AT&T Beats Q3 Estimates, Increases Full Year Outlook On Better Cost Management

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AT&T (NYSE:T), the second largest U.S. wireless carrier and largest pay-TV service provider, published its Q3 results on Thursday, beating market estimates on earnings, although revenues fell short of expectations. The wireless business had a relatively mixed quarter, as postpaid churn rates trended higher and net adds fell amid intense competition, although wireless margins were aided by an increasing uptake of subsidy-free plans and improved efficiency. The company also said that the integration of DirecTV – which it acquired for roughly $49 billion – was on track, indicating that it had seen some early success in realizing synergies, while bolstering its content strategy. Separately, AT&T also raised its full year EPS and free cash flow outlook, driven by lower costs across most of its product lines and increased confidence surrounding the DirecTV integration. In this note, we take take a look at how the carrier’s wireless business fared during the quarter and also review the progress of the DirecTV integration.

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

See our complete analysis for AT&T here

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Wireless Subscriber Metrics Come Under Pressure, Margins Improve

AT&T is now reporting its wireless operations under two segments – Business Solutions and Consumer Mobility – but for the sake of comparison we will focus on the consolidated numbers in this note. The carrier added a net of 289,000 postpaid customers (23,000 from the consumer side) during Q3, down from about 785,000 in the year-ago quarter and about 410,000 in Q2. [1] This could possibly be due to stronger promotional activity by smaller rivals Sprint and T-Mobile  relating to the launch of the new iPhones, as well as lower churn and comparatively better net adds at Verizon. Wireless postpaid churn figures also deteriorated to about 1.16% from about 0.99% a year-ago, largely due to the attrition of feature phone subscribers and the company’s focus on maintaining a higher-quality smartphone customer base. [2]

The carrier’s wireless service ARPU continued to trend lower, falling by about 8% year-over-year to $40 driven by continued adoption of its Mobile Share value plans, which allow customers to share data among several devices. However, ARPU plus billings from the Next equipment installment plans – which are a more appropriate metric as the company transitions to installment-based plans – rose by about 5% year-over-year to around $69. Wireless service margin stood at 49.4%, the company’s best ever, up from 43.1% a year-ago. While a portion of this operating margin increase came from better cost management, a significant part of the improvement is likely transitory. This is because equipment installment plans recognize most of the handset revenues at the time of sale and also move handset revenues (which are lower-margin) from the service revenue header into the equipment revenue line item. The carrier says that roughly 80% of smartphone sales are on no-subsidy plans such as Next or bring-your-own device (BYOD).

DirecTV Integration Updates

AT&T has emerged the largest U.S. pay TV player following the close of its acquisition of DirecTV in July. The primary rationale for the deal included bringing in cost and revenue synergies, while giving AT&T greater leverage in content distribution, and the company appears to have executed reasonably well on all three fronts. For instance, AT&T noted that it was on track to meet or exceed its $2.5 billion in targeted DTV merger synergies (by FY 2018) as cost savings related to customer service and installation ramp-up. The carrier is also selling DirecTV in almost all of its company-owned stores, while increasing its promotional activities to drive bundled service sales (wireless, broadband and satellite TV). There were also some noteworthy developments on the content front. The company forged a multi-year agreement with Viacom for U-verse and DirecTV subscribers, as it looks to reduce content costs with a larger base of paying subscribers. The company also launched an expanded NFL Sunday Ticket streaming service for consumers who cannot receive DirecTV satellite service. [3] As expected, there were a lot of moving parts in terms of the operational results of DirecTV and AT&T’s broader entertainment division. The company added a net of 26,000 DirecTV U.S. satellite subscribers, while its base of U-Verse TV subscribers fell by 91,000, as it reduced promotions while increasingly emphasizing satellite sales, which see lower content costs.

Key Earnings Takeaways

  • Consolidated revenues grew 19% year-over-year to $39.1 billion.
  • Adjusted diluted EPS (Non-GAAP) came in at $0.74 versus $0.65 a year ago.
  • Wireless revenues remained flat year-over-year at about $18.3 billion.
  • Note that Q3 results include DirecTV operations since the acquisition date of July 25, and the year over-year comps are not adjusted for these results.

Updated FY 2015 Outlook 

  • Raised adjusted EPS guidance to $2.68 to $2.74 from $2.62 to $2.68. [4]
  • Raised free cash flow outlook to $15 billion or better from prior estimate of $13 billion or better.
  • Reaffirmed full year capex guidance at $21 billion range.

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Notes:
  1. AT&T Financial and Operational Results []
  2. AT&T (T) Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 2015 []
  3. AT&T Q3 2015 Investor Briefing []
  4. Q3 2015 Earnings Presentation []