What Drove AT&T’s Earnings Beat?

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AT&T (NYSE:T) posted a stronger than expected set of Q2’17 results on Tuesday, despite mounting competition in the postpaid wireless space and continued subscriber losses at its pay TV operations, as it focused on improving wireless margins and reducing postpaid churn. In this note, we provide some of the key takeaways from the carrier’s results.

We have a $42 price estimate for AT&T, which is about 20% ahead of the current market price.

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While the wireless market has seen intense competition in recent quarters, with the major carriers re-introducing unlimited plans, AT&T’s wireless operations performed relatively well during Q2. The company’s postpaid phone net losses reduced to 89k compared to 348k in the previous quarter, amid lower losses of feature phone subscribers. Postpaid phone churn also fell to a record low of just 0.79%, driven by its increasing bundling of wireless and video services, which helped to retain subscribers. The carrier’s postpaid phone ARPU remained almost flat sequentially at $58.30, as the impact of the higher-priced Unlimited Plus plans was likely offset by lower overage revenues. AT&T’s wireless EBITDA margins also came in at record highs of 41.8%, driven by the low postpaid phone churn figures, its growing prepaid and connected device base (which typically have lower subscriber acquisition costs) as well as lower network related expenses. There could be scope for further reduction in network expenses, as the carrier noted that it expects network virtualization to increase from levels of 40% to close to 55% by the end of this year.

AT&T’s pay TV business continued to lose subscribers, amid broader industry headwinds and seasonal pressures during Q2. While the U-verse product lost 195k customers over the quarter, the DirecTV satellite product posted its first quarter of subscriber losses in almost two years. That said, the carrier’s DirecTV Now streaming TV service has been gaining traction. Over the last quarter, net adds stood at 152k, with the total subscriber base growing to roughly 500k. AT&T has been increasing the number of local channels available on the platform and indicated that it was testing a new cloud-based DVR option.

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