AT&T's postpaid net adds fall below expectations in Q3, and shift from subsidies continues

AT&T Mobility (NYSE: T) reported fewer postpaid subscriber additions in the third quarter than analysts had expected. Still, the carrier reported strong data revenue growth and said that customers buying smartphones via its Next handset upgrade plan accounted for half of all smartphone sales in the quarter.

AT&T notched 785,000 postpaid net subscriber additions for the period, which was more than double the 363,000 the company reported in the year-ago quarter. Still, the figure came in below what some Wall Street analysts had expected. Analysts at Credit Suisse had predicted AT&T would report 800,000 postpaid net additions in the third quarter while analysts at Jefferies had predicted the carrier would post 1.019 million postpaid net adds.

The growth AT&T experienced in the postpaid segment was split fairly evenly between smartphones and tablets, in contrast to Verizon Wireless (NYSE: VZ), which reported stronger postpaid growth figures that were heavily weighted toward tablets.

Interestingly, on the company's earnings conference call, AT&T CFO John Stephens was asked about the carrier's "Domain 2.0" program for vendors. The program is based around using Software-Defined Networking (SDN) and Network Function Virtualization (NFV) to not only cut down costs and turn hardware-based network functions into software-based ones, but also to facilitate the deployment of new services. 

"We continue to remain positive," Stephens said of SDN in particular, according to a Seeking Alpha transcript of his remarks. "We take that into account in our spending projections in our assets."

Stephens said that the transformation of AT&T's network is "not a short road but a long road" because the company had around $100 billion worth of network plant and property to change. "It's going to take some time, but we remain positive and optimistic," he said. He said the program is already "receiving savings or achieving value," though he did not specify a figure, and said AT&T hopes to increase those over time.

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

Subscribers: AT&T said it added 2 million total wireless subscribers in the quarter. Of its 785,000 net postpaid adds, the company added 466,000 smartphones and 434,000 tablets, implying the company lost 115,000 feature phone customers, who typically generate lower revenue. The postpaid figures exclude any internal migrations from Cricket prepaid customers to AT&T's postpaid service.

AT&T said its connected device net adds totaled 1.275 million and included more than 500,000 connected cars. AT&T is likely starting to see the benefits from its relationship with General Motors and other automakers like Audi.

The carrier lost 140,000 prepaid subscribers, which it said was primarily due to declines in session-based tablets as well as an expected loss of Cricket subscribers as the company transitions the customer base from Cricket's CDMA network to AT&T's GSM/HSPA+/LTE network.

AT&T also reported a net gain of 87,000 reseller subscribers, its first gain in that category in seven quarters.

Source: AT&T

Financials: AT&T said total wireless revenues, which include equipment sales, grew 4.9 percent year-over-year to $18.3 billion. Wireless service revenues were flat in the third quarter at $15.4 billion, and wireless equipment revenues increased 44.3 percent to $2.9 billion as more customers chose Next equipment installment plans instead of subsidized devices.

AT&T said that as expected its wireless margins were hit by stronger adoption of Mobile Share Value shared data plans, solid customer growth, promotional activities and continued investment in new services.

AT&T's third-quarter wireless operating income margin was 24.6 percent, down from 26.4 percent in the year-earlier quarter. The company's wireless EBITDA margin was 35.3 percent, down from 37.2 percent a year ago. 

AT&T said its wireless operating expenses in the quarter totaled $13.8 billion, up 7.5 percent compared to the year-earlier quarter due to higher equipment costs, network systems expenses and marketing costs, largely attributable to the company's acquisition of Leap Wireless.

Mobile Share: AT&T said Mobile Share plans, including Mobile Share Value plans, now represent nearly 47 million connections, or about 62 percent of postpaid subscribers. That's up from 41 million connections, or about 56 percent of its postpaid subscribers, at the end of the second quarter.

The number of AT&T's Mobile Share accounts more than tripled year over year to reach 16.7 million, with an average of about three devices per account. At the end of the third quarter, 51 percent of Mobile Share accounts had 10 GB or larger data plans, up from 30 percent in the year-ago quarter. Those higher-usage data plans helped spark a nearly 24 percent year-over-year increase in wireless data billings. In total, about 82 percent of AT&T's postpaid smartphone subscribers are on usage-based data plans, compared to 72 percent a year ago.

Source: AT&T

Smartphones: AT&T had a record third-quarter 6.8 million postpaid smartphone gross adds and upgrades. That's up from 6.7 million smartphone activations in the year-ago period and 6.2 million in the second quarter.

About half, or 3.4 million, of all postpaid smartphone gross adds and upgrades chose AT&T Next, translating to a 50 percent adoption rate, the same as in the second quarter. AT&T said its total smartphone activations figure includes 462,000 customers who brought their own phone. AT&T said two-thirds of its postpaid smartphone subscriber base now uses LTE phones.

Stephens said AT&T expects Next adoption rates to increase in the fourth quarter. He said that will be because at corporate retail stores there will be fewer inventory shortages of smartphones (likely new iPhones) and that workers at big-box retailers are getting more adept at selling the Next product.

Half of AT&T's smartphone base is now on a no-device-subsidy plan, and Stephens said the company expects that to grow to around 66 percent by the end of the year.

ARPU: The continued adoption of AT&T Next and Mobile Share Value plans led to year-over-year reduction in postpaid service average revenues per user. However, ARPU improved when compared to the second quarter of 2014. Phone-only postpaid ARPU fell 8 percent compared to the year-ago quarter, from $67.96 down to $62.45, but increased 0.3 percent compared to the second quarter.

Source: AT&T

Churn: AT&T said it recorded its best-ever, third-quarter postpaid churn at 0.99 percent, which was down from 1.07 percent in the year-ago quarter. Total churn of 1.36 percent was up versus 1.31 percent in the year-ago quarter due to expected pressure in prepaid from the Leap acquisition.

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

Special Report: Wireless in the third quarter of 2014

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