AT&T Posts Strong Q1 On Adoption Of Mobile Share And Next Plans

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AT&T (NYSE:T) announced a strong set of Q1 2014 results Tuesday, as the carrier successfully fended off competition from rivals such as T-Mobile to post its best first-quarter subscriber growth in five years. The second largest wireless carrier in the U.S. added 625,000 postpaid subscribers during the quarter, more than double the figure from a year ago. Its overall revenues grew year-on-year by 3.6%, partially aided by the acquisition of Leap Wireless during the quarter. The upward trend in wireless continued, with revenues growing 7% year-over-year as subscribers shifted to the higher tiers of AT&T’s Mobile Share data plans. The carrier’s strategy to combat T-Mobile’s ‘Uncarrier’ initiatives with equipment financing plans of its own worked well, as Next accounted for 40% of its postpaid smartphone gross adds and upgrades in Q1 – up from 15% last quarter. Despite the strong postpaid net-adds during the quarter, the carrier posted a 220 basis point improvement in its EBITDA margins as subscribers increasingly adopted Next and management’s cost-optimization initiatives took hold.

We have a $37.50 price estimate for AT&T, which is slightly ahead of the current market price.

See our complete analysis for AT&T here

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Strong response to T-Mobile competition

AT&T’s strong postpaid showing comes against the backdrop of a saturated wireless market in the U.S. and intense competition for subscribers, ignited especially by T-Mobile’s recent Uncarrier initiatives. Last year, T-Mobile was the first to launch no-contract service plans that saw tremendous response from subscribers and forced rivals to follow suit with similar plans of their own. More recently, the carrier started offering subscribers up to $350 in early termination fees to cover switching costs, in a bid to poach subscribers from rivals, especially AT&T. It also came up with a revised data allocation for its postpaid plans, adding 500MB of data to its lowest two data tiers for the same price.

In response, AT&T initially offered T-Mobile subscribers $200 to switch and followed it up by announcing price cuts on some of its more expensive 10GB+ family data plans for unsubsidized smartphones. It then slashed the price of its single-line 2GB Mobile Share Value plan by $15 to $65, and that for two lines sharing the data by $15 to $90. The discounting and strong Next push helped AT&T mitigate the competitive pressures effectively, as can be seen in the strong take rates of its shared data and Next installment plans.

Mobile Share and Next drive outperformance

AT&T saw its Mobile Share accounts almost triple year-over-year and increase 50% sequentially. The take rates of its higher-data tiers were especially impressive, as penetration of 10GB+ data plans increased significantly, from 27% of its Mobile Share base at the end of the fourth quarter to 46% in Q1. By discounting higher data usage, AT&T is counting on subscribers adding more mobile devices to their shared data plans and shifting to the higher data tiers. Growing LTE adoption should also help drive the trend, now that AT&T is nearly done with its initial LTE buildout and will soon be adding data capacity in high-traffic areas. This will help AT&T offset the impact of the pricing discounts on offer and defend its long-term data potential.

Usually, in a quarter that AT&T shows impressive postpaid net-add figures, the carrier also suffers from margin compression due to subsidies. However, the increasing adoption of Next helped AT&T avoid the impact this quarter. This is because the carrier is able to recognize a greater portion of the device’s upfront cost as revenues when subscribers finance their devices through Next’s installment plans. The carrier reported a 52% increase in device revenues in Q1, although smartphone sales declined slightly year-over-year. The accounting change helped the carrier realize significant margin gains, as Next sales surpassed expectations and accounted for 40% of gross postpaid smartphone adds during the quarter.

However, the discounting of service plans with Next meant that AT&T’s ARPU levels did not increase by much. AT&T’s phone-only postpaid ARPU increased just 0.4% as compared to the prior-year quarter, but when combined with Next monthly billings (a more apt metric for comparison with the traditional subsidy model) saw 2% growth year-over-year.

Going forward, we expect the trend of rising data usage and margin expansion to continue as LTE adoption grows further. Increased adoption of 4G will reduce dependence on AT&T’s less cost-efficient 3G network, and incentivize higher data usage on tiered data plans. LTE as a network technology not only supports higher speeds but is also more efficient than current 3G networks at handling data, thereby reducing maintenance and handling costs.

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