AT&T: Next upgrade plans powered half of all smartphone sales in Q3

AT&T Mobility (NYSE: T) postpaid customers continue to migrate away from device subsidies through the company's Next handset-upgrade and device-installment plan.

In a filing with the Securities and Exchange Commission AT&T made in conjunction with an investor meeting in Atlanta, the carrier said it expects total AT&T Next adoption rates to be around 50 percent in the third quarter and to have more than 400,000 postpaid smartphone gross additions from customers who brought their own phones.

In the second quarter, AT&T said it had 3.1 million AT&T Next smartphone sales, compared with 2.9 million in the first quarter. AT&T said Next sales represented around 50 percent of all smartphone sales in the second quarter. That compares to around 40 percent in the first quarter (or 35 percent when taking out accelerated upgrades). Customers who choose to finance the cost of their device in monthly installments through Next then get access to discounted Mobile Share Value service pricing and earlier device upgrades.

AT&T also expects around 58 percent of its postpaid smartphone base to be on Mobile Share Value plans at the end of the third quarter. At the end of the second quarter the company said it expected the percentage postpaid smartphone customers on its no-device-subsidy plans to grow to around 66 percent by year-end.

AT&T also said it still expects wireless postpaid churn to be 1 percent or lower. In the second quarter the carrier said its postpaid churn was a record-low 0.86 percent.

AT&T also provided an update on the outlook for its connected car business and its Digital Life home automation and security business. In the filing AT&T said it "expects meaningful subscriber growth for its connected car services" in the next three to five years. As of today, AT&T provides either wholesale or retail connectivity to nearly 2 million U.S. registered passenger vehicles, with about 500,000 added in the third quarter. Part of that is likely being driven by AT&T's recently announced deals to provide LTE connectivity to vehicles from General Motors and for Audi's A3 and Q3 cars.

"In 2015, AT&T expects to connect nearly half of new wireless-connected U.S. passenger vehicles," the company stated in its filing. "The company expects to serve more than 10 million such vehicles by the end of 2017." 

AT&T said it expects revenues from its connected cars to be driven initially by wholesale customer relationships with auto makers, with the opportunity to develop a direct retail relationship with drivers. Wholesale average monthly revenue per subscriber, paid for by auto makers, is expected to be in the low single digits and retail ARPU, paid for by the car owners, is expected to be similar to that of a tablet on an AT&T Mobile Share Value Plan, which is $10 per month. 

In addition, AT&T said its Digital Life business had around 140,000 subscribers at the end of the third quarter, with more than half of those added in the last two quarters. AT&T launched Digital Life service in April 2013 and it's now available in 82 markets across the country. The plans range  from $40 a month for a basic security plan to $70 a month with security and automation packages. AT&T said around a third of customers who sign up for Digital Life security plans are also adding automation products, with the majority of those choosing video or door-control products.

Analysts see strong revenue prospects for AT&T in both the connected car market and Digital Life. "The company expects to reach 10M connected cars in 2017. With 10M customers, we estimate AT&T could generate nearly $1B in annual revenue (wholesale ARPU is low single digit; retail is about $10)," Credit Suisse analysts Joseph Mastrogiovanni and Michael Baresich wrote in a research note.

"The company has 140k Digital Life customers with roughly half coming over the last two quarters. If we assume the company adds approximately 35k/quarter, Digital Life could generate about $200M of annual revenue in 2017," they added. "Given the low penetration of home security and automation and AT&T's nationwide coverage, we think this could be conservative. Management believes that they can scale these products globally, but the company doesn't need local network assets to go global."

For more:
- see this SEC filing
- see this WSJ article (sub. req.)
- see this Atlanta Business Chronicle article

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