How Are AT&T’s Mexican Wireless Operations Faring?

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AT&T (NYSE:T) doubled down on the Mexican wireless market in 2015, purchasing wireless operator Iusacell and the wireless assets of Nextel Mexico, as it looked to diversify operations beyond the saturated and highly competitive U.S. market. The business fared reasonably well over 2016, recording robust customer growth, although this came at the expense of aggressive pricing and weaker margins. Below we provide an overview of how AT&T’s Mexican operations trended over 2016.

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Strong Customer Growth, But Heavy Investments And FX Headwinds Impact Financials

AT&T’s Mexican wireless base expanded by about 23% over the first nine months of this year to roughly 10.7 million subscribers. The carrier has been growing via a mix of aggressive pricing and expanding coverage. For instance, AT&T offers a 6 GB data, voice and text plan for about $25 a month. In comparison, pricing in the U.S. stands at roughly $80. The carrier’s LTE coverage in the country has grown from just about 51 million POPs in Q1 2016 to about 74 million POPs at the end of Q3. The carrier has also pledged to invest as much as $3 billion to upgrade its network, improving LTE coverage to reach about 100 million POPs by 2018.

However, AT&T’s revenue growth in dollar terms has been hurt by the depreciation of the Mexican Peso versus the U.S. dollar (The Peso is down 20% over the last 12 months). For instance, while the Mexican telecom sector as a whole witnessed 13.3% year-over-year growth in revenues over Q3, AT&T’s growth in dollar terms remained almost flat. AT&T’s operations also remained loss-making over the first nine months, amid continued investment in operations, network and subscriber acquisition, with operating margins standing at around -36%. That said, things should improve going forward as wireless is a high-fixed cost business, and AT&T’s expanding subscriber base should help it to improve cost absorption and margins. Moreover, AT&T’s postpaid mix in Mexico stands at a healthy 44%, well ahead of the broader industry, which has a postpaid mix of just about 16%. This could also help profitability in the long-run.

Favorable Market Conditions In Mexico Should Aid Long-term Growth

The Mexican government introduced a slew of new telecom reforms in 2014 to improve coverage and lower costs for customers. Notably, the government has been looking to reduce the influence of America Movil, the dominant player in the Mexican market, requiring the carrier to reduce its market share to under 50%. As the carrier hasn’t been able to meet this requirement yet, given its slow progress with divestitures, regulators have forced it to eliminate interconnection charges that its smaller rivals had to pay for incoming calls to its network, as well as requiring it to share infrastructure with others. These asymmetric regulations have been proving beneficial for smaller players such as AT&T, which holds roughly 12% of the Mexican wireless market.

The demographics in Mexico also remain relatively conducive for wireless growth. Mexico’s mobile connection penetration for 2016 is projected to stand at 90.3% of the population, according to eMarketer, compared to other Latin American markets where penetration stands at above 100%. Smartphone adoption is also rising fast, with penetration (as a percentage of total mobile users) projected to rise to 82.7% by the end of this year from just about 72% in Q1.

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