AT&T Earnings Preview: Subscriber Metrics, DirecTV Integration In Focus

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AT&T (NYSE:T) is expected to publish its Q3 2015 earnings on October 22, reporting on an eventful quarter that saw a flurry of promotional activity in the wireless industry and also saw AT&T close its acquisition of DirecTV. [1] Below, we provide a brief review of some of the key factors that we will be watching when the company reports earnings Thursday.

We have a $38 price estimate for AT&T, which is about 15% ahead of the current market price. We will be revisiting our price estimate post the earnings release.

See our complete analysis for AT&T here

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Wireless Postpaid Net Adds And Churn

During Q2, AT&T’s postpaid phone net adds fell to 410,000, marking a 60% y-o-y decline and a 7% sequential decline, while its churn figures rose to 1.01% from about 0.86% in the year ago quarter,  due to higher competition from Verizon and smaller rivals Sprint and T-Mobile. Both metrics could face further pressure this quarter, for two primary reasons. First, there was a flurry of promotional activity in the industry towards the end of Q3, with the launch of Apple’s new iPhone 6S and 6S Plus. Sprint and T-Mobile came up with particularly innovative plans, offering the new iPhones for just a few dollars a month under trade-in schemes (related: Why The $1 A Month iPhone 6S Offer Could Be Great For Sprint). AT&T’s offers were perceived as being relatively conservative compared to the smaller players, and this could have an impact on its churn and postpaid net add numbers.

Additionally, Sprint has been able to meaningfully reduce its subscriber losses, banking on discounting and significant network improvements. This could potentially reduce the supply of new customers for top-tier carriers such as AT&T and Verizon, who had been taking subscribers from Sprint in recent years. Sprint’s platform postpaid subscriber losses narrowed to just 12,000 during the Q2, while its post paid churn rates improved by 0.49% y-o-y to 1.56% and there’s a good chance that it continued to make more progress through Q3 as well.

Mobile Share Value Plan And ARPU Impacts 

Data consumption is the biggest lever of ARPU growth for wireless carriers, and AT&T has been looking to bolster the metric by encouraging the adoption of its 4G LTE services, while also promoting wireless plans that allow customers to share data among several devices. LTE has proven a big driver of data consumption growth for carriers, given that it supports higher speeds while also being more efficient in handling data compared to 3G networks. At the end of Q2, 83% of AT&T’s postpaid smartphone customers had an LTE-capable device, up from about 80% during Q1, and this could help the carrier accelerate data usage and ARPU through the quarter. The carrier’s Mobile Share Value plans, that allow customers to share their monthly data usage across devices, have also been a factor driving data consumption. The carrier says that the number of Mobile Share accounts on 15 gigabyte or larger data plans quadrupled y-o-y during Q2.  During Q2, ARPU plus installment billings grew by about 6.1% y-o-y and 3.3% sequentially to $68.29, and it’s possible that we will see some improvement on a year-over-year basis in Q3 as well.

DirecTV Integration Updates

AT&T closed the DirecTV acquisition on July 24, and there are likely to be a lot of moving parts related to DirecTV’s financial results this quarter since the integration is still under way. It could take time for synergies and other strategic benefits to kick in (related: AT&T Closes DirecTV Acquisition: Reviewing The Concessions And Benefits). However, AT&T has indicated that it expects positive net adds for the U.S. satellite operations in Q3, while noting that that the subscriber base for its U-verse TV was expected to decline, as it focuses on satellite and high-value subscribers. Separately, AT&T has noted that it will be revising its operating segments to account for the DirecTV merger and related organizational changes, effective for Q3. The company’s new reportable segments will comprise of 1) Business Solutions; 2) Entertainment and Internet Services; 3) Consumer Mobility; and 4) International. [2]

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Notes:
  1. AT&T Event Details []
  2. AT&T Form 8-K []