AT&T (NYSE:T) is scheduled to announce its Q4 FY2011 results on Tuesday. After the record smartphone sales posted in the December quarter, we expect to see a seasonal slowdown in this quarter’s sales. This may have a negative impact on postpaid additions, compared to last quarter. However, it may not be such a bad thing to happen for AT&T, whose wireless operating margins were battered by almost a half last quarter due to the heavy smartphone subsidies. Meanwhile, with carriers such as Verizon (NYSE:VZ) planning to promote 4G LTE heavily this year, we will be expecting an update on what kind of traction AT&T has been getting on its LTE smartphones and how it is planning to counter the Verizon challenge.
Modest postpaid subscriber gains
After the frenetic holiday buying seen last quarter, which helped AT&T post its best quarter ever in terms of smartphone sales, we expect to see a seasonal slowdown in smartphone sales. This will in turn result in modest postpaid subscriber gains for the carrier as the U.S. wireless market increasingly gets saturated with more wireless connections than the population. (CTIA Wireless Facts))
However, AT&T has been gaining good ground in the connected devices category (wireless connections apart from mobile phones) where most of the growth is being seen. AT&T currently has over 40% market share in this high-margin segment, and will be looking to build upon that lead in this quarter.
Margins should rebound
Record smartphone sales last quarter had eaten away into AT&T’s wireless operating margins, which fell by almost a half due to the heavy smartphone subsidies. A basic model of the iPhone 4S, which AT&T sold a whopping 7.6 million of last quarter, costs around $650 for the carrier who then subsidizes it heavily to sell for $199. While checks have shown that the iPhone 4S continues to be the best seller at AT&T, it will be tough for the sales to be as high as last quarter.
The seasonal slowdown in smartphone sales that we expect should help margins rebound in this and subsequent quarters as well. Also, the higher data ARPUs that the added smartphone customers will generate over the life of their contractual period (two years) should help the margins on their way up. This may however not last as the need to promote LTE more kicks in, and AT&T starts providing higher subsidies on LTE smartphones in order to spur demand in the yet nascent technology.
AT&T has already kicked off its LTE promotions with the launch of Nokia’s Lumia 900 on its network. However, the effect of this will not show in the Q1 results as the phone was launched after the end of the March quarter. AT&T has been investing a lot in deploying its LTE network, which is showing in its burgeoning capital expenditures. It will therefore be looking to at least partially recover these costs through the increased adoption of its LTE phones. Higher LTE speeds will also see subscribers increasingly using data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPU levels for AT&T over the coming years.
It will therefore be interesting to know the sales figures of its LTE smartphones and the outlook for the year given by the management in this respect. We currently have a $34 price estimate for AT&T stock, which is about 10% ahead of the market price.