AT&T beats expectations with 329K postpaid phone net additions in Q4, touts wireless/video bundles

AT&T CEO Randall Stephenson said the company continues to bundle wireless products with video products.

AT&T said it added 329,000 postpaid phone net customers in the fourth quarter, which the carrier attributed in part to its strategy of bundling its video offerings with its wireless services.

Those results were generally far above most Wall Street estimates. "Heavy volumes and record 4Q churn (postpaid phone churn of 0.89%) drove solid postpaid phone adds of +329K vs. our -34K loss and the St’s. -36K," wrote the analysts at Cowen and Company in a note to investors. However, the firm noted that AT&T's promotional activities, including smartphone offers of buy-one, get-one-free, took a toll on the operator's margins. The firm said AT&T reported wireless EBITDA margins of 32.7%, which was below Cowen expectations of 35.1%.

AT&T's results in wireless were such at the analysts at New Street Research said the operator has "righted the ship" in wireless. "AT&T beat handily on postpaid phone net adds and
added subs for the first time since 3Q14," the Wall Street research firm wrote in a note to investors.

Indeed, AT&T attributed much of its wireless customer success in the quarter to bundling. The operator said that the number of households that take both its video and wireless products increased by 160,000 in the quarter—equating to roughly 700,000 more wireless customers who bundle their service with AT&T’s video products. “That’s significant because the churn rate of our DirecTV customers who have our wireless service is nearly half that of standalone satellite subscribers,” said John Stephens, the operator’s CFO.

“A key strategy is to bundle,” explained Stephens on AT&T’s quarterly conference call with analysts today. “When we’re bundling with wireless, when we’re bundling with broadband, we’re seeing significant improvement. … That bundling allows us to have profitability from that combined account. It also creates higher lifetime value for those customers.”

And Stephens said that work would continue to help AT&T improve its overall finances in its mobility business. “We expect service revenues to improve throughout the coming year and turn positive for the year,” he said. “We take a disciplined approach to building our customer base. We’ll continue to be keenly focused on cost management but also look for efficient opportunity to reinvest in our customer and continue growing.”

AT&T CEO Randall Stephenson also pointed to the operator’s efforts to sell wireless services packaged with its DirecTV satellite service or its DirecTV Now streaming video offering. Indeed, AT&T said it added 368,000 DirecTV Now customers during the quarter, bringing its customer base up to nearly 1.2 million DirecTV Now subscribers. Click here for more on this topic.

“There’s probably no more powerful driver of margins in our industry than low churn. So, you think about what drives low churn. It’s customer satisfaction, is the No. 1 driver of low churn,” Stephenson said. “But the second is multiproduct bundles with our customer. The more relationships they have with us with different products, the more powerful the driver of churn is.”

Continued Stephenson: “We believe very strongly that combining video with our mobile product is a really important element, and you will see us continue to do that and probably take it to new and different levels because it’s proving so powerful on churn. But we’re also getting to a place where we’ve learned that it’s also very powerful as it relates to customer acquisition. So, combining video and wireless is a really important driver, and you’ve seen some in the industry begin to make moves to mimic that. But that’s usually an indication that you’ve had some success. So, we’ll see more and more of that.”

“AT&T’s improved subscriber performance highlights the value proposition of its DirecTV Now mobile bundles and their success in combatting competitive pressures including T-Mobile and Sprint beginning to offer free access to Netflix and Hulu, respectively,” noted TBR analyst Steve Vachon in a statement released immediately after AT&T’s fourth-quarter earnings report. “AT&T’s strategies will also help the carrier cement its subscriber base as the company will face heightened competition from new MVNO mobile video bundles from cable providers such as Comcast, Charter and Altice as well as new OTT services that will launch in 2018 including T-Mobile’s upcoming video platform.”

Aside from bundling and video, AT&T’s management also offered insight into a variety of topics in conjunction with the release of the operator’s fourth-quarter results.

Capex. AT&T said it would raise its 2018 capex to around $25 billion. Click here for more on this story.

Subscribers. AT&T reported 329,000 postpaid phone net adds and postpaid phone churn of 0.89% in the period. The company said it also recorded 541,000 total postpaid net adds, 2.7 million total net adds, and 681,000 branded net adds. Wells Fargo had expected AT&T to lose 75,000 postpaid phones, with 600,000 branded net adds.

Financials. AT&T posted consolidated revenues for the fourth quarter of $41.7 billion, down slightly from the $41.8 billion it recorded in the year-ago quarter. The company’s net income for the period clocked in at $19 billion, up from the $2.4 billion it notched in the same quarter a year ago—a massive increase AT&T attributed to the recent passage of corporate tax reform.

As the analysts at Scotiabank noted, those results were somewhat mixed. "Consolidated revenue also beat estimates at $41.8B vs. our and consensus $41.2B. However, at the EBITDA level, AT&T missed estimates at $11.9B vs. our $12.1B and the Street’s $12.4B," the analysts wrote in a note to investors.

5G. AT&T’s Stephenson confirmed that the operator would first offer a “puck” when it launches mobile 5G services in a dozen cities later this year. “Getting the handsets at scale, penetrated into the market will slow things down. So it’s hard. We’ll be deploying pucks in the first part of our deployments in these 12 markets, so it is a mobile solution, but it’s not going to be a handset because there’s not going to be that many handsets available,” he said. “We’ll be pushing the vendors to make that happen faster, but we know how long these things take.”

Time Warner. Stephenson said AT&T continues to hope to eventually close its acquisition of Time Warner, which has been challenged by the Department of Justice. “We were obviously surprised when the government decided to block the merger because it is a classic vertical merger between two companies that don’t even compete with one another,” he said. “While we remain open to finding some reasonable solutions to address the government’s concern, we do expect this case will ultimately be litigated in court. … We remain very confident that we will complete this merger.”

Article updated Feb. 1 with additional analyst commentary.