AT&T Beats Estimates On Strong Subscriber Growth, Next Adoption

AT&T (NYSE:T) reported a strong set of Q4 and full year 2014 results on Tuesday, January 27, which highlighted the wireless major’s competent handling of the ongoing price war in the U.S. wireless industry. The country’s second largest wireless carrier added 854,000 postpaid subscribers and about 1.3 million connected devices during the fourth quarter, more than 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 58% of its postpaid smartphone gross adds and upgrades in Q4, compared to a 50% take rate in the previous quarter. AT&T’s overall revenues grew by about 4% year-on-year (y-o-y) to about $34.4 billion, which was above the Thomson Reuters-compiled analyst consensus of $34.27 billion. The moderate revenue growth can be 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. ^{[1] [2] [3]}

On the cost side, the carrier’s wireless EBITDA margin declined from 31.8% in Q4 2013 to 26.4% in Q4 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 115 basis points y-o-y to 27.9% in the fourth quarter. Pricing pressures due to rising competition impacted wireless net income, which declined about 19% to $3.2 billion. Overall, the company reported a net loss of about $4 billion in Q4 2014 compared to a profit of $6.9 billion in the prior year quarter on account of certain actuarial losses related to the company’s benefit plans, write-offs related to certain network assets, DirecTV transaction costs and loss on the sale of some properties in Connecticut. Adjusting for such items, AT&T reported earnings per share of 55 cents in the quarter, compared to 53 cents in Q4 2013.

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

Robust Growth In Mobile Share Accounts, Next Plan Adoption

The number of AT&T’s Mobile Share accounts more than doubled y-o-y in 2014 to reach 18.4 million, representing over 52 million connections or about 70% of its total postpaid base. 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% by the end of 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 is also helping drive the trend.

Owing to the growing adoption of AT&T’s no-subsidy Next plans, the carrier reported a 72.3% increase in device revenues in the fourth quarter, even as service revenues declined 3.7% y-o-y. 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 58% of gross postpaid smartphone adds during the quarter.

Impact Of Next On Wireless ARPU, LTE Base

The discounting of service plans with Next resulted in a decline in AT&T’s ARPU (Average Revenue Per User) levels over the prior year quarter. AT&T’s phone-only postpaid ARPU declined by about 11% y-o-y and 2.3% sequentially to $60.99 in Q4 2014. However, when combined with Next monthly billings (a more apt metric for comparison with the traditional subsidy model), AT&T’s postpaid ARPU was almost flat sequentially at $65.86 in the quarter.

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 2014, about 83% of AT&T’s postpaid subscribers had smartphones, and more than three-quarters of them had a 4G LTE-enabled device. Considering that AT&T’s postpaid subscriber base currently stands at close to 76 million, this translates to over 40 million users on the carrier’s network having a 4G-enabled smartphone. ^[1]

U-verse Drives Wireline ARPU

The sale of AT&T’s wireline business in Connecticut to Frontier Communications closed in Q4 2014 and the company released its earnings incorporating this transaction. The Connecticut wireline business had 407,000 total broadband subscribers, 298,000 U-verse high speed Internet subscribers and 197,000 U-verse TV subscribers. Taking this loss of subscribers into account, AT&T’s total wireline broadband subscriber base decreased by 51,000 in Q4 2014. However, U-verse TV reported an increase of 73,000 subscribers after adjusting for the sale of the Connecticut operations. Overall, U-verse, AT&T’s fiber-optic based triple-play communications service, had a solid year 2014 with overall revenues (after adjusting for Connecticut sale) increasing by about 22% y-o-y on the back of solid growth in TV, Internet and Broadband revenues.

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 wireline ARPU as well. ARPU for triple-play customers continues to be over $170 per month and overall wireline broadband ARPU increased by 7% y-o-y in the fourth quarter this year.

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1. Press release, AT&T, Jan 27 2015 [↩] [↩]
2. AT&T Q4 2014 Earnings Transcript, Seeking Alpha, Jan 27 2015 [↩] [↩]
3. Presentation Q4 2014, AT&T, Jan 27 2015 [↩]