* Raises AT&T, Verizon from “neutral”
* Sees margin improvement from decline in subsidies, upgrades
* Raises price target to $36.50 for AT&T, to $45 for Verizon
May 11 (Reuters) - U.S. wireless carriers will see a sharp improvement in margins as the cost of subsidies for smartphones and cellphone upgrade volumes are set to decline, said Credit Suisse, raising Verizon Communications Inc and AT&T Inc to “outperform.”
Carriers like AT&T and Verizon have long paid hefty subsidies for smartphones like Apple Inc’s iPhone with an aim to attract new customers and keeping existing customers happy.
Industry returns have been under pressure, with rising smartphone penetration driving up costs and capital expenditures at a faster rate than revenue, said Credit Suisse.
Subsidies have been the biggest source of pressure for carriers, with costs rising 34 percent from 2010 to 2011, it estimated.
AT&T and rival Verizon Wireless have recently been tightening their policies to temper upgrades after they were both hurt by hefty iPhone subsidies in the fourth quarter, when the latest model hit stores.
Verizon Wireless last month said it will start charging customers a $30 fee for cellphone upgrades.
The decline in upgrade volumes should drive an 80 to 120 basis point increase in wireless margins for AT&T, Verizon and Sprint Nextel, said Credit Suisse.
Upgrades can be less attractive to operators because despite paying a subsidy for the new device, mobile companies often get no extra revenue from existing customers who switch phones.
Shares of AT&T closed at $33.13 on Thursday on the New York Stock Exchange. Verizon shares closed at $40.55.