AT&T surprises in Q1, posts 625K net postpaid adds driven by phones, tablets

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AT&T Mobility (NYSE: T) surprised the market by reporting 625,000 postpaid subscriber net additions in the first quarter, more than analysts had expected and the carrier's best first-quarter postpaid performance in five years.

Click here for key slides from AT&T's earnings report.

AT&T essentially brushed aside competitive pressure from T-Mobile US (NYSE:TMUS), which since January has been offering customers up to $650 to pay off their Early Termination Fees if they switch to T-Mobile and trade in their phones. AT&T's performance easily beat analysts' estimates: Credit Suisse analysts had said they expected AT&T to add 200,000 postpaid subscribers in the quarter, and analysts at New Street Research had said last month they expected AT&T to add 229,000 net new subscribers in the quarter.

The No. 2 carrier saw strong growth in its Mobile Share shared data plans and in its Next handset upgrade plan. The two go hand in hand, in that customers who choose to finance the cost of their device through Next then get access to discounted Mobile Share service pricing. Indeed, AT&T said more than a quarter of its smartphone subscribers are on no-device-subsidy pricing plans.

"We are making the buying process as open and as transparent as possible, and then letting customers manage the process," AT&T CFO John Stephens said on the company's earnings conference call.

Here's a breakdown of AT&T's key quarterly metrics:

Subscribers: AT&T said its postpaid net adds for the quarter included 311,000 smartphones. Total branded smartphone net adds (both postpaid and prepaid) were 566,000. Total branded tablet net adds were 313,000. AT&T's postpaid subscriber performance in the first quarter easily beat the 296,000 postpaid net adds it reported in the year-ago period and well as the 566,000 it had in the fourth quarter of 2013.

Overall, AT&T added 1.062 million total wireless subscribers in the quarter, including 693,000 connected device net additions. The gains were offset by a net loss of 50,000 prepaid subscribers, due to declines in session-based tablets, and a net loss of 206,000 reseller subscribers, which AT&T said was primarily due to losses in low-revenue 2G subscriber accounts. AT&T said its prepaid net adds include first-quarter results from Leap Wireless only after AT&T acquired the company on March 13.

New Street Research analyst Jonathan Chaplin wrote in a research note that after doing the math, AT&T's postpaid net adds included 449,000 tablet activations. However, he said that the results suggest AT&T "regained phone share despite TMUS's competitive pricing."

Chaplin wrote that he was still cautious about AT&T's prospects. "AT&T delivered better than expected sub trends, despite heightened competitive pressures; however, we think this came at a cost that has been masked in the near-term by installment plan accounting," he wrote. "We believe competitive pressures will ultimately take their toll, slowing earnings growth to the low single digits, absent a recovery in Business Services."

Financials: AT&T said total wireless revenues, which include equipment sales, were up 7 percent year-over-year to $17.9 billion. The carrier's wireless service revenues increased 2.2 percent to $15.4 billion.

AT&T said its first-quarter wireless operating income margin was 28.3 percent, roughly in line with the 28.0 percent it reported in the year-ago quarter. AT&T's wireless EBITDA margin was up slightly versus the year-ago period to 39.1 percent. AT&T said its wireless EBITDA service margin also increased to 45.4 percent, compared with 43.2 percent in the first quarter of 2013. AT&T said its Next handset upgrade program helped widen its margins by removing the need for the carrier to pay for handset subsidies.

Mobile Share: AT&T said its Mobile Share shared data plans now represent nearly 33 million connections, or about 45 percent of its postpaid subscribers. In fact, the number of Mobile Share accounts more than tripled year-over-year to 11.3 million, with an average of about three devices per account. Those figures compare to 21 million connections, or about 29 percent of AT&T's postpaid subscribers, at the end of the fourth quarter of 2013.

AT&T said at the end of the first quarter, 46 percent of Mobile Share accounts had 10 GB or higher plans, up from 28 percent in the year-ago quarter and 27 percent in the fourth quarter of 2013. Overall, around 81 percent, or 42.9 million, of postpaid smartphone subscribers are on usage-based data plans (either tiered data and Mobile Share plans), compared to 33.5 million a year ago.

In February AT&T cut its Mobile Share prices for some customers. AT&T said customers who choose a Mobile Share plan with 10 GB of data per month get a range of savings, depending upon their existing plans. For example, customers who sign up for four smartphones with unlimited voice, texting and 10 GB of data will now pay $160 per month, or $40 less than AT&T's old plan at that level. Verizon Wireless (NYSE: VZ) recently followed suit to match that pricing.

Smartphones: AT&T said it sold 5.8 million smartphones in the first quarter, down from 6 million in the year-ago period and 7.9 million smartphones in the fourth quarter. AT&T added 1.1 million postpaid smartphone customers in the first quarter. At the end of the quarter, 78 percent, or 53 million, of AT&T's postpaid phone subscribers had smartphones, up from 72 percent, or 48.3 million, a year earlier.

AT&T said that more than 40 percent, or 2.9 million, of all smartphone gross adds and upgrades were on AT&T Next in the quarter; without 1.1 million accelerated upgrades, the Next adoption rate was about 35 percent, up from 15 percent in the fourth quarter.

LTE: AT&T's LTE network now covers more than 280 million POPs. The company aims to hit 300 million POPs by the middle of the year. At the end of the first quarter, 57 percent of AT&T's postpaid smartphone customers used an LTE-capable device.

ARPU: AT&T said phone-only postpaid average revenue per user increased 0.4 percent to $66.33 compared to the year-earlier quarter. 

Churn: AT&T said total churn was flat at 1.39 percent compared to 1.38 percent in the year-ago quarter. Postpaid churn was 1.07 percent, was down sequentially and up slightly compared to 1.04 percent in the year-ago quarter.

For more:
- see this release
- see this FierceTelecom article

Special Report: Wireless in the first quarter of 2014

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