AT&T Misses Q3 Revenue Guidance, Lowers Full-Year Growth Forecast

AT&T (NYSE:T) reported a mixed set of Q3 2014 results on Wednesday, October 22, which highlighted the wireless major’s transition towards shared data plans and the no-subsidy model, in line with its peers in the U.S. The country’s second largest wireless carrier added about 785,000 postpaid subscribers and 1.28 million connected devices during the quarter, almost double the figure from a year ago. The carrier’s strategy to combat the innovative initiatives of rivals with equipment financing plans of its own worked well, as Next accounted for about 50% of its postpaid smartphone gross adds and upgrades in Q3, similar to its take rate in the previous quarter. However, its overall revenues grew by only 2.5% year-on-year (y-o-y) to about $33 billion, which was below the Thomson Reuters-compiled analyst consensus of $33.22 billion. The slow revenue growth was attributed to the transition to no-subsidy plans, which shift revenue recognition from service to equipment (handsets), and a higher proportion of bring-your-own-device (BYOD) gross adds. Looking at these factors and the impact of rationalization of its business portfolio, AT&T lowered its revenue growth forecast for full year 2014 from 5% to 3-4%. ^{[1] [2] [3]}

On the cost side, the carrier’s wireless EBITDA margin declined from 37.2% in Q3 2013 to 35.3% in Q3 2014 on increasing adoption of mobile share value plans, subscriber shifts towards the no-subsidy model, rising promotional activities and the Leap acquisition. However, after adjusting for Leap and Alltel integration costs, the wireless EBITDA margin improved 110 basis points y-o-y to 43.1% in the third quarter. Pricing pressures due to rising competition and higher interest expenses impacted net income, which declined over 21% to just over $3 billion. We have a $38 price estimate for AT&T, which is about 10% ahead of the current market price.

See our complete analysis for AT&T here

Adoption Of Mobile Share, Next Plans Remains Strong

The number of AT&T’s Mobile Share accounts have more than tripled y-o-y in 2014 to reach 16.7 million. 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 2013 to over 50% in Q3 2014. 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.

Owing to growing adoption of AT&T’s no-subsidy Next plans, the carrier reported a 45% increase in device revenues in Q3, although service revenues were flat year-over-year. Under the Next plan, 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 accounting change helped the carrier maintain its high margin levels, as Next sales accounted for 50% of gross postpaid smartphone adds during the quarter.

However, the discounting of service plans with Next resulted in a decline in AT&T’s ARPU levels over the prior year quarter. AT&T’s phone-only postpaid ARPU declined by about 8% in Q3 2014 as compared to same period last year, but when combined with Next monthly billings (a more apt metric for comparison with the traditional subsidy model), the decline in ARPU moderated to about 3.4% y-o-y.

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. At the end of the third quarter, about 81% of AT&T’s postpaid subscribers had smartphones, and 67% of them had a 4G LTE-enabled device. Considering that AT&T’s postpaid subscriber base currently stands at over 75 million, this translates to over 40 million users on the carrier’s network having a 4G-enabled smartphone. ^[1]

U-verse Drives Wireline ARPU

U-verse, AT&T’s fiber-optic based triple-play communications service, continued its solid performance in the third quarter this year. Overall U-verse revenues increased by about 24% y-o-y on the back of solid growth in TV, Internet and Broadband revenues. U-verse TV added 216,000 subscribers in Q3 to take its total user base to over 6 million, and U-verse high speed Internet added 601,000 new subscribers in the quarter to take its total to 12.1 million. This rise in subscriptions helped the company improve its proportion of U-verse subscribers to total broadband users to over 73% in Q3 2014 from 59% in the year-ago quarter.

An important factor in the consistent and solid expansion of the U-verse business is its triple-play functionality. This is reflected in the fact that its triple-play bundled accounts have significantly lower churn compared to accounts opting for standalone services, according to the company. ^[2] In addition, more than 97% of the company’s video users subscribe to bundled services which helps drive the average revenue per user (ARPU) as well. ARPU for triple-play customers continues to be over $170 per month and overall wireline broadband ARPU increased by 6% y-o-y in the third quarter this year.

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1. Press release, AT&T, Oct 22 2014 [↩] [↩]
2. AT&T Q3 2014 Earnings Transcript, Seeking Alpha, Oct 22 2014 [↩] [↩]
3. Presentation Q3 2014, AT&T, Oct 22 2014 [↩]