AT&T (NYSE:T) announced a strong set of first quarter results in April, 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 3.6% year-over-year (y-o-y), partially aided by the acquisition of Leap Wireless during the quarter. The company’s wireline division witnessed a marginal drop in revenues to $14.5 billion, driven by 2.7% decline in sales in the wireline business segment, partially offset by strong gains in the wireline consumer segment, which operates U-verse. 
U-verse is AT&T’s fiber-based communications network which provides digital TV, voice as well as high-speed internet services. In the first quarter this year, U-verse revenues grew 28% y-o-y owing to solid subscriber growth in internet as well as TV. The company increased its U-verse high-speed internet subscriber base by about 634,000 in Q1 to reach a total of 11 million. Its U-verse TV subscribers increased by 201,000 to reach 5.7 million in the same period. Going forward, we expect the growing adoption of U-verse services to drive wireline sales. ((ref:1))
We have a $37.50 price estimate for AT&T, implying a slight premium to the current market price.
U-verse Subscriber Adds To Drive Top Line Growth
In the first quarter of the year, U-verse contributed about 24% of total wireline revenues with $3.5 billion, which is a significant improvement over the prior-year quarter when its contribution was less than 18%. Since overall wireline revenues have remained largely the same, it is apparent that U-verse is growing much faster than the overall wireline business, which is witnessing weakening demand in fixed-line voice and DSL. U-verse high-speed internet subscribers now account for more than 67% of all wireline broadband subscribers for the company, compared to about 51% in the prior-year quarter.
The shifting user preference from DSL to U-verse internet is a positive sign for the company’s future top-line growth, largely because of the potential for higher ARPU (average revenue per user) and bundled services. This was evident in the first quarter this year when the company stated that 90% of its new U-verse TV customers had also opted for its high-speed internet service and more than two-thirds of its total U-verse TV subscribers also opt for two to three other services from the carrier. Going forward, we expect the growing adoption of U-verse services to drive the wireline division’s revenue growth and help offset the declines in its traditional fixed-line voice and broadband revenues.
Uncertainty Related To DirecTV Acquisition
In light of AT&T’s recent proposition to acquire satellite-TV provider DirecTV, it will be interesting to see how the carrier manages its 5.7 million U-verse TV subscribers along with DirecTV’s nearly 20 million users in the U.S., if the deal is approved. DirecTV’s model is generally less costly to expand TV services compared to U-verse, given the cost of laying fiber to the premises, and this is one of the important benefits of the deal for AT&T. However, slowing down investment in U-verse could create problems with regulatory authorities, who are looking to encourage high-speed broadband/Internet expansion and investment in the country. Notes:
- Q1 2014 Earnings Press Release, AT&T, April 22 2014 [↩]
- U-verse Is The Regulatory Key To The Proposed AT&T/DirecTV Merger, Seeking Alpha, June 20 2014 [↩]