Key Takeaways From AT&T’s Q4 Results

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AT&T (NYSE:T) published its Q4 2015 results on January 26, meeting market expectations on earnings but missing estimates on revenues. The company’s bread and butter wireless business had a mixed quarter, posting lower revenues on the back of weaker equipment sales, although margins trended higher on account of the shift to subsidy-free plans. There was some improvement on the pay TV front, with relatively strong subscriber adds from DirecTV and a lower net loss of overall video customers. Below are some of the key takeaways from the carrier’s Q4 results.

We have a $37 price estimate for AT&T, which is roughly in line with the current market price.

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Postpaid Phone Subscriber Metrics Remain Under Pressure

While AT&T now reports wireless operations under two segments – Business Solutions and Consumer Mobility – for the sake of comparison we will use consolidated numbers in our review. AT&T added a total of about 2.2 million wireless customers in the United States, driven largely by the addition of connected devices, tablets and prepaid phones. The company had 995k branded net additions (postpaid and prepaid), including 213k branded phone net adds. However, the company’s crucial branded postpaid phone base continued to shrink, falling by 256k subscribers, compared to a loss of 151k during the same quarter last year. While AT&T said that this was largely due to the attrition of less lucrative feature phone postpaid subscribers (average ARPU of $35), there is also a possibility that carrier was hurt by intense competition from Sprint and T-Mobile, who posted 366k and 917k net postpaid phone adds, respectively, for the quarter. ((AT&T’s (T) CEO Randall Stephenson on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, January 2016)) The carrier’s overall postpaid churn figures stood at 1.18%, down by 4 basis points year-over-year, while churn for the full year stood at 1.09%.

AT&T’s total wireless revenues were down 4.9% year-over-year to $18.9 billion, largely due to a decrease in equipment revenue, that was brought about by lower upgrade sales and an increasing number of bring-your-own-device customers (700k in the quarter). Service revenues were also lower, owing to the adoption of the carrier’s Mobile Share Value plans. As anticipated, there were some moving parts in the margin and per-subscriber revenue metrics, owing to the shift away from the contract model to the equipment installment plan (EIP) and BYOD model. Postpaid ARPU declined by about 5% year-over-year, although phone-only ARPU with AT&T Next monthly billings increased by 4.6% year-over-year to $68.91. Wireless operating income margin stood at 23.2%, compared to 18.0% in the year-earlier quarter. [1]

AT&T has been making a big push into the Internet of Things space, and the carrier says that it now connects 26.2 million devices globally, of which 1.2 million were added in this quarter (related: How Much Value Can The Internet of Things Add For AT&T?). The carrier has also put a lot of focus on its relationship with auto makers, noting that it had added 1 million connected cars this quarter. AT&T has also announced an expanded relationship with Ford with plans to connect over 10 million Ford vehicles with AT&T 4G LTE over the next five years.

DirecTV Integration And Content Deal Updates

Q4 marked the first full quarter since the close of AT&T’s acquisition of satellite TV provider DirecTV. The company added 214k U.S. satellite subscribers during the quarter, versus a net addition of just 26k subscribers during the previous quarter, as it began selling DirecTV in almost all of its company-owned stores, while promoting DirecTV over its relatively lower margin U-Verse video offering. U-Verse saw a net of 240k customers leave during the quarter. Separately, the company noted that it was on track to deliver at least $2.5 billion in annual cost synergies from this deal by 2018, and it’s likely that revenue synergies could also ramp up as the carrier sells bundled services. For instance, AT&T recently reinstated its unlimited wireless data option (that it stopped five years ago) for wireless customers who subscribe to U-Verse television plans or DirecTV’s satellite TV service.

AT&T is also looking to get more involved in mobile video and content, as it looks for new revenue streams amid saturation in its core wireless and television businesses. The carrier is working on deals that should allow it to distribute content from its DirecTV business to its wireless customers. The carrier said that its new video service could be unveiled within the next 45 days. [2]

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Notes:
  1. AT&T Financial And Operating Results []
  2. AT&T sees video as its new special sauce, CNET, January 2016 []