Sprint’s Efforts Hurting AT&T, Impact May Be Short-Lived

Growing competition is going to hurt AT&T (NYSE:T) in the fourth quarter, with expectations of higher churn and lower margins, according to CFO John Stephens. Speaking at UBS’s 42nd Annual Global Media and Communications Conference earlier this month, Stephens said that even though postpaid net subscriber additions were expected to improve year-over-year (y-o-y), postpaid churn was likely to be higher in Q4 than the 1.11% reported last year. In addition, growing competition and aggressive promotions by rivals Sprint (NYSE:S), T-Mobile and Verizon (NYSE:VZ) are expected to hurt margins in the fourth quarter. However, Stephens also stated that the company was not particularly worried about these short term hiccups, as such promotions were unlikely to continue in the long run. AT&T’s confidence also stems from the fact that its network has wider coverage as well as better quality than the smaller carriers who have spearheaded this latest price war in the market. ^[1]

The country’s second-largest wireless carrier now has over 118 million total subscribers, including 75 million postpaid subscribers. In comparison, Verizon has 100 million postpaid subscribers, Sprint has over 29 million and T-Mobile’s postpaid subscriber base is marginally short of 26 million. We have a $36 price estimate for AT&T, which is about 10% ahead of the current market price.

See our complete analysis for AT&T here

Sprint’s Impact On AT&T

In the last three months, AT&T has been the least proactive among major players in offering innovative discounts to lure customers. It also recently cancelled its promotional offer of 15 GB of shared data for $100 per month within 2 weeks of launch. In contrast, Sprint directly targeted AT&T customers earlier this month with its “Cut Your Bill in Half” event. Per the plan, existing AT&T or Verizon customers who switched over to Sprint were offered unlimited text and calls across the U.S. and a matching data allowance as their earlier plan, at half the monthly rate they paid earlier. Sprint also launched innovative iPhone 6 no-subsidy plans and leasing plans in September to attract subscribers away from rivals. This is also likely to have negatively impacted AT&T’s churn rate considering that AT&T has the largest iPhone customer base in the U.S. wireless market.

However, looking at Sprint’s current financial position and continued subscriber losses, it is unlikely to be able to sustain such offers over the long term, and network quality and customer service is likely to prevail over minor price differences in plan rates going forward. This is likely the reason that AT&T has largely kept away from the recent price war and is instead luring customers on the back of its better network quality and no-subsidy Next plan offerings.

AT&T’s Recent Performance

In the third quarter ending September 2014, AT&T added about 785,000 postpaid subscribers and 1.28 million connected devices, 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. Notwithstanding the churn rate and margin concerns for Q4 expressed recently, AT&T’s CFO John Stephens stated that the company expects its full year 2014 churn rate “to be one of our best ever” and full year 2014 wireless service margins to be in line with 2013 levels. In 2013, AT&T’s postpaid churn rate was 1.06% and its wireless EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) margin was slightly over 36%. ^[1]

In terms of financial metrics, AT&T’s revenues grew by only 2.5% y-o-y to about $33 billion in the third quarter, 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 the rationalization of its business portfolio, AT&T lowered its revenue growth forecast for full year 2014 from 5% to 3-4% at the beginning on the fourth quarter. ((Press release, AT&T, Oct 22 2014)) ^{[2] [3]}

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1. AT&T’s (T) Management Presents at UBS 42nd Annual Global Media and Communications Conference (Transcript), Seeking Alpha, Dec 9 2014 [↩] [↩]
2. AT&T Q3 2014 Earnings Transcript, Seeking Alpha, Oct 22 2014 [↩]
3. Presentation Q3 2014, AT&T, Oct 22 2014 [↩]