AT&T’s Postpaid Phone Business Turns The Corner

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AT&T (NYSE:T) published its Q4 2017 results on Wednesday, January 31, reporting a stronger than expected set of results that were driven by the new U.S. tax law and a strong performance from the lucrative postpaid phone business. While quarterly revenues remained essentially flat year-over-year, profitability soared as the company booked a paper profit of about $20 billion in Q4, after revaluing deferred taxes on their books post the U.S. tax overhaul. Below, we take a brief look at the performance of the company’s entertainment and wireless segments.

We have a $42 price estimate for AT&T, which is about 10% ahead of the current market price.

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Postpaid Phone Business Finally Turns The Corner

AT&T’s postpaid phone business finally turned the corner, posting net additions of 329k, ending multiple years of subscriber attrition.  In comparison, the company lost about 67k subscribers in the year-ago period. The net adds were driven by lower customer attrition, a buy one, get one free promotion on the iPhone 8 and strong uptake for unlimited data plans. Postpaid phone churn also came in at record Q4 lows of 0.89%, compared to 0.98% in the year-ago quarter driven by its bundled video offerings. However, per subscriber billings (phone only ARPU plus EIP billings) came under some pressure, declining by about 2% year-over-year to about $68.20, as customers have been increasingly migrating to unlimited plans, which don’t have overage fees. Moreover, customers have also been holding on to smartphones for longer, impacting EIP payments.

Postpaid Phone Business Finally Turns The Corner

AT&T’s linear TV business continued to underperform, with the DirecTV satellite product losing 147k subscribers – its third straight quarter of net losses, while the U-Verse IPTV product also lost 60k subscribers, amid headwinds in the pay-TV market. Although AT&T more than offset the declines in the traditional TV business, adding 368k subscribers to its DirecTV Now over-the-top streaming TV service, the service is likely to be a lot less lucrative compared to traditional TV offerings, which posted ARPU of $127 in Q4. The operating margins of the entertainment division are also reflecting this shift, declining by about 190 bps year-over-year to 8.4%. We have created an interactive dashboard outlining the company’s expected EPS for Q1 2018.

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