AT&T leans on prepaid, connected devices for subscriber growth in Q3

AT&T Mobility (NYSE: T) added far fewer postpaid customers in the third quarter than it did a year ago but saw a resurgence in its prepaid business, notching the best quarterly prepaid subscriber additions in nearly eight years.

The company noted that its Cricket prepaid brand is producing average revenue per user of $42. The company's prepaid operations are benefiting from lower churn and expanded distribution, AT&T said, noting that it has shut down Cricket's CDMA network and that the entire Cricket customer base is now on AT&T's LTE/HSPA+/GSM network. On the company's earnings conference call, AT&T CFO John Stephens said that the ARPU from Cricket smartphone customers the company added in the quarter is nearly $10 more than the ARPU of postpaid feature phone customers AT&T lost in the period. 

"Cricket gives us a quality prepaid offering for the more value-conscious customer, same great network, quality customer service, and the flexibility prepaid delivers with subscriber acquisition costs that are much lower than our postpaid voice," Stephens added, according to a Seeking Alpha transcript. 

However, nearly two-thirds of AT&T's wireless customer growth in the quarter came from connected devices, including connected cars. While AT&T has emphasized that is where its business is going as it provides cellular connectivity for wearables, cars and devices inside in smart homes, such devices typically come with lower average revenue per user than smartphones.

AT&T's wireless revenue stagnated compared to last year. Competitors like T-Mobile US (NYSE:TMUS) have highlighted their postpaid phone subscriber growth as a barometer of their business to show they are adding high-value customers.

AT&T did note that it added nearly 1 million branded (postpaid and prepaid) smartphones to its customer base through new customer additions and upgrades. Yet that's down from the year-ago period, when it added 1.2 million postpaid smartphones alone. Part of that might be explained by the fact that the third quarter of last year included the launch of the Apple (NASDAQ: AAPL) iPhone 6 and 6 Plus, which is typically more popular than the off-year "S" upgrade Apple rolled out this year.

AT&T's postpaid numbers were lower than the 500,000 analysts at Evercore ISI had predicted but slightly higher than the 275,000 analysts at Wells Fargo had expected. In the year-ago period, AT&T notched 785,000 postpaid net subscriber additions and in the second quarter AT&T added 414,000 total postpaid customers.

Here's a breakdown of AT&T's key quarterly metrics:

Subscribers: AT&T said it added 2.5 million domestic wireless customers in the quarter.

AT&T said it added 622,000 tablets and computing devices in the quarter and 289,000 total postpaid net additions. AT&T said it lost 545,000 postpaid phone customers in the quarter. AT&T also lost 322,000 postpaid phone customers in the second quarter.

Stephens said that the company is losing postpaid feature phone customers and that such churn is "having an impact on us." He said AT&T has made a decision not to chase every customer and that its pricing might not work for feature phone customers. He reiterated that AT&T wants to grow its customer base but do so profitability. Stephens added that as AT&T's feature phone customer base declines over time as more customers upgrade to smartphones, it will be less of an issue. 

Stephens said that AT&T is "adding premium prepaid subscribers whose ARPU is higher and subsidy costs are lower than postpaid feature phone subscribers who have the highest postpaid churn." 

AT&T added 466,000 prepaid net subscriber in the third quarter, a sharp improvement from the loss of 140,000 prepaid customers in the year-ago quarter and 331,000 prepaid net adds in the second quarter.

AT&T also reported a record 1.6 million connected device subscriber additions, including 1 million connected cars.  

"Wireless customer losses were the worst ever as AT&T held the line in a competitive environment," New Street Research analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam said in a research note. "Postpaid smartphone net adds have fallen from being consistently above 1 million last year to 285K this quarter. We think AT&T will continue to hold firm on pricing until these turn negative, and then all bets are off. "

Financials: Starting this quarter AT&T is splitting its wireless results into two different units – one for the enterprise market and one for consumers. AT&T said total wireless revenue for both units was flat at $18.3 billion. Total service revenues dipped 2 percent to $15.09 billion. However, equipment revenues jumped 11 percent year-over-year to $3.23 billion, reflecting the continued adoption of AT&T's Next equipment installment plans.

AT&T posted a record wireless EBITDA service margin of 49.4 percent, up from 43.1 percent a year ago and 48.5 percent in the second quarter. 

Mobile Share: The total number of AT&T's Mobile Share shared data plan accounts was up 25 percent year-over-year to reach 20.8 million, with an average of about three devices per account. Around 80 percent of postpaid smartphone subscribers are on Mobile Share Value plans. Almost 30 percent of Mobile Share accounts are on 15 GB or larger data plans, three times the number from a year ago. In total, nearly 90 percent of postpaid smartphone subscribers are on usage-based data plans (tiered data, Mobile Share and other plans).

Smartphones/AT&T Next: The company had 7.5 million total branded smartphone gross adds and upgrades in the quarter (including 1.7 million prepaid smartphones). However, that means AT&T had 5.8 million postpaid gross adds, down from 6.8 million a year ago.

Sales on AT&T Next also increased during the quarter as 71 percent of all postpaid smartphone gross adds and upgrades chose AT&T Next, up from 68 percent in the second quarter and 50 percent a year ago.  

More than 40 percent of the postpaid smartphone base is on AT&T Next, with about 66 percent, or 38.2 million, of postpaid smartphone subscribers on no-device subsidy Mobile Share Value plans.

AT&T has aggressively pushed Next plans and has indicated it expects to eventually stop selling subsidized smartphones with two-year contracts.

ARPU: AT&T said its "phone-only" postpaid average revenue per user was $60.81, down 2.6 percent from a year ago. However, AT&T said that when adding in Next monthly equipment billings, a measure of how much cash AT&T is getting per customer, ARPU was up 4.8 percent to $68.82.

Churn: AT&T said postpaid churn was 1.16 percent, up from 0.99 percent in the year-ago period and 1.01 percent in the second quarter. Total churn was 1.33 percent, down from 1.36 percent a year ago, as improvements in prepaid churn offset higher postpaid churn.

For more:
- see this release
- see this Seeking Alpha transcript

Special Report:  Wireless in the third quarter of 2015

Related articles:
Analyst: T-Mobile likely gained most subs in Q3 and AT&T fared poorly, based on social media mentions of switching
AT&T to split financial reporting of wireless biz into consumer, enterprise segments
Analysts: AT&T to add fewer postpaid and more prepaid subscribers in Q3
AT&T expects around 2M wireless net adds in Q3, will 'maintain momentum' in wireless margins
AT&T adds fewer postpaid subs in Q2 than expected as it loses 322K postpaid phone customers
AT&T's postpaid net adds fall below expectations in Q3, and shift from subsidies continues

Correction, Oct. 23, 2015: This article incorrectly stated AT&T Mobility lost 333,000 postpaid phone subscribers in the third quarter of 2015. AT&T actually lost 545,000 such subscribers. 

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