AT&T Earnings Preview: Postpaid Subscriber Adds, Margins In Focus

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AT&T (NYSE:T) is scheduled to announce its Q4 2014 results on Tuesday, January 27. The carrier reported a mixed set of results last quarter, 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. It added about 785,000 postpaid subscribers and 1.28 million connected devices during the quarter, almost double the figure from a year ago. 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 the rationalization of its business portfolio, AT&T lowered its revenue growth forecast for full year 2014 from 5% to 3-4%. [1] [2] [3]

For the fourth quarter, AT&T CFO John 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. Speaking at UBS’s 42nd Annual Global Media and Communications Conference last month, Stephens also said that growing competition and aggressive promotions by rivals Sprint (NYSE:S), T-Mobile and Verizon (NYSE:VZ) were expected to hurt margins in the fourth quarter. Notwithstanding the Q4 churn rate and margin concerns, Stephens stated that the company was expecting 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%. ((AT&T’s (T) Management Presents at UBS 42nd Annual Global Media and Communications Conference (Transcript), Seeking Alpha, Dec 9 2014))

The country’s second-largest wireless carrier had over 118 million total subscribers at the end of September 2014, including 75 million postpaid subscribers. In comparison, Verizon had 100 million postpaid subscribers, Sprint had over 29 million and T-Mobile’s postpaid subscriber base was marginally short of 26 million. We have a $36 price estimate for AT&T, which is about 10% ahead of the current market price.

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Postpaid Subscriber Adds, Margins In Focus

The number of AT&T’s Mobile Share accounts more than tripled y-o-y in the first nine months of 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. It will be interesting to see how the carrier performs in adding postpaid subscribers and Mobile Share accounts in Q4 and its outlook for 2015.

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.

U.S. Carrier Data

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 third quarter.

Going forward, we expect the trend of rising data usage and margin expansion to continue as LTE adoption grows further. However, increased competition and the ongoing price war in the wireless industry might put some pressure on margins in the near term.

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Notes:
  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 []