AT&T Mobility (NYSE: T) expects to add around 400,000 postpaid customers in the first quarter, which would be a weaker performance than the year-ago period and below analysts' expectations--but the carrier also expects to see its postpaid churn improve. Financial analysts predicted the company's improved churn figures would be offset by weaker wireless margins.
AT&T yesterday in a filing with the Securities and Exchange Commission disclosed its first quarter expectations of 400,000 postpaid customers. In the year-ago period, AT&T notched 625,000 postpaid net additions.
Today in an appearance at the Deutsche Bank Media, Internet & Telecom Conference, AT&T CFO John Stephens said the carrier will add postpaid smartphone customers in the quarter, but will likely continue to lose feature phone customers. He did not elaborate on the figures for handset additions, but noted that smartphone customers typically generate twice the average revenue per user of non-smartphone subscribers.
Stephens also noted that AT&T's shift to Software-Defined Networking could let the company cut its capital expenditures as a percentage of service revenue over time.
AT&T said that its postpaid churn is running lower on both a year-over-year and sequential basis. The carrier's postpaid churn was 1.07 percent in the first quarter of 2014 and 1.22 percent in the fourth quarter of 2014.
AT&T also said it expects service revenues in the first quarter to take a hit thanks to the continued adoption of its Mobile Share Value plans, which offer customers discounted service pricing in exchange for them paying for their device in installments, paying the full cost of their phone or bringing an unlocked phone to AT&T. The company said it expects around 60 percent of its postpaid smartphone base to be on a no-device-subsidy Mobile Share Value plan at the end of the first quarter, compared to less than 30 percent of its postpaid smartphone base on no-device-subsidy plans at the end of the first quarter 2014.
Further, AT&T said that the strong adoption of its Mobile Share Value plans as well as operational results from its Cricket prepaid brand will pressure margins on a year-over-year basis. In the first quarter of 2014 AT&T posted a wireless EBITDA service margin of 45.4 percent. AT&T said it expects margins to improve throughout 2015 and for its wireless service margins to grow this year on a year-over-year basis. AT&T noted that its Mobile Share Value plans were first introduced in mid-February 2014, so a direct comparison between the first quarter of 2015 and the year-ago period is not completely possible.
Wells Fargo analyst Jennifer Fritszche wrote in a research note that AT&T's expected postpaid subscriber results are weaker than she had expected (she had been looking for around 450,000), but also noted that AT&T reiterated its 2015 guidance. "In our view, the abovementioned wireless revenue issue is more an issue of timing than anything else, in our view," she wrote. "We would expect the [year-over-year] decline in this metric to improve each quarter throughout 2015. Also lost in this release may be a very meaningful comment on churn."
Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note that AT&T's guidance on postpaid subscriber growth is "well below" their prior estimate of 580,000. They now expect AT&T to add 420,000 net postpaid customers in the first quarter, including a loss of 180,000 handsets. AT&T's outlook reflects slightly better churn, implying a decline in gross adds from a year ago, they added.
Meanwhile, Credit Suisse analyst Joseph Mastrogiovanni wrote in a research note that he had been expecting 450,000 postpaid net adds from AT&T in the first quarter. He thinks AT&T's first-quarter postpaid churn will be around 1.05 percent, down from his previous estimate of 1.17 percent.
AT&T said late last year that it expects its 2015 capital expenditures to be around $18 billion, down from 2014's spending of around $21 billion, which surprised analysts. Stephens said at the conference that AT&T cut its capex because it has "essentially" finished its Project Velocity IP network upgrades faster and more efficiently than it had expected.
Long term, AT&T continues to target its capex to be around 15 percent of its service revenues. However, Stephens said that as AT&T embraces SDN (the company expects to have 75 percent of its network be software-driven by 2020), that figure could come down. He noted that the network gear of the future is going to be more capital-efficient and that SDN will make both purchasing deploying network equipment easier and more efficient.
Yet Stephens noted AT&T still plans to spend around $18 billion on capex this year and so it has a "captive audience" with SDN vendors. "It's going to be great to work with them" to improve the quality and flexibility of AT&T's network. Moving to SDN will also let AT&T deploy new services faster, he said, and generate more revenue as a result.
- see this SEC filing
- see this webcast
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