AT&T expects to add 500K postpaid subs in Q2, but margins will be hit

AT&T (NYSE:T) said it expects to add around 500,000 postpaid wireless subscribers during the second quarter, a marked sequential and year-over-year improvement in that metric, but also added that promotions and smartphone sales will dent its margins.

AT&T held a meeting with financial analysts in New York City Thursday evening, and disclosed some of its preliminary estimates for the second quarter. Executives from the carrier also touched on several major issues, according to analysts, including capital expenditures and the possibility of expanding AT&T's presence in Europe. 

"In the wireless segment, the company launched several successful promotions in the quarter which are driving strong sales, higher gross adds and smartphone upgrade rates similar to the first quarter," AT&T said. "As a result, the company expects second-quarter wireless EBITDA margins to be comparable to the first quarter. Additionally, given strong consolidated customer additions and investments in new growth opportunities, consolidated margins are expected to be down year-over-year."

AT&T added 320,000 net postpaid customers in the second quarter of 2012 and 296,000 in the first quarter of 2013, so a 500,000 figure would represent a marked improvement. The company will report its full second-quarter results after the market closes on July 23.

In the first quarter of 2013, AT&T's wireless EBITDA service margin stood at 43.2 percent. In the second quarter of 2012, the company's wireless EBITDA service margin was 45.0 percent.

Also in the first quarter AT&T added 1.2 million new smartphone subscribers, and said smartphones now account for 88 percent of the carrier's postpaid phone sales. The company's 6 million smartphone sales in the quarter represented a record for the first quarter for AT&T.

Analysts had several key takeaways from the meeting with AT&T's management. According to New Street Research analyst Jonathan Chaplin, AT&T CEO Randall Stephenson indicated that the company's capital expenditures had a "downward bias" and that capex could decline in absolute terms over time.

"The key driver of the shift is that they are only investing in the 'target architecture' in both wireless and wireline networks," Chaplin wrote. "For example, they expect 3G wireless traffic to peak in 3Q13, which means they will not have to invest anything more in 3G capacity. LTE capacity investments are 50 percent more efficient."

"CTO John Donovan put some meat on that bone by indicating that the cloud based, session based, SDN network that [AT&T] was building today would be far more capital efficient than the connections and raw steel based network from which they are converting," Jefferies analysts Thomas Seitz, Kunal Madhukar and Ankit Sharma wrote in a research note.

In late April when the company discussed first-quarter results, AT&T said it was ahead of pace in its LTE network deployment, which is part of its Project VIP (or Velocity IP) network upgrade project. The company currently covers 200 million POPs with LTE and plans to have 270 million POPs covered by year-end. In addition, the company adjusted its capital expenditures for Project VIP to $20 billion for 2014 and 2015, down from its initial $22 billion projection. AT&T CFO John Stephens said at the time the carrier lowered the figure due to refined planning and better integration.

AT&T indicated in March it is open to selling some of its non-core assets, which might include wireless towers. Chaplin wrote that AT&T management "seemed to suggest that conditions for a tower sale could get worse if rates continued to rise. We interpreted this to suggest that a sale is more likely." He estimates potential proceeds of $4 billion to $5 billion from a tower sale, which he noted would likely be used for share repurchases.

AT&T executives also said that "Europe is attractive," although it was not clear what exactly that meant. "They believe that many of the sources of revenue pressure have run their course and that there is a significant opportunity going forward as smartphone adoption and data usage follows similar trends to the U.S.," Chaplin wrote. "They reject the claim that ARPU in Europe is lower because of 'cultural factors.' They blamed lower ARPU on a host of factors that are correctible, including a lack of investment, poor pricing strategies and regulation."

"There probably was way more discussion on Europe than was warranted at present," the Jefferies analysts added. "Nevertheless, [AT&T] senior management continues to say intriguing things regarding the opportunity they see overseas. In their view, many of the cloud based, session based platforms they are building in the U.S. are globally scalable. Consequently, they are exploring both network and non-network based ways of potentially deploying some of these platforms."

For more:
- see this release
- see this Dow Jones Newswires article (sub. req.)
- see this Bloomberg article
- see this Reuters article

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