Reviewing AT&T’s Mixed Q1 Results

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AT&T (NYSE:T) published its Q1 2017 results on Tuesday, reporting a mixed set of numbers amid continued postpaid phone and pay TV subscriber losses as well as record-low wireless equipment sales. That said, there were also a couple of bright spots in the earnings release, as the carrier posted strong gains at its Mexican wireless operations, while also adding about 2.1 million prepaid and connected device subscribers in the United States. Below we provide some of the key takeaways from the carrier’s earnings.

We have a $43 price estimate for AT&T, which is slightly ahead of the current market price.

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U.S. Postpaid Mobility Business Continues To Face Headwinds

AT&T lost 348k postpaid phone subscribers during Q1, marking an increase over the 67k postpaid net losses it posted in Q4’16, amid a continued loss of feature phone subscribers (~414k losses) and competition from smaller rivals T-Mobile and Sprint, who have made value-priced unlimited plans their primary offering since August 2016. While AT&T also rolled out unlimited plans to mainstream subscribers during Q1 (it was previously limited to its pay TV subscribers), helping to slow the loss of customers to smaller rivals, the plans are more expensive than the competition. The fully-loaded Unlimited Plus plan ($90 per month for a single line)  is priced at a $30 premium compared to Sprint and $10 premium compared to Verizon. The budget plan, which is priced at $60, in line with Sprint’s offering, offers just 3G data speeds. We believe that there is a possibility that the carrier could upgrade its plans in the near term to better compete in the current environment.

Postpaid phone-only ARPU trended slightly lower to about $58 on a year-over-year basis, amid a higher mix of customers on un-subsidized plans, while ARPU+ equipment installment plan billings also faced some pressure, amid record low equipment sales and lower upgrade rates. We expect ARPU to see some pressure in the interim, despite the fact that both of AT&T’s unlimited plans are priced above its current phone-only ARPU, as there is a possibility that heavy data users on tiered-plans will shift down to lower-priced unlimited offerings. Lower overage fees could also put pressure on overall ARPU.

AT&T’s prepaid operations fared reasonably well, adding about 282k subscribers, driven by both its Cricket and Go Phone brands. However, this was still about 45% below last year, likely due to the delayed tax refund season, which appears to have impacted the broader prepaid market (T-Mobile’s net prepaid adds declined by 53% during Q1). AT&T posted record connected device additions (2.57 million), marking a 65.7% improvement on a year-over-year basis. The carrier also continued to do well in Mexico, adding 633k wireless subscribers during the quarter, marking a 20% year-over-year improvement, driven by improving coverage as well as a favorable regulatory environment. The carrier’s LTE networks in the country now reach about 85 million people.

Pay TV Business

AT&T’s linear pay TV business had a relatively difficult quarter, losing 233k subscribers. While all the losses came from the U-Verse IPTV product, the carrier’s DirecTV satellite-based product also underperformed, as it posted no net additions for the quarter, unlike the year ago period, when it added about 328k subscribers. That said, the higher mix of satellite subscribers should bode well for AT&T, as it has lower content costs compared to its U-Verse offering, allowing it to potentially improve margins.

Q1 marked the first full quarter of availability of AT&T’s over-the-top (OTT) streaming TV service, DirecTV Now, which launched towards the end of 2016. While the carrier did not disclose the exact number of gains on its new service, it indicated that the net adds on the service helped the company offset the subscriber decline in its traditional pay TV business (233k). For perspective, the offering saw about 200k paid subscribers adds over the first month post launch, driven partly by promotional pricing and launch offers.

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