AT&T Reports Solid Q2 Earnings: Explaining Its Connected Car Strategy

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AT&T (NYSE:T) reported a reasonably good set of Q2 2015 numbers, with earnings beating consensus while revenues were roughly in line with street estimates. On the wireless side, revenues grew by about 2.1% year-over-year, driven by higher equipment revenues and stabilizing service revenues. However, the crucial postpaid net add metric fell sharply (410k vs 1.026 million a year ago), while churn numbers also edged higher. Wireline revenues continued to fall (-1% adjusted for disposals), although the growth in U-Verse IP based services helped to soften the decline. Overall, consolidated revenues stood at $33.0 billion, up 2.2% year-over-year, adjusted for divestment of the Connecticut wireline operations, while operating income grew to $5.7 billion from about $5.6 billion in the year ago quarter. [1] Below, we review the performance of AT&T’s wireless division and take a look at its connected car business, which has been accounting for a bulk of its recent wireless adds.

We have a $37 price estimate for AT&T, which is about 10% ahead of the current market price.

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Postpaid Adds And Churn Disappoint, But New Plans Help Margins and ARPU

AT&T added 2.1 million net wireless connections in Q2. However, the crucial postpaid phone net adds number fell to 410,000, marking a 60% y-o-y decline and a 7% sequential decline. Much of the growth actually came from the addition of 1.4 million connected devices (1 million connected car adds) and 331,000 prepaid net adds. AT&T’s postpaid churn figures rose to 1.01% from about 0.86% in the year ago quarter, possibly due to higher competition from Verizon and the smaller two carriers. Churn is a key metric in the wireless industry, since lower churn rates typically help carriers save costs that they would otherwise incur on acquiring new customers.

AT&T has been repositioning its postpaid strategy with initiatives such as Mobile Share Value – which allows customers to share data among several devices, and Next – which is essentially a subsidy-free equipment installment plan on the lines of T-Mobile’s Uncarrier and Verizon’s Edge programs. The carrier says that Mobile Share Value plans now account for 77% of its smartphone base and this is a relatively encouraging trend, since it should bolster long-term data usage while also helping to reduce churn numbers. For example, the company says that the number of Mobile Share accounts on 15 gigabyte or larger data plans quadrupled y-o-y. These two offerings have helped postpaid phone-only ARPU plus installment billings on next phones grow by about 6.1% y-o-y and 3.3% sequentially to $68.29. [2] Adjusted wireless EBITDA service margins also saw a nice bump, growing by close to 6% year over year to 48.5%. To be sure, some of these year-over-year growth numbers are only likely to be transitory, since equipment installment plans recognize most of the handset revenues at the time of sale and also move away handset revenues (which are lower margin) from the service revenue header into the equipment revenue line item. As AT&T gradually moves most of its subscriber base onto these installment plans (Next accounts for just 37% of its base), we could see these growth numbers leveling off.

What’s The Connected Car Business About? 

Investors are likely to be intrigued by AT&T’s recent strength in connected car additions, which have accounted for close to half  (or more) of its net wireless adds over the last two quarters. So what exactly does the business entail and what is the opportunity here for the company?

A growing list of car makers are deploying connectivity as a key part of their new car strategies, and AT&T notes that it now has relationships with 8 manufacturers who now produce more than half of the new connected cars in the United States. [3] The company is apparently taking a three-pronged approach to monetizing its connected car business. Firstly, it is looking at wholesale relationships with auto manufacturers to gather or deliver on-time and real-time information to and from cars (services upgrades to mapping and other electronic systems, for example). The biggest value add here comes from the fact that much of this activity can be done in off-peak hours, without requiring additional bandwidth. Secondly, the company is looking to effectively add cars as another connected device on its Mobile Share Value Plan for data sharing. Thirdly, AT&T looking at a prepaid internet opportunity, which could presumably relate to providing internet access for rental cars. With that said, we don’t really think these strategies will be big revenue drivers for the carrier, although they could help margins, since the incremental costs involved are likely to be very low.

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Notes:
  1. AT&T Investor Briefing Q2 2015 []
  2. AT&T Financial and Operational Results []
  3. AT&T’s (T) Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, June 2015 []