AT&T: 2016 In Review

AT&T (NYSE:T) had an interesting 2016, which saw the company continue its transition from being a largely U.S-focused telecom provider to a broader telecom, media and content distribution conglomerate. Below we provide a brief overview of the year that was for AT&T and what to expect from the company in 2017.

We have a $44 price estimate for AT&T, which is slightly ahead of the current market price.

See our complete analysis for AT&T here

Wireless Operations Continue To Face Challenges

AT&T lost a total of 811k paid phone subscribers over the first nine months of 2016, amid the defection of feature phone customers to smaller rivals such as T-Mobile and Sprint and also due to its focus on more lucrative smartphone customers. The carrier has lost postpaid phone subscribers for eight straight quarters now, and we do not see the trend reversing in early 2017, given that it still has about 6 million feature phone subscribers (as of September), many of whom have ARPUs of just ~$35 per month. Moreover, there is a possibility that the company’s current deal-making activity and the associated regulatory clearances could be distracting it from its core wireless operations, giving its rivals room to gain market share.

That said, we expect things to be more positive on the ARPU and margin front. In August, AT&T introduced a new set of pricing plans that increase the base price for its most frugal users, while incentivizing users to opt for higher data tiers by dropping pricing on premium plans. (Related: Can AT&T’s New Plans Boost Its ARPU) This could help to boost the company’s per subscriber billings over the next year. Wireless service margins could also fare better, amid a higher mix of smartphone subscribers (90% of post paid base as of Q3).

Mexican Wireless Operations Post Strong Growth

AT&T entered the Mexican wireless market in 2015 as it looked to take advantage of the country’s telecom reforms and certain asymmetric regulations, which favored smaller operators and new entrants. 2016 turned out to be a strong year for the Mexican operations, which saw its subscriber base expand by close to 23% over the first nine months of the year to roughly 10.7 million subscribers, driven by expanding coverage as well aggressive pricing. While we expect growth to largely continue into 2017, currency headwinds will be a key factor to watch, given the possibility of trade-related tensions between U.S. and Mexico. (related: How Are AT&T’s Mexican Wireless Operations Faring?) The Peso is down by roughly 20% versus the U.S. dollar over the last 12 months.

Pay TV Business Focused On Profitability, But Streaming Can Hurt Margins In 2017

2016 turned out to be a relatively tough year for the U.S. pay TV market, with subscriber attrition accelerating amid cord cutting and competition from online streaming services. However , AT&T (NYSE:T), which became the largest pay TV provider with its 2015 acquisition of DirecTV, fared better than the broader market by improving profitability by focusing on its DirecTV operations (which have lower content costs versus its U-Verse IP TV) while keeping overall attrition in check. (related: AT&T’s Pay TV Business: 2016 In Review) The company says that the DirecTV deal is on track to deliver at least $2.5 billion in annual cost synergies by 2018. However, there could be some margin pressures for the pay TV business in the near-term, as AT&T scales up its first over-the-top (OTT) streaming TV service, DirecTV Now, which launched in late November. The service launched at an introductory price of $35 per month for 100+ channels, roughly a third of the ARPU for AT&T’s current linear TV offerings.

Time Warner Acquisition Makes Financial Sense, But Could Dent Credit Rating

AT&T made deeper inroads into the content creation space this year, announcing that it would  purchase Time Warner in a stock and cash deal valued at $85.4 billion. The deal, which is expected to close by the end of 2017, will give AT&T access to high-quality original content, while providing it with bargaining leverage in acquiring content from other companies for distribution, potentially helping to mitigate rising content costs. The deal will also bring about $1 billion in annual run rate cost synergies within three years of closing. While the deal initially saw some opposition in political circles, the odds of it going through appear to be improving, with the incoming Presidential administration appearing to soften its stance. (related: The Odds Of The AT&T Time Warner Deal Going Through Are Improving) However, AT&T could see its debt load swell from about $120 billion to over $180 billion following the deal ($40 billion in bridge financing and about $23 billion in Time Warner debt) This could potentially impact AT&T’s credit rating, which currently stands at BBB+ at S&P.

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