AT&T’s Q1 2015 Insights: Expect Postpaid Churn Improvement, Service Margins To Remain Under Pressure

AT&T (NYSE:T) recently provided some insights about its expectations for the first quarter ending March 31. Reiterating its earlier guidance of improving postpaid subscriber adds and expanding margins in the full year, the company stated that it expected net postpaid subscriber adds to be in the 400,000 range in the first quarter, driven by growth in tablet adds. It also stated that postpaid churn was likely to improve both sequentially as well as year-over-year (y-o-y) in Q1 2015, highlighting the fact that the company had finally achieved some success in fending off competition from rivals. AT&T’s postpaid churn had increased drastically over the last couple of quarters, from 0.86% in Q2 2014 to 1.22% in Q4 2014, due to aggressive promotions from smaller rivals Sprint (NYSE:S) and T-Mobile in the latter half of last year.

AT&T reiterated that the growing adoption of its no-device-subsidy Mobile Share Value plans was expected to impact service margins in the first quarter, but its impact will likely be diluted as the year progressed. By the end of March, AT&T expects about 60% of its postpaid subscriber base to be on the no-device-subsidy plans, up from 58% at the end of Q4 2014 and about 30% at the end of Q1 2014. ^{[1] [2]}

In addition to insights on first quarter trends, AT&T announced that it will now have three reportable business segments – Wireless, Wireline and International, with International representing its acquisition of Mexican wireless player Iusacell in November last year. (AT&T In Competition With America Movil In Mexico With Iusacell Acquisition) It also stated that it is likely to incur a charge of about $130 million in the quarter to pay around 3,000 retirees who elected to retire as part of a special offer.

We have a $36 price estimate for AT&T, which is about 15% ahead of the current market price.

See our complete analysis for AT&T here

First Quarter Wireline Trends

In the wireline business, AT&T expects its U-verse consumer revenue and strategic business revenue to continue to grow in double digits in the first quarter. However, margins are likely to be under pressure owing to the sale of its Connecticut wireline properties, higher costs for TV content and non-cash benefit expenses. The company stated that margins are likely to improve going forward with steady top-line growth and additional cost savings.

In the previous quarter, 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 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.

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1. AT&T 8-K Release, AT&T, March 10 2015 [↩]
2. AT&T 10-K 2014, AT&T, March 2015 [↩]