AT&T Earnings: Data Growth Continues While Postpaid Adds Surprise On The Downside

by Trefis Team
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AT&T (NYSE:T) posted a mixed set of Q3 2012 results on October 24th. The second largest wireless carrier in the U.S. reported a healthy 2.6% y-o-y growth in revenues, excluding the impact of its Yellow Pages business which was sold off in Q2. Data continued to be AT&T’s primary growth driver with revenues from wireless data and U-Verse broadband and video services growing respectively by 18% and 38% over the year-ago quarter. Wireless margins however took a hit as the carrier doled out subsidies to sell 27% more smartphones and 74% more iPhones than the year-ago quarter.

Despite reporting strong smartphone sales, AT&T surprisingly added only about 151,000 postpaid connections during the quarter, a figure that represents a sequential as well as y-o-y decrease of more than 50% and is only a tenth of the postpaid net adds that Verizon reported for the quarter. Increasing competition from rivals Verizon (NYSE:VZ) and Sprint (NYSE:S) in an increasingly saturated wireless market is gradually causing subscriber growth to slow, and the availability (or not) of LTE in certain markets could be key to attracting new subscribers as well as retaining old ones from hereon.

See our complete analysis for AT&T here

Saturated wireless market

The U.S. wireless market has become increasingly saturated recently with wireless connections having exceeded the population in mid-2011. This has made the acquisition of new subscribers, especially those that pay for the higher-margin data plans, highly tough for the wireless carriers. AT&T’s dismal postpaid adds this quarter is, to an extent, reflective of this industry-wide phenomenon but could well have been amplified by iPhone 5 supply constraints. While all the three largest wireless carriers sell the iPhone currently, AT&T has historically been more dependent on the smartphone than others. Due to the supply issues and iPhone 5′s limited availability during the quarter (it was available for only nine days before the quarter ended), it is possible that AT&T wasn’t able to ship as many iPhones to new subscribers as it usually does.

AT&T sold more than 4.7 million iPhones during the quarter, only 18% of which were to new subscribers. This is lower than the over 21% that AT&T managed to sell to new subscribers in the first half of the year. If iPhone sales to new subscribers have only been deferred to the next quarter, we should see that effect in Q4.

With the wireless industry getting more saturated, the focus has shifted from acquiring new subscribers to converting more of their existing base to smartphones and increasing ARPU. Almost 64% of AT&T’s postpaid base uses a smartphone currently, up from about 53% a year ago. More than 80% of AT&T’s postpaid device sales during the quarter were smartphones. A growing smartphone penetration helped AT&T post its strongest postpaid ARPU growth in six quarters, as postpaid data ARPU rose close to 15% and overall postpaid ARPU increased 2.4% over the year-ago quarter.

Data Share Plans

At the same time, AT&T is exploring new growth areas in non-smartphone connected devices such as M2M, telematics, tablets and e-readers. One of the major reasons why wireless penetration in the U.S. has exceeded 100% is because of these connected devices whose market is growing really fast.

AT&T will therefore look to fuel the demand for these connected devices with the recent launch of data share plans that make it easier for users to add more such devices to the carrier’s wireless network. While this might decrease the average revenue per device seeing as these connected data-only devices consume much less data, AT&T revenues from each individual subscriber will rise as users connect more devices to its wireless network. Moreover, since their data consumption is low, it will help shore up the service margins for AT&T. The early adoption of AT&T’s Mobile Share plans has been encouraging with nearly 2 million subscribers signing up in about five weeks since availability and more than a third going for the higher tier (>10GB) plans.

It is also likely that, sometime in the future, AT&T, which has been a vocal critic of unlimited plans in the past, will follow in Verizon’s footsteps and prohibit its unlimited plan users from availing smartphone subsidies in case they want to continue using their plans. This, we believe, will be a step in the right direction since it will help AT&T more efficiently manage its limited network resources and monetize every bit of data that is transferred on its pipes. (see AT&T Looks To Fuel Data Demand With Mobile Share Plans) The company said that its Mobile Share plans have encouraged almost 15% of its unlimited plan users to switch to a tiered plan.

LTE Rollout Continues

With AT&T’s LTE coverage expected to lag Verizon’s well into the next year, it is looking to almost double its current coverage by the year-end and gradually close the gap. (see AT&T Expanding Its LTE Network As Juicy Data Revenues Flow) AT&T has already been investing heavily in its LTE infrastructure, rapidly rolling it out in new markets to make up for its relatively late entry into the space, and we expect this to continue in the future.

While AT&T’s LTE network may not have a country-wide presence right now, we do not see it impacting AT&T much in the longer-term since LTE adoption has been sluggish so far. As of last quarter, Verizon had converted only 16.5% of its subscriber base to LTE despite having such a wide lead in terms of LTE coverage over others. AT&T plans to complete its LTE roll-out and be on par with Verizon’s LTE coverage by the end of 2013. We expect LTE adoption to start picking up only now that the iPhone 5 is launched, and strengthen in 2013. So, longer-term, AT&T may not miss out by a lot so long as it continues to deliver on its current roll-out plans.

An increased adoption of 4G in the long term will reduce dependence on AT&T’s 3G networks, which are under great strain due to the heavy data usage of smartphones such as the iPhone. Also, LTE as a network technology not only supports higher speeds but is also more efficient than current 3G networks at handling data, reducing maintenance and handling costs. Further, higher LTE speeds will see subscribers increasingly use data-intensive applications on their smartphones.

This will drive data revenues, thereby increasing ARPU levels for AT&T over the coming years. In the near-term, limited LTE coverage may be a deterrent for many but a fallback option in the form of the carrier’s HSPA+ network, which provides higher speeds than 3G and has a wider coverage area than its LTE network, should offer an interim solution.

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