AT&T's (NYSE: T) strategy of focusing on high-revenue wireless customers continued to provide mixed results in the second quarter, boosting margins but sacrificing the lucrative postpaid smartphone market in the U.S.
The nation's second-largest mobile network operator reported 2.1 million net adds, driven primarily by connected devices, its growing business in Mexico and the prepaid brand Cricket. It reported 185,000 branded phone net adds in the U.S., including both prepaid and postpaid.
But the operator lost 180,000 postpaid phone net adds, marking the seventh consecutive quarterly loss. The figure was actually an improvement, though, as AT&T lost 276,000 such users during the year-prior period and 363,000 in the first quarter of 2016.
AT&T said it enjoyed an overall wireless EBITDA margin of 41.4 percent and service EBITDA margin of 49.8 percent, both of which are records for the carrier. More than 90 percent of its smartphone sales were unsubsidized phones, the operator said.
Tellingly, AT&T added nearly 800,000 U.S. branded smartphones to its network, more than offsetting the 600,000 U.S. feature phone users it lost. Those figures underscore AT&T's ongoing strategy of targeting prepaid smartphone users through its Cricket brand and focusing less on postpaid feature phone customers.
"The postpaid subs that we're losing are a lot of feature phones," AT&T CFO John Stephens said on a conference call with analysts. "They're averaging somewhere around $35, maybe a little bit less, in ARPU, and have costs associated… with retaining (those customers). On the postpaid side, it's probably around $41 or $42 ARPU, depending on the specifics, and very, very small upfront costs, subscriber acquisition costs, maintenance costs. So from that standpoint the economics are better. And that's showing in our margins."
Here's a closer look at some key quarterly metrics from AT&T:
Subscribers: The operator is clearly making progress in prepaid, the IoT, and its expanding business in Mexico. Interestingly, Stephens said the carrier connected 500,000 phones that customers already owned during the quarter. U.S. postpaid churn was .97 percent, marking the second-best quarter ever for AT&T.
Financials: The company reported an overall profit of $3.41 billion, up from $3.08 billion during the prior year. Both wireless service revenue and wireless equipment revenue were down slightly from the previous year, but EBITDA margin and EBITDA service margin were both up 130 basis points.
Spectrum: AT&T continued to migrate customers off its 2G network to refarm the airwaves for LTE use before it shuts down 2G completely by the end of the year. Stephens said the carrier has roughly 150 MHz of airwaves in its portfolio, 40 MHz of which is "relatively untapped" AWS and WCS spectrum. And while he couldn't discuss specifics due to the FCC-mandated quiet period, AT&T is widely expected to participate actively in the upcoming forward auction of 600 MHz spectrum.
Network: The operator is making solid progress in virtualizing its network, Stephens said. Only 5 percent of its network was virtualized by the end of last year, but the carrier is on track to see 30 percent of its network virtualized this year.
Summary: Earnings were roughly in line with Wall Street expectations, and analysts seemed unsurprised as AT&T shares barely dipped in after-hours trading. The second quarter is a traditionally slow period for the carrier market, and analysts have expected that the second quarter will largely mirror the first. But things may heat up for AT&T in a big way later this year with the release of the iPhone 7 and the launch of its cross-platform DirecTV service.
- see AT&T's quarterly earnings materials
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