sold 5.9 million Smartphones while AT&T only sold 5.1 million. The 5.1 million Smartphones sold by AT&T accounted for 77% of all postpaid phone sales, while the 5.9 million Smartphones sold by Verizon accounted for 73% of all postpaid phone sales. Therefore, Verizon holds a larger share of the important Smartphone market, which gives them an important competitive edge.

Wireline is another important source of income for both Verizon and AT&T. In Q2 2012 AT&T's revenue from wireline was $14.9 billion, while Verizon's was $9.9 billion. AT&T has an edge over Verizon in the wireline market. However, while wireline is an important source of income, wireless is a more important source of revenue for both companies.

Debt is another important factor when evaluating a company. Both companies have a significant amount of debt, however Verizon has $9.422 billion less debt then AT&T, which is no small amount. Verizon has more short-term debt ($5.827 billion versus $3.402 billion), but has more than enough cash to cover this debt. Verizon actually has 5x more cash than AT&T ($10.001 billion versus $2.151 billion).

My opinion:

I believe that Verizon is the better investment. I like the fact that Verizon has less debt and can afford to pay off their short-term debt. However, what I really like is that Verizon sells more Smartphones. I think this gives them a significant competitive edge (an example is the current demand for the iPhone 5 - see more). This will be a key factor in the coming years.

Source: Telecom Titans: AT&T Versus Verizon

Additional disclosure: While I express my opinion in this article, only you can determine if a specific stock is right for your portfolio. You should always do your own research before buying or selling any stock.