Reviewing AT&T’s Mixed Q2 Results

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AT&T (NYSE:T) published a relatively mixed set of Q2 2016 results on Thursday, with earnings coming in line with expectations, although revenues fell short of estimates amid lower wireless service and equipment revenues. Below we provide some of the key takeaways from AT&T’s results. ((AT&T Q2 2016 Financial and Operational Results))

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Mobility: EIP Shift & Feature Phone Losses Hurt Revenue, But Margins Trend Higher 

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  • AT&T’s mobility revenues contracted by about 2% year-over-year, as service revenues trended lower amid uptake for subsidy free plans which have lower service billings (75% of smartphone base on no-subsidy plans), while the carrier’s recent postpaid phone subscriber losses also weighed on revenues. Equipment sales were also lower, amid fewer high-profile handset launches and longer smartphone upgrade cycles.
  • While AT&T’s total postpaid subscriber base grew, driven by the addition of non-phone devices, the carrier continued to lose postpaid phone subscribers, on account of the attrition of less valuable feature phone subscribers (ARPU $35 or less). Its smartphone mix, on the other hand, has expanded to about 89%.
  • Wireless EBITDA margins expanded by 130 bps year-over-year, driven by the uptake of equipment installment plans, lower handset upgrade rates, operating cost reductions and a higher mix of smartphone users.
  • AT&T has been doing very well on the prepaid front, adding about 365k new customers during the quarter. The carrier’s prepaid subscriber base has grown by about 21% year-over-year, driven partly by strong promotions for its Cricket prepaid brand and weakness at Sprint – a key player in the prepaid market.

Entertainment: Satellite Uptake Strong, IP Broadband Adds Slow Sharply

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  • AT&T’s Entertainment division revenues, adjusted to include DirecTV’s U.S. operations for Q2’15, grew by 2% driven by an increasing mix of satellite subscribers and higher advertising revenues.
  • AT&T has been promoting DTV’s satellite TV package over its U-Verse offering, since DTV typically has a slightly higher ARPU, in addition to seeing lower content costs. For this quarter, the carrier lost a net of 49k video subscribers as U-Verse losses continued to eclipse its satellite gains.
  • AT&T’s total wireline Broadband subscriber base declined by about 2% year-over-year amid DSL subscriber attrition (164k net losses). IP broadband net adds also slowed down significantly (54k vs 217k a year ago), although the carrier expects this to pick up during the second half of the year. [1]
  • The company expects the integration of DirecTV to bring in $1.5 billion or more in run-rate cost synergies by the end of this year, with plans to touch $2.5 billion or more in run-rate savings by the end of 2018.

International: Mexican Wireless Growth Accelerates, DTV LatAm Sees Some Respite 

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  • AT&T’s Mexican wireless operations performed well during the quarter. Net subscriber adds came in at 742k, marking the strongest quarterly performance since the carrier entered the market last year.
  • Churn figures also trended lower by about 1% to 5.8%. That said, churn figures remain significantly higher compared to AT&T’s U.S. wireless operations, on account of a higher mix of prepaid wireless users (51% of subscriber base).
  • DirecTV Latin America saw a total of 87k net subscriber adds, ending a streak of three straight quarters of subscriber losses since AT&T acquired the business. That said, these adds were driven partly by the Copa America Soccer Tournament, and it remains to be seen whether AT&T can maintain the momentum in the face of macroeconomic headwinds in the region.

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Notes:
  1. AT&T (T) Q2 2016 Results – Earnings Call Transcript, Seeking Alpha, July 2015 []