AT&T Mobility (NYSE: T) beat analysts' expectations in terms of subscriber growth for the fourth quarter, but saw churn rise amid intensifying competition. AT&T also saw its margins drop in the quarter, as had been expected.
Despite the tough competitive environment, AT&T notched 1.9 million total net wireless subscriber additions in the quarter, including postpaid net adds of 854,000. Those figures easily surpassed what AT&T did in the year-ago period. In the fourth quarter of 2013, AT&T reported 809,000 total net wireless customer additions, including postpaid net adds of 566,000.
The carrier's postpaid net add performance also outpaced what some analysts had been expecting. Analysts at Credit Suisse had expected 850,000 postpaid net subscriber additions for AT&T, while Wells Fargo had expected 750,000 postpaid net adds and postpaid churn of 1.15 percent (it wound up being higher, at 1.22 percent).
AT&T CFO John Stephens had warned in December that the carrier would likely see higher churn in the fourth quarter than it had in the year-ago period. He also said the combination of higher churn, promotions and more subscriber growth would cut into fourth-quarter margins. Both predictions turned out to be true.
During the company's earnings conference call, AT&T CEO Randall Stephenson said that the company is going to be focused in 2015 on growing its smartphone base as well as on offering new wireless services to business customers. He noted that while AT&T is seeing pressure in the feature phone market and is losing customers there, he said the company will use its Cricket prepaid brand to counteract those trends. Stephenson added that in the fourth quarter the Cricket brand had positive net adds; he pointed out that Cricket is very complimentary to the Iusacell and Nextel Mexico assets AT&T is buying in Mexico.
Here's a breakdown of AT&T's key quarterly metrics:
Subscribers: Although AT&T's 854,000 postpaid net adds were up more than 50 percent from the year-ago period, they contained 969,000 postpaid tablet net adds, implying that AT&T lost 115,000 phone and other postpaid customers. AT&T said it added just 148,000 net postpaid smartphone customers in the quarter.
The company's 1.9 million total net adds more than double what AT&T had in the year-ago period, and included nearly 1.3 million connected device net adds, including 800,000 connected car subscribers.
It was not all rosy news for AT&T though, as the company lost 180,000 prepaid net subscribers, especially GoPhone and session-based tablet subscribers, and also lost 65,000 net reseller customers.
Financials: AT&T said total wireless revenues, which include equipment sales, jumped 7.7 percent year-over-year to $19.9 billion. Wireless equipment revenues increased 72.3 percent to $4.8 billion, as more customers chose equipment installment plans as opposed to subsidized devices. Wireless service revenues actually fell 3.7 percent to $15.1 billion, reflecting continued customer growth of Mobile Share Value plans. Customers who choose to finance the cost of their device in monthly installments through AT&T's Next plan get access to discounted Mobile Share Value service pricing and earlier device upgrades.
As expected, AT&T's wireless margins took a hit on the back of strong seasonal gross subscriber additions and upgrades, as well as adoption of Mobile Share Value plans and continued investment in new services. AT&T's wireless operating income margin was 16.3 percent, down from 21.4 percent in the year-ago quarter. When adjusting for integration costs, AT&T said its wireless EBITDA service margin was 36.7 percent compared to 37.4 percent in the year-ago quarter.
Mobile Share: AT&T said Mobile Share plans, including Mobile Share Value plans, now represent more than 52 million connections, or almost 70 percent of its postpaid subscribers. That's up from nearly 47 million connections, or about 62 percent of postpaid subscribers, at the end of the third quarter.
The carrier said that in the fourth quarter, an increasing number of subscribers chose Mobile Share Value plans. The number of Mobile Share accounts more than doubled year-over-year to reach 18.4 million, with an average of about three devices per account.
Further, AT&T said at the end of the fourth quarter, half of its Mobile Share accounts had 10 GB or larger data plans, up from 27 percent in the year-ago quarter. AT&T added that helped drive an 18 percent year-over-year increase in wireless data billings. In total, about 85 percent of postpaid smartphone subscribers are on AT&T's usage-based data plans (tiered data and Mobile Share plans), up from 75 percent a year ago.
Smartphones: AT&T posted a record 10.1 million postpaid smartphone gross adds and upgrades, up from 7.9 million a year ago and 6.8 million in the third quarter. AT&T said smartphones now represent 83 percent of its postpaid phone base and 94 percent of postpaid phone sales.
In the fourth quarter, AT&T said 5.9 million, or 58 percent, of all its postpaid smartphone gross adds and upgrades were on AT&T Next. That's up from a Next adoption rate of 50 percent in the third quarter. The company now has 15 million postpaid smartphones on Next plans. More than a quarter of AT&T's smartphone base is on AT&T Next, with 58 percent of of Next customers on no-device-subsidy plans. Stephens added that AT&T can increase its Next adoption rate in 2015 as sales representatives at big-box retailers become better educated on the plans.
ARPU: The continued adoption of AT&T's Next and Mobile Share Value plans led to year-over-year reduction in its postpaid service average revenues per user. Phone-only postpaid ARPU decreased 10.7 percent compared the year-earlier quarter, down to $60.99. Phone-only postpaid ARPU with AT&T Next monthly billings decreased 4.1 percent year-over-year to $65.86, but increased 0.4 percent from the third
Churn: AT&T's postpaid churn jumped up to 1.22 percent, up from 1.11 percent in the year-ago quarter, which had been AT&T's best fourth-quarter postpaid churn. AT&T said around 95 percent of its total postpaid base is on AT&T Family Talk, Mobile Share or business plans, and that churn for these plans is significantly lower than for other postpaid subscribers. In the third quarter AT&T had recorded its best-ever, third-quarter postpaid churn at 0.99 percent.
For more:
- see this release
- see this investor briefing (PDF)
Special Report: Wireless in the fourth quarter of 2014
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Correction, Jan. 28, 2015: This article incorrectly stated 58 percent of AT&T's postpaid phone base was on a no-device-subsidy plan. In fact, 58 percent of Next customers are on no-device-subsidy plans.