AT&T expects Next equipment installment plan adoption to accelerate, remains open to smartphone leasing

AT&T (NYSE: T) CFO John Stephens said the carrier expects the number of its wireless customers using its Next equipment installment plans (EIP) to continue increasing, which should drive up how much money the company gets every month from customers, even if AT&T is getting less service revenue than before.

Stephens noted that in the second quarter, 75 percent of AT&T's smartphone activations were either through Next or from customers who brought their own device. "We have dramatically shifted the understanding what is the cost of the service separate from the cost of the handset," he said during an appearance at the Goldman Sachs Communacopia Conference.

Notably, Stephens said that AT&T is "seeing a tendency" of customers holding onto their smartphones they purchased through EIP for longer than the carrier had expected, because they can pocket savings every month once they pay off their device through Next after making monthly installments. Customers who choose Next get discounts on service pricing, $15 to $25 per line per smartphone line, depending on the plan.  

AT&T said 68 percent of all postpaid customers who purchased smartphones or upgraded in the second quarter chose Next, up from 65 percent in the first quarter. AT&T has aggressively pushed Next plans and has indicated it expects to eventually stop selling subsidized smartphones with two-year contracts.

Nearly 37 percent of AT&T's postpaid smartphone base is on AT&T Next plans. AT&T said around 64 percent, or 36.9 million, of its postpaid smartphone subscribers are on no-device-subsidy Mobile Share Value plans.

Stephens acknowledged there are some customers on Mobile Share Value plans who are not on Next, meaning they are getting discounted service pricing without making monthly device payments. However, he thinks Next activations will continue to grow. "We should have a continuing increase in the number of customers going on Next," he said, which will have a positive impact on AT&T's equipment revenues and monthly billings per customer.

Stephens also reiterated what he said at a separate investor conference last week and said AT&T has the ability to do smartphone leasing if there is customer demand for it. However, he noted that with leasing, customers never stop making monthly device payments and do not get savings once they pay off the cost of the device, which he said customers enjoy and appreciate. He also said customers pay sales tax on the device over the course of the lease and not upfront.

Apple's (NASDAQ: AAPL) decision to get directly into phone leasing for its new iPhones is "pretty interesting," Stephens said, adding that Apple likely wants to drive more regular iPhone sales and upgrades through the program, under which users can purchase one new iPhone every year. Prices for the service start at $32 per month for the 16 GB iPhone 6s and increase to $45 per month for the 128 GB iPhone 6s Plus. 

"They are probably really interested in getting a regular annuity selling an iPhone every year," Stephens said of Apple. "I certainly understand that. If that's what customers want, that's great."

Stephens said that the program will lead to a lot of slightly-used iPhones on the market and that AT&T would be interested in buying those phones, at the right price, to use in insurance programs, the prepaid market or to resell into its Mexican market. Stephens also said that the program could take expenses for financing device purchases off of AT&T's balance sheet. However, he said he is not worried about the program because AT&T sells "a lot more iPhones" at its own stores than Apple does.   

The AT&T CFO also touched on the company's recent purchase of DirecTV and its wider video strategy, especially in the context of Verizon Wireless' (NYSE: VZ) forthcoming national launch of its Go90 over-the-top mobile video service, which will be open to customers of all carriers later this month.

Stephens said AT&T's video strategy will include mobile components and extending its in-home TV strategy. He said AT&T's LTE network, which now covers around 310 million POPs, is already a "video-centric" network and has been for some time. However, he said Dish Network (NASDAQ: DISH), with its OTT Sling TV service, does not have "owners economics" of controlling its own wireless network, and Verizon doesn't have the scale in video to negotiate the same kinds of content deals that AT&T does.

"It allows us to transform or transition to a mixture of the model, including over-the-top," he said, adding "we can do those and more," referring to competitors' offerings.  

"I think it's an overall video and entertainment strategy" he said, noting that "mobility is absolutely an important part of that."

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