AT&T reported wireless customer numbers that were slightly above some Wall Street expectations, and the carrier reiterated its promise that its financial footing in wireless would improve, but some analysts expressed concern at the operator’s somewhat rocky performance.
“While we admit we could see a relief rally on a positive TWX [Time Warner acquisition] outcome over the near-to-medium term and recognize the stock is cheap, the structural headwinds and execution risk makes it hard to recommend,” summed the analysts at Cowen in a research note issued to investors shortly after AT&T reported its first-quarter results yesterday.
As the Cowen analysts noted, AT&T reported losing 22,000 postpaid net phone customers during the quarter, which the analysts said was above their expectations of 45,000 losses and a Wall Street consensus of 28,000 losses. The firm also noted that AT&T reported prepaid net customer additions of 241,000 during the quarter, also above Wall Street’s consensus.
For its part, AT&T in its earnings release crowed of growth in postpaid phone net customer additions and the addition of 500,000 branded smartphones to its base.
But the analysts at Barclays said that AT&T’s promotions during the first quarter – which included a buy-one, get-one-free offer on the iPhone X – took their toll, dragging down the operator’s margins: “Despite higher promotional activity levels which drove up upgrade rates and reduced segment EBITDA margins by ~350bps.”
AT&T’s CFO John Stephens acknowledged that the operator’s wireless service revenues were essentially flat from the previous quarter, but he said the carrier is “confident that service revenues will improve throughout the year and still expect that we'll be positive for the full year on a comparable basis.”
Stephens argued that AT&T’s situation in wireless would improve as 2018 continues because in part the carrier would work to tie more subscribers to its other products, including wired internet services and its video offerings like DirecTV Now. “These are the most valuable customers with churn significantly lower than single-service customers,” Stephens argued. “These results are very encouraging and gives us the confidence to continue to carefully invest in our customer base.”
Some Wall Street analysts said that AT&T’s bundling strategy is the right one: “T's strategy to maintain wireless/video subscribers through aggressive promotions (phone BOGO's, low bundled TV prices, etc.) continues to impact margins this year,” wrote the analysts at Oppenheimer. “The goal is to retain customers and upsell with new digital services with dramatically lower operating costs long term, which we agree with.”
However, the firm warned that AT&T may continue to reduce expenses as it works to reach service revenue growth.
Finally, Stephens offered a somewhat oblique look at AT&T's plans for wireless promotions for the coming months, arguing that the operator would continue to offer specific promotions in specific markets that the operator could change and tweak depending on the results.
"What I'd suggest is we should continue to see something like the three offers that we've, I guess, recently put out in the marketplace," he said. "In New York, where we're using video as an opportunity to attract customers; in Chicago, where we're using our capabilities with regard to broadband to attract customers; or in Los Angeles, where we're using wireless. We're trying to be market-directed, market-informed and trying to put offers out that'll, if you will, make a difference. You can expect to continue to see us change some things, try some things. We might do a BOGO and then we might do a second one is a 50% fee as opposed to a full BOGO. I think we recently did that with wireless offering."
Concluded Stephens: "So you'll see us make changes on a regular basis."
Here are some other key metrics from AT&T’s first quarter earnings report:
Financials: In its release, AT&T said its consolidated revenues for the first quarter totaled $38 billion, down from the $39.4 billion it reported in the year-ago quarter. The carrier’s operating income also declined to $6.2 billion, from a year-ago $6.4 billion. The analysts at Oppenheimer said those results missed the firm’s expectations by roughly 1%.
Churn: AT&T, along with much of the rest of the wireless industry, reported another quarter of record low churn. “AT&T reported its lowest ever 1Q postpaid phone churn at 0.84% (-6bp yoy),” wrote the analysts at Deutsche Bank Research. “We believe this improvement is largely a result of the company’s bundling initiatives, as well as recent margin re-investments in retention/growth. For context, 30% of AT&T’s postpaid wireless connections are bundled with video and/or IP broadband today (from 28% in 1Q17, and 25% in 1Q16).”
Video and entertainment: AT&T’s video efforts are housed in its Entertainment division. That business attracted the bulk of analysts’ attention during the carrier’s first quarter earnings conference call, as analysts attempted to discern whether AT&T’s purchase of DirecTV, its subsequent launch of DirecTV Now, and its pending acquisition of Time Warner, are worth the operator’s efforts. Importantly, AT&T reported the addition of 312,000 users to its virtual pay TV platform, DirecTV Now, in the first quarter, with the company now describing its video business in full transition from satellite and IPTV to OTT.
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