AT&T Q4 Earnings Preview: How Will Postpaid Phone Subscriber Metrics Trend?

AT&T (NYSE:T), the second largest U.S. wireless carrier, is expected to publish Q4 2015 earnings on January 26th, reporting on the first full quarter following its acquisition of satellite TV provider DirecTV. We expect the company’s numbers to be driven by the increasing shift towards contract-free post paid wireless plans, potentially lower costs and the recognition of some revenue and cost synergies from the DirectTV acquisition. Below is a brief review of what we will be watching when AT&T publishes earnings Tuesday.

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

See our complete analysis for AT&T here

Wireless Subscriber Growth Could Remain Under Pressure

AT&T’s wireless additions have been somewhat lackluster over the last year. While total postpaid wireless subscriber net adds stood at 1.1 million for the first nine months of 2015, the carrier’s postpaid phone subscriber base saw a decline. This was driven by attrition of lower-value feature phone subscribers, the company’s focus on maintaining a higher-quality smartphone customer base and stronger competition from T-Mobile – which led the industry in terms of subscriber adds last year – as well as Sprint. It’s possible that things remained challenging during Q4 as well, amid competition from the smaller carriers, although this could have been offset by cross-selling opportunities arising from the DirecTV purchase.

That said, the company’s per-subscriber metrics and margins are likely to see some improvement, amid the increasing shift to the company’s ‘Next’ equipment installment plans. During the previous quarter, ARPU plus billings from the Next EIP rose by about 5% year-over-year to around $69, due to the effects of greater equipment revenues recognized under installment plans. During Q3, the 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 is attributable to better cost management, a bulk of the improvement is likely transitory, owing to lower subsidy spending and a shift of handset revenues into the equipment revenue line item. AT&T sold roughly 80% of its smartphones under no-subsidy plans such as Next or bring-your-own device (BYOD) during Q3, and the number is likely to rise going forward, since the carrier recently announced that it would stop offering subsidized plans altogether.

Updates on DirecTV Integration And Customer Metrics

AT&T has become the largest U.S. pay-TV operator after it closed its acquisition of DirecTV in July 2015. During Q3, the company added a net of 26,000 DirecTV U.S. satellite subscribers, although it lost 91,000 AT&T U-Verse subscribers. It’s possible that DirecTV’s adds could see stronger growth during Q4, as the company has started selling DirecTV in almost all of its company-owned stores, while promoting DirecTV over its U-Verse offering. Cross selling and providing bundled service (wireless, broadband and satellite TV) is likely to be a big opportunity. The company estimated that about 15 million homes could potentially add wireless services with 21 million potentially adding video and 3 million adding high-speed Internet services. We will also be looking for updates on the realization of cost synergies. During the Q3 2015 earnings conference call, management indicated that the firm was on track to meet or exceed its $2.5 billion in targeted merger synergies (by FY 2018) driven by cost savings related to customer service and installation ramp-up.

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