AT&T Q2 Preview: Postpaid Wireless, DirecTV In Focus

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AT&T (NYSE:T), the second largest U.S. wireless carrier and largest pay-TV provider, is expected to publish its Q2 2016 earnings on July 21. We expect the carrier’s results to be driven by its entertainment division, which is benefiting from cost improvements and a greater mix of lucrative satellite subscribers additions following its mid-2015 acquisition of DirecTV. However, the carrier’s bread-and-butter mobility unit could see some revenue pressure on account of recent feature phone attrition and sluggish equipment sales. Below we review some of the key factors to watch when AT&T reports earnings. 

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AT&T Mobility: Postpaid Phone Subscribers In Focus 

AT&T’s postpaid phone subscriber base has been trending lower over the last six quarters, with postpaid phone net losses coming in at about 363k during Q1 2016. While these declines are largely due to the attrition of less lucrative feature phone post paid subscribers (ARPU of roughly $35), there is a possibility that AT&T is being hurt by competition from smaller rivals Sprint and T-Mobile – who are posting positive subscriber numbers amid improving network quality and attractive promotional offers.

AT&T’s equipment revenues have also come under pressure, falling on a year-over-year basis over the last two quarters, likely driven by lower smartphone sales and longer upgrade cycles. It is possible that the metric could see a decline once again this quarter, given the lack of major flagship handset launches. However, we expect AT&T’s wireless margins to improve year-over-year, driver by the higher mix of smartphone customers, lower equipment sales, as well as a higher mix of customers on subsidy free equipment installment plans.

 Entertainment: Will DirecTV Customer Gains Offset U-Verse Losses? 

The results of AT&T’s Entertainment business should benefit from an increasing mix of satellite subscribers and potential cost savings. AT&T has been promoting DirecTV’s satellite TV package over its U-Verse offering, since DirecTV typically has lower content costs and higher revenues per user. During Q1 2016, the company’s satellite subscribers as a percentage of total pay TV subscribers stood at 79.3% as of Q1 2016, up 240 basis points since Q3 2015, the first quarter since the deal closed. That said, the company is losing U-Verse video customers more quickly than it is adding DirecTV subscribers, resulting in a net loss of 54,000 video subscribers during Q1. We will be watching if the carrier can reverse this trend in Q2.

Overall, AT&T expects the integration of DirecTV to bring in $1.5 billion or more in run-rate cost synergies by the end of this year, on account of lower content costs and other operational savings such as installations and support. There could be some revenue synergies from the deal as well, as AT&T has been increasingly promoting bundled services. For instance, the carrier reinstated its unlimited wireless data option, that it stopped about five years ago, for wireless customers who subscribe for one of its pay TV services.

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