AT&T Earnings Preview: Wireless And Entertainment Division In Focus

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AT&T (NYSE:T) is expected to publish its Q3 2017 results on October 24, reporting on a quarter that saw significant competitive activity in the wireless market.  Below we take a look at some of the key trends to watch in the company’s U.S. wireless and pay TV operations.

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

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Wireless Business 

The wireless market has seen intense competition in recent quarters, with the all the nationwide carriers re-introducing unlimited postpaid plans. While we expect AT&T to continue to lose postpaid phone subscribers amid feature phone subscriber attrition, the losses could moderate year-over-year. The carrier offered promos such as free HBO subscriptions to its postpaid unlimited plan subscribers, which may stem subscriber attrition. AT&T’s prepaid operations could also continue to grow, driven by both its Cricket and Go Phone brands. Postpaid phone churn should also remain low, driven by AT&T’s increased bundling of wireless and video services, which help to retain subscribers. Moreover, it’s unlikely that the launch of new flagship devices from Samsung and Apple have caused significant churn, as all the major carriers have been fairly circumspect about device promotions.

AT&T’s ARPU is likely to remain relatively flat, as the impact of an increasing mix of unlimited plans is offset by potentially lower overage fees. However, AT&T’s wireless EBITDA margins could see some improvement on a year-over-year basis, driven by potentially lower postpaid churn figures, its growing prepaid and connected device base (which has lower subscriber acquisition costs) as well as lower network related expenses. AT&T has been increasingly virtualizing its network, projecting virtualization levels of about 55% by the end of this year, up from 40% as of Q2.

Pay TV Operations: DirecTV Now Gains Could Partially Offset Declines 

AT&T’s pay TV business has been losing subscribers amid broader industry headwinds and cord-cutting. During the second quarter, the company’s legacy U-verse product lost 195k customers, while its satellite-based DirecTV 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 some traction. In the previous 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, indicating that it now offers at least one local station on the service in 75% of the country. While it’s possible that the subscriber gains on the OTT offering could help to offset losses from traditional linear TV, revenues could face some pressure as ARPU on linear TV offerings is much higher at around $120.

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