AT&T (NYSE:T) reported weaker wireless subscriber growth for the fourth quarter than it had in the year-ago period, but the company also posted stronger data revenues.
Click here for key slides from AT&T about the carrier's wireless business in the fourth quarter.
The carrier lost prepaid subscribers in the period but AT&T CEO Randall Stephenson said on the company's earnings conference call that AT&T's deal to acquire regional prepaid carrier Leap Wireless (NASDAQ:LEAP) will close by the end of the first quarter. AT&T will maintain Leap's Cricket prepaid brand and discontinue its own Aio Wireless brand. "We're convinced that putting the Cricket brand on top of the AT&T network is going to shake things up in this space," he said.
When questioned on the call about how AT&T would do that specifically, Stephenson said that AT&T has spent the past six or seven years adding capacity to its network and has been reluctant to move down market as it sought to protect its higher-ARPU customers. "As we make the move to LTE, and as we continue to push the network build and create capacity, it's created a whole new opportunity for us to think about the value segment and the no-contract segment," he said. Stephenson said Cricket is a strong brand and that AT&T wants to use that brand "to be very assertive and very aggressive to push smartphone penetration in the no-contract space and to be aggressive as it relates to pricing."
Stephenson said that in 2013, AT&T focused on its networks, including expanding its LTE network. He also said that AT&T has focused on new business opportunities, such as its Digital Life home security and automation service as well as the connected car, where AT&T has announced deals with General Motors, Audi, Tesla and others.
Stephenson noted that 2013 was a "formative" year for the industry in terms of competition, especially in changes carriers made to device financing. "Our customers are demonstrating an interest, a desire even, to put more of their money into the handset in exchange for lower monthly pricing," he said, according to a Seeking Alpha transcript.
AT&T said that its "Next" handset upgrade program attracted 10 percent of device sales at the end of the third quarter. For all of the fourth quarter it was 15 percent but in December it was 20 percent.
In December AT&T tweaked the pricing of its Mobile Share shared data plans for contract customers, and also introduced new "Mobile Share Value" shared data plans that are less expensive and are targeted at no-contract customers. Customers can get the plans by purchasing a new smartphone for no down payment with Next with monthly installment payments; bringing their own smartphone; buying a smartphone at the full retail price; or switching to the new plan when they are no longer under contract.
Analysts said they expected AT&T to continue to face competitive challenges this year. New Street Research analyst Jonathan Chaplin wrote in a research note that on the surface, "signs of competitive intensity were few: churn, ARPU, and margins were all better than expected." However, he thinks T-Mobile US (NYSE:TMUS) is gaining momentum, resulting in continuing pressure on gross subscriber additions.
However, Credit Suisse analyst Joseph Mastrogiovanni wrote that he thinks AT&T is in a strong position to compete. "We also believe AT&T could further leverage its high network quality (the best in the U.S. according to third-party surveys, e.g. Nielsen) through increased marketing and fight back in the value segment once the Leap deal closes," he wrote. "During its conference call , the company said it would use Leap as a tool to be disruptive in the value segment of the market. While this could mean some cannibalization on the margin, we view it as a better option than cutting price too much in the AT&T base, causing a repricing of the base."
Mastrogiovanni also said AT&T's new Mobile Share Value plans "will further drive uptake of the Next handset installment plans, as customers now get a discount on the service plan. As customers on Next essentially pay the full price for the handsets, it basically just reallocates revenues from handset from ARPU to equipment revenues."
Here's a breakdown of AT&T's key quarterly metrics:
Subscribers: AT&T reported a net increase in total wireless subscribers of 809,000 in the fourth quarter, including postpaid net adds of 566,000. Postpaid net adds included 299,000 smartphones.
AT&T's total branded smartphone net adds (both postpaid and prepaid) were 529,000. Total branded tablet net adds were 440,000.
In the year-ago period, AT&T reported postpaid subscriber net adds of 780,000, and 1.1 million total net wireless subscribers in the period.
AT&T said connected device net adds were 398,000. Interestingly, AT&T said its prepaid subscriber base had a net loss of 32,000 subscribers, "primarily due to declines in session-based tablets." However, AT&T said prepaid revenues increased both year over year and sequentially. AT&T also said resellers suffered a net loss of 123,000 subscribers, primarily due to losses in low-revenue 2G subscriber accounts.
By comparison, Verizon Wireless (NYSE:VZ) added 1.7 million retail net connections in the fourth quarter, including 1.6 million net retail postpaid connections. Verizon said tablet net adds made up 625,000 of company's retail postpaid connections in the quarter.
Earlier this month at the 2014 Consumer Electronics Show, T-Mobile CEO John Legere said that in the fourth quarter T-Mobile added 1.645 million customers. Of those, 869,000 were postpaid. "This was our best quarter in eight years," Legere said, noting that of those 869,000 postpaid adds, 69,000 were tablets. That figure is notable considering the carrier just started selling tablets in the fourth quarter.
Sprint (NYSE:S) will report earnings Feb. 11 but analysts expect the company to report that it lost postpaid subscribers in the quarter.
Financials: AT&T said total wireless revenues, which include equipment sales, were up 4.5 percent year over year to $18.4 billion. The carrier posted wireless service revenues of $15.7 billion, up 4.8 percent from the year-ago period. Wireless data revenues increased 16.8 percent from the year-ago quarter to $5.7 billion. Fourth quarter wireless operating expenses totaled $14.5 billion, down 3.9 percent versus the year-earlier quarter, and wireless operating income was $3.9 billion, up 53.8 percent year over year.
AT&T's wireless EBITDA service margin was 37.4 percent, compared with 29.1 percent in the year-ago period and 42 percent in the third quarter. AT&T's fourth-quarter wireless operating income margin was 21.4 percent, compared to 14.5 percent in the year-ago period and 26.4 percent in the third quarter.
Mobile Share: AT&T said its Mobile Share shared data plans now represent more than 21 million connections, or about 29 percent of its postpaid subscribers, up from 16 million connections, or more than 22 percent, of postpaid subscribers at the end of the third quarter. The number of AT&T's Mobile Share accounts reached 7.1 million in the fourth quarter with an average of about three devices per account. AT&T said 30 percent of its Mobile Share accounts selected 10 GB or higher plans.
Smartphones: AT&T said it sold 7.9 million smartphones in the fourth quarter, up from 6.7 million smartphones sold in the third quarter, but down from 10.2 million it sold in the year-ago period. The year-over-year drop reflects increasing smartphone penetration in the carrier's subscriber base. More than 1 million of the 7.9 million smartphone sales in the fourth quarter were on Next.
AT&T CFO John Stephens said the carrier has around 2 million prepaid smartphone subscribers in its base, and average revenue per user of these customers is 70 percent higher than non-smartphone prepaid customers.
LTE: AT&T said its LTE network now covers nearly 280 million POPs. The company said its LTE deployment is expected to be substantially complete by this summer.
ARPU: AT&T said postpaid, phone-only ARPU increased 3.9 percent versus the year-ago quarter. Total postpaid subscriber ARPU, which includes high-margin but lower-ARPU tablets, increased 2.1 percent versus the year-earlier quarter. AT&T said this marked the 20th consecutive quarter AT&T has reported a year-over-year increase in postpaid ARPU. Postpaid data ARPU increased 15.4 percent versus the year-earlier quarter.
Churn: The company had its lowest-ever fourth-quarter postpaid churn of 1.11 percent, compared to 1.19 percent in the year-ago quarter. Total churn was flat at 1.43 percent versus 1.42 percent in the year-ago quarter. AT&T noted that about 90 percent of postpaid subscribers are on Mobile Share, FamilyTalk or business plans, all of which have significantly lower churn than other postpaid subscribers.
- see this release
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Article updated Jan. 29 with analyst commentary.