AT&T , the second largest U.S. wireless carrier and largest pay-TV provider, published its Q1 2016 results on April 26, reporting better-than-expected earnings that were driven by lower costs and improved performance of its entertainment business. While the carrier’s bread-and-butter wireless unit saw revenues decline slightly, amid weaker equipment sales, sales from the entertainment unit – adjusted to include the acquisition of DirecTV – witnessed some growth, driven by a growing mix of higher-value satellite subscribers and strong IP broadband subscriber additions. Below, we provide some of the key takeaways from the carrier’s earnings release.
We have a $37 price estimate for AT&T, which is slightly below the current market price. We are updating our valuation model to account for AT&Ts new reporting structure and the quarterly results.
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- Wireless revenues trended slightly lower on account of weaker equipment sales (-6%). However, service revenues remained relatively flat amid continued growth of smartphones and tablets, which helped to offset the continued adoption of Mobile Share Value plans.
- Wireless margins showed strong growth, rising by 390 bps year-over-year. It’s likely that the improvement was driven by a higher mix of smartphone customers, lower handset subsidies, weaker equipment sales and better operating cost management.
- AT&T continues to lose postpaid phone subscribers, as it reduces its focus on less lucrative feature phone users (subscriber base down 30% year-over-year) in favor of smartphone users. The feature phone attrition also resulted in a slight increase in postpaid churn figures.
- While postpaid phone ARPU saw a slight decline, likely driven by the shift towards equipment installment plans, which essentially decouple equipment and service revenues, ARPU including EIP billings witnessed an improvement.
- Prepaid business performed well, with net adds growing by 410% year-over-year, driven by a strong performance of the Cricket and GoPhone brands.
- Entertainment revenues, adjusted to include DirecTV, grew by 3.1% driven by an increasing mix of satellite subscribers and strong performance of AT&T’s IP broadband services.
- AT&T has been promoting DTV’s satellite TV package over its U-Verse offering, since DTV typically has higher ARPU, in addition to seeing lower content costs. However, for this quarter, the carrier lost a net of 54k video subscribers as U-Verse losses eclipsed satellite gains
- The company expects the integration of DirecTV to bring in $1.5 billion or more in run-rate cost synergies by the end of this year.
- AT&T has been increasingly promoting bundled services. For instance, in January the carrier reinstated its unlimited wireless data option (that it stopped five years ago) for wireless customers who subscribe to U-Verse television plans or DirecTV’s satellite TV service. The carrier notes that it now has 3 million customers on this plan.
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