AT&T's Stephens: Fewer 2G customers means higher service margins

Source: Flickr user Mike Mozart

AT&T continues to migrate customers off its 2G network ahead of shutting down those towers at the end of the year. And those moves are boosting the bottom line, according to CFO John Stephens.

More advanced networks enable the carrier to deliver data more efficiently, Stephens explained at an investor conference Wednesday, which in turn leads to improved wireless service margins. Meanwhile, AT&T is refarming that spectrum for more advanced wireless services.

T-Mobile earlier this week launched a promotion targeting AT&T’s IoT users on 2G, offering free SIM cards and service through the rest of the year to them. AT&T has programs in place to help those users upgrade to devices that support newer networks, but customers are ultimately responsible for handling upgrades in advance of the network shutdown.

“It may sound like a lot of talk, but if you look at the last four quarters of our wireless business we have had record margins, and we had nearly 50 percent margins last quarter,” he said. “So this path that we’ve been on for a number of years of network efficiency improvements investing is making sense, and the numbers are proving it out. And now we’re taking that opportunity to use some of that to make sure we stay competitive” by providing high-quality service.

Those improvements have included an ongoing effort to move customers off the 2G network, he continued. Roughly 6 million AT&T customers still use 2G – about half as many as were on that network a year ago – and “most of those or virtually all of those” are on connected devices such as M2M gadgets.

“So what you’ve seen over the last year with these record margins has included the impact of reducing this 2G base,” Stephens explained. “So we’ve been going through this for a full year or longer, and you’ve been witnessing it, you just may not have noticed our responses. And we’ve been putting up record margins and really great churn results.”

And Stephens said the carrier continues to make progress in virtualizing its network. AT&T is on pace to virtualize 30 percent of its network functions by the end of 2016, up from just 5 percent last year, and aims to push that figure to 75 percent by 2020. Not only does that make the network more efficient, he said, it also lessens the need to deploy technicians to change hardware to make every tweak to the network.

“If you put those things together, you can see the opportunities are significant. And that’s how we expect to grow cash; that’s how we expect to grow margins,” he said, declining to say how much the move toward virtualization has saved the company thus far. “Last thing I will tell you is that we can say all of that, but the real point is in the second quarter free cash flow was $4.8 billion. So we’re putting up numbers that show it’s achievable.”

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