AT&T’s Q1 Results: Rising “Next” Adoption, U-verse Gains Drive Top Line

+5.74%
Upside
17.30
Market
18.29
Trefis
T: AT&T logo
T
AT&T

AT&T (NYSE:T) reported a mixed set of Q1 2015 results on Thursday, April 23, which highlighted the ongoing price war in the U.S. wireless industry and transformation underway in the company’s wireline business. The country’s second largest wireless carrier added 441,000 postpaid subscribers and about 945,000 connected devices during the first quarter, over 17% more than in the year ago quarter. 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 65% of its postpaid smartphone gross adds and upgrades in Q1, compared to a 58% take rate in the previous quarter. Another 5% of new customers brought their own devices which meant that about 70% of phone sales in the first quarter did not require any subsidies. AT&T’s overall revenues grew by a marginal 0.3% year-on-year (y-o-y) to about $32.6 billion, owing to a 3% decline in wireline sales and the transition to no-subsidy plans in the wireless space. [1] [2] [3]

On the cost side, the carrier’s wireless EBITDA margin declined by 3.3 percentage points from 39.1% in Q1 2014 to 35.8% in Q1 2015 on increasing adoption of mobile share value plans, subscriber shifts towards the no-subsidy model and rising promotional activities. However, after adjusting for wireless integration costs, AT&T’s wireless EBITDA margin declined by 2.3 percentage points y-o-y to 36.9% and its wireless EBITDA service margin declined by just 20 basis points to 45.3% in the first quarter this year. Pricing pressures due to rising competition impacted wireless net income, which declined about 12% to $4.4 billion. Overall, the company reported a net profit of about $3.2 billion in Q1 2015, down over 12.3% from $3.65 billion in the prior year quarter. Adjusting for certain items such as Leap integration expenses and costs associated with its voluntary retirement plan, AT&T reported earnings per share of 63 cents in the quarter, compared to 71 cents in Q1 2014.

We have a $38 price estimate for AT&T, which is about 10% ahead of the current market price.

Relevant Articles
  1. Down 50% From 2021, We Think There’s Upside For AT&T Stock
  2. Will AT&T Stock See Gains Post Q2 Results?
  3. At $15, AT&T Stock Appears Oversold
  4. AT&T Stock Held Up In A Tough Market. What Does 2023 Hold?
  5. What’s Happening With AT&T Stock?
  6. AT&T Falls 9% In A Month. Will It Recover?

See our complete analysis for AT&T here

Mobile Share Accounts, “Next” Plan Adoption In Focus

The number of AT&T’s Mobile Share accounts grew about 72% y-o-y in Q1 2015 to reach 19.4 million, representing over 55.6 million connections or about 70% of its total postpaid base. The take rates of its higher-data tiers continues to be impressive, with about 50% of all accounts on the 10GB+ data plans and 20% on 15GB or larger data plans. 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 36% increase in device revenues in the first 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 65% 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 10% y-o-y and 1.7% sequentially to $60 in Q1 2015. However, when combined with “Next” monthly billings (a more apt metric for comparison with the traditional subsidy model), AT&T’s postpaid ARPU marginally grew sequentially to $66.14 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 March 2015, about 84% of AT&T’s postpaid subscribers had smartphones, and 80% of them had a 4G LTE-enabled device. Considering that AT&T’s postpaid subscriber base currently stands at over 76 million, this translates to about 61 million users on the carrier’s network having a 4G-enabled smartphone. [1]

U-verse Reports Steady Growth

AT&T’s U-verse IP Internet service gained 440,000 new subscribers in Q1, taking its total user base to 12.6 million. Overall, its total wireline broadband subscriber base (U-verse, DSL and Satellite broadband) increased by 69,000 to 16 million connections. U-verse TV reported an increase of 50,000 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 quarter with overall revenues (after adjusting for Connecticut sale) increasing by over 20% y-o-y on the back of solid growth in TV and Broadband sales. In Q1 2015, U-verse services accounted for 69% of the company’s consumer revenues ($5.66 billion) and about 28% of total wireline revenues ($14.15 billion), up from 59% and 23% in Q1 2014, respectively.

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. 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.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Press release, AT&T, April 23 2015 [] []
  2. AT&T Q4 2014 Earnings Transcript, Seeking Alpha, April 23 2015 []
  3. Presentation Q4 2014, AT&T, April 23 2015 []