AT&T adds 1M postpaid subs in Q2 as shift away from device subsidies continues

AT&T Mobility (NYSE: T) added more than 1 million net postpaid subscribers in the second quarter, its best performance in the postpaid market in nearly five years. In contrast to rival Verizon Wireless (NYSE: VZ), which reported second-quarter earnings Tuesday and had tablets make up the bulk of its postpaid adds, the vast majority of AT&T's postpaid adds came from smartphones in the second quarter.

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

AT&T's postpaid adds were higher than the 800,000 it said it was expecting when it pre-announced some earnings figures in early June.

Further, as had been expected based on its pre-announcement, AT&T reported a continuing trend toward device financing. AT&T said it had 3.1 million AT&T Next smartphone sales in the second quarter, compared to 2.9 million in the first quarter. AT&T said Next sales represented around 50 percent of all smartphone sales in the second quarter. That compares to around 40 percent in the first quarter (or 35 percent when taking out accelerated upgrades). Customers who choose to finance the cost of their device in monthly installments through Next then get access to discounted Mobile Share Value service pricing and earlier device upgrades.

"We are very pleased with what we are seeing from our wireless repositioning and are confident in our strategy," AT&T CFO John Stephens said on the company's earnings conference call.

About 44 percent of AT&T's postpaid smartphone base is on its no-device-subsidy Mobile Share Value plans. That equates to roughly 24 million total phones, including 7 million Next customers and 17 million customers who are eligible for AT&T Next upgrades that are on no-device-subsidy pricing. AT&T Mobility CEO Ralph de la Vega said the carrier expects the percentage postpaid smartphones customers on its no-device-subsidy plans to grow to around 66 percent by year-end. In the first quarter, AT&T said more than a quarter of its smartphone subscribers were on no-device-subsidy pricing plans.

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

Subscribers: AT&T said total wireless subscribers increased by 634,000 in the quarter, led by postpaid net adds of 1,026,000 and 175,000 connected device net adds. AT&T said the gains were offset by a net loss of 405,000 prepaid subscribers, which the company said was due to declines in session-based tablets and the expected second-quarter drop in Cricket subscribers as the company began its integration of Leap Wireless. The company also had a net loss of 162,000 reseller subscribers, primarily due to losses in low-revenue 2G subscriber accounts.

In breaking down its postpaid net adds, AT&T said the 1.026 million figure included 707,000 smartphones. The company also had 366,000 postpaid tablet net adds.

In contrast, Verizon had 1.42 million postpaid net adds in the second quarter and 1.15 million were postpaid tablet net adds.

Source: AT&T

Financials: AT&T said total wireless revenues, which include equipment sales, grew 3.7 percent year-over-year to $17.9 billion. Wireless service revenues fell 1.4 percent to $15.1 billion, and wireless equipment revenues increased 44.8 percent to $2.8 billion as the company continued to move its postpaid subscriber base to equipment installment plans from the traditional device subsidy model. The carrier's shift from subsidies to device financing has led to higher equipment revenues and lower service revenues and average revenue per user.

As expected, AT&T's wireless margins dropped in the second quarter. AT&T reported wireless operating income margins of 24.1 percent, down from the 27.1 percent it reported in the year-ago quarter. AT&T's wireless EBITDA margin was 35.5 percent, down from 37.7 percent in the second quarter of 2013. And AT&T's wireless service margin was 42 percent, down from 42.4 percent in the year-ago quarter.

Stephens said moving away from a subsidy model helps lower churn and increase the total amount of revenue AT&T can obtain from a customer. He also said it can mitigate the swings in AT&T's margins, especially when new devices like new iPhones come out. "In the past we used to have mixed feeling about those events," Stephens said, adding that they were "great for sales" but they pressured margins and financial results.

Both Stephens and De la Vega noted that churn is even lower among customers on Mobile Share Value plans and Next when compared with the average postpaid customer.

Financial analysts were divided on what the long-term effects of AT&T's shift toward device financing. "If AT&T's strategic initiatives result in sustainable subscriber trends that are similar to 2Q, we expect to see an improvement in the company's financial results," Credit Suisse analyst Joseph  Mastrogiovanni wrote in a research note. "With low churn, the company can overcome ARPU pressure with volume gains. Additionally, AT&T's Mobile Share Value plans are driving strong adoption of smartphones, tablets and higher tiered data plans, which drive higher monthly recurring charges. We believe churn can remain below 1% given the sub-0.86% rate for Mobile Share Value, Next and smartphone subs."

However, New Street Research analyst Jonathan Chaplin wrote in a research note that while AT&T's management "may be right" in believing that "churn will be structurally lower and upgrade rates will fall as customers adopt installment plans," it's too soon to know.

"We don't think current churn trends evidence a change in a subscriber's propensity to churn," Chaplin added. "Rather, they reflect two things: selection bias and a near-term churn impact from lowering pricing by $10-20 per sub per month. We can't think why installment plan adoption would impact churn over the long-term: it won't change mortality rates; it won't change emigration rates; it won't change the behavior of subs that are frustrated with their carrier's network performance or who want a lower price. All carriers will offer and promote these plans. And annual upgrades is one of the key selling points for Next."


Mobile Share: AT&T said its Mobile Share shared data plans, including Mobile Share Value, now represent more than 41 million connections, or about 56 percent of its postpaid subscribers.

The number of AT&T's Mobile Share accounts more than tripled year-over-year to reach 14.6 million, with an average of about three devices per account. At the end of the second quarter, AT&T said 49 percent of its Mobile Share accounts had 10 GB or larger data plans, up from 46 percent in the first quarter and 29 percent in the year-ago quarter. That helped drive a nearly 20 percent year-over-year increase in wireless data billings.

In total, more than 80 percent of AT&T's postpaid smartphone subscribers are on usage-based data plans (either tiered or Mobile Share), compared to about 70 percent a year ago.

Smartphones: AT&T counted 6.2 million postpaid smartphones gross adds and upgrades in the quarter, down from 6.8 million in the year-ago period, but up from 5.8 million smartphones it sold in the first quarter. At the end of the second quarter, 80 percent, or 54.6 million, of AT&T's postpaid phone subscribers had smartphones, up from 73 percent, or 49.5 million, a year earlier. Smartphones accounted for 92 percent of postpaid phone sales in the quarter.

LTE: The company said its LTE network now covers more than 290 million POPs. The company's LTE deployment is expected to be "substantially complete" this summer, AT&T said.

ARPU: AT&T said phone-only postpaid average revenue per user fell 7.7 percent to $62.28 compared to the year-ago quarter. Phone-only postpaid ARPU with AT&T Next monthly billings decreased 4.7 percent to $64.35. The carrier noted that as customers upgrade with Next, phone-only ARPU with Next monthly billings is expected to increase.

Churn: The carrier said its postpaid churn was a record-low 0.86 percent, compared to 1.02 percent in the year-ago quarter and 1.07 percent in the first quarter of 2014. Total churn was 1.47 percent, up from 1.36 percent in the year-ago quarter due to expected pressure in prepaid with the transition of Cricket subscribers.

AT&T's postpaid churn figure was lower than Verizon's 0.94 percent in the second quarter--Verizon has long enjoyed the industry's lowest churn figures, until now.

For more:
- see this release

Special Report: Wireless in the second quarter of 2014

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Click here for AT&T's full earnings presentation PDF.