AT&T Q2 Preview: DirecTV Now, U.S. Postpaid Business In Focus

AT&T (NYSE:T), the second largest U.S. wireless carrier and largest pay TV operator, is expected to publish its second quarter earnings on July 25, reporting on a quarter that saw significant competitive activity in the wireless market and accelerated cord-cutting in the cable space. Below we take a look at some of the key factors to watch when the carrier reports earnings.

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

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Mobility Business Could See Lower Net Losses, But ARPU May Come Under Pressure

AT&T’s wireless business lost 348k postpaid phone subscribers during Q1, marking a sequential increase. The primary reason for the subscriber losses has been the carrier’s shrinking feature phone base. AT&T lost around 414k feature phone subscribers during Q1, and the trend is likely to continue into Q2, as the carrier had 7.3 million feature phone customers at the end of March 2017. That said, AT&T’s move to offer unlimited plans to its broader customer base (it previously restricted unlimited offerings to its pay TV subscribers) could help it add a greater number of smartphone subscribers, resulting in lower net losses for the quarter.

While the carrier’s postpaid phone ARPU has been trending lower (~$58 during Q1), amid a higher mix of customers on un-subsidized plans, there is a possibility that the trend could accelerate slightly due to the introduction of unlimited plans. Unlimited plans can effectively cap ARPU, as they put a ceiling on revenues from high-spending customers, while limiting the overage fees that are charged when customers exceed their monthly quotas. That said, AT&T’s unlimited plans are more expensive compared to rivals, which could limit the decline for the carrier. For instance, the fully-loaded Unlimited Plus plan ($90 per month for a single line) is priced at a $30 premium compared to Sprint and a $10 premium compared to Verizon.

Pay TV Business Could Have Another Difficult Quarter, Amid Market Headwinds

AT&T’s linear pay TV business had a relatively difficult first quarter, losing 233k subscribers, as its U-Verse IPTV product lost customers while DirectTV posted virtually no subscriber adds. Things could get worse during Q2, as cord cutting in the U.S. market is expected to accelerate. For instance, UBS has projected as many as 1 million linear TV subscriber losses in the U.S. during Q2, compared to ~700k losses during Q1.

We will be interested to hear updates on the performance of AT&T’s over-the-top (OTT) streaming TV service, DirecTV Now, which launched towards the end of 2016. The service is likely to become a key driver of AT&T’s pay TV growth over the long run, as it looks to target cord cutters and “cord-nevers” (people who have never had a cable TV connection). While the service got off to a relatively strong start, adding about 200k subscribers within about a month of launching, driven partly by promos, the company didn’t provide any hard subscriber figures for Q1. We will be interested to hear updates on its progress for this quarter.

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