AT&T's Stephens: LTE network will fend off competition, but feature phone base is shrinking

AT&T (NYSE:T) reported stronger subscriber growth and posted record smartphone sales in the third quarter. The company is plowing ahead with its LTE network deployment and thinks its network strength will insulate it from intensifying competition in the market.

AT&T added close to 1 million wireless subscribers in the quarter, up from 678,000 net adds in the year-ago period. The carrier also boosted its postpaid net add numbers year-over-year. AT&T reported 6.7 million smartphone activations in the third quarter. "AT&T delivered slightly better than expected postpaid adds despite a stronger competitive environment," Credit Suisse analysts Joseph Mastrogiovanni and Henrik Herbst wrote in a research note. 

The results come as AT&T is likely going to be hit with a fresh assault from feisty rival T-Mobile US (NYSE:TMUS), which plans to offer up to 200 MB of free LTE data each month for life for customers who use tablets on its network. T-Mobile said its latest "uncarrier" move is designed to get customers using cellular data on their tablets. AT&T has historically been the U.S. market leader in providing cellular data for tablet users, and added 388,000 tablets in the quarter, the vast majority of which were LTE-enabled.

"With regard to the wireless market overall, it continues to be competitive and there continues to be a lot of, as I mentioned in my comments, noise around what's going on," AT&T CFO John Stephens said on the company's earnings conference call, according to a Seeking Alpha transcript. "I think the first thing to step back from is to realize that our churn was down year-over-year in total churn on postpaid basis and [churn], so even with all this activity our churn numbers are doing really well. We had expected, we are hopeful to improve on that, but we think the power of our network and the power of our customer service is certainly helping that churn aspect and that's the real measured business."

Stephens did indicate that the company is facing pressure in its feature phone business, contrasted to strong smartphone sales; smartphone customers tend to produce more service revenue.

AT&T added 363,000 net new contract customers, but with 388,000 coming from tablets and 178,000  from smartphones, AT&T likely had a large loss of feature phone customers to get back to the 363,000 figure, as CNET notes.

Stephens said close to 70 percent of the feature phone losses were customers upgrading to smartphones, as most of AT&T's 1.2 million smartphone customer additions were upgrades.  "Now, there are some customers who are really price-sensitive, who are looking to others and we have come out with new plans both, in Mobile Share and in the tablet area, to addresses those needs and try to give value on a reasonable basis to those customers, so I view this as kind of normal competitive process and with a great network, great customer service, we are going to be able to work through this very quickly," he said.

AT&T is also preparing to get further enmeshed in the prepaid market.  AT&T is working to acquire regional prepaid carrier Leap Wireless (NASDAQ:LEAP) to aggressively go after the price-sensitive part of the market, where it is currently feeling pressure. AT&T hopes to close its $1.2 billion acquisition of Leap and its Cricket brand in the first quarter and Stephens said AT&T will "use that Cricket brand and infrastructure to really take advantage of that marketplace in a different way with different capabilities than we have today and that's what's real positive for us."

Leap pushed back a shareholder vote on the deal to Oct. 30. AT&T disclosed last week that it plans to close its new Aio Wireless prepaid brand if the carrier is successful in acquiring Leap.

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

Subscribers: AT&T added a total of 989,000 wireless subscribers in the third quarter. That figure included net postpaid subscriber additions of 363,000 and 192,000 prepaid net additions. The total figure also included 719,000 net connected device additions. AT&T said reseller revenues increased year-over-year but that its reseller segment had a net loss of 285,000 subscribers, primarily due to losses in low-revenue 2G subscriber accounts.

Within its postpaid net adds though, AT&T only had 178,000 smartphone additions.

The figures were a sequential improvement. In the second quarter AT&T added a total of 632,000 subscribers in the quarter, which included 551,000 postpaid adds, 11,000 net prepaid additions and 70,000 connected device/reseller additions. The third quarter results were also an improvement year-over-year. A year ago AT&T reported just 678,000 net adds in the third quarter, of which only 151,000 were postpaid net adds.

"Tablet growth was solid; however, TMUS will start attacking this base in 4Q13 with aggressive new plans and a marketing push," New Street Research analyst Jonathan Chaplin wrote in a research note. 

By comparison, Verizon Wireless (NYSE:VZ) added 1.1 million net retail connections in the quarter, including 927,000 net retail postpaid connections. However, those results were below some analyst expectations--and New Street Research analyst Jonathan Chaplin warned that Verizon's sluggish third quarter results could be attributed to increased competition from the newly recharged T-Mobile.

Financials: AT&T said total wireless revenues for the quarter, which includes equipment sales, were up 5.1 percent year over year to $17.5 billion. The carrier said wireless service revenues increased 3.7 percent in the quarter to $15.5 billion. Wireless data revenues increased 17.6 percent from the year-ago quarter to $5.5 billion.

AT&T's wireless EBITDA service margin was 42 percent, compared with 41.6 percent in the year-ago period and 42.4 percent in the second quarter. AT&T's third-quarter wireless operating income margin was 26.4 percent, compared to 26.9 percent in the year-ago period and down from 27.1 percent in the second quarter. The company said its wireless margins reflected record third-quarter smartphone sales, strong upgrades and further revenue gains from the company's smartphone subscriber base.

Mobile Share: AT&T said it now has more than 16 million connections, or more than 22 percent of postpaid subscribers, on its Mobile Share shared plans. The number of Mobile Share accounts reached 5.3 million in the third quarter with an average of about three devices per account. That's up from 4.3 million Mobile Share accounts serving 13 million subscribers at the end of the second quarter.

AT&T said adoption of higher-data plans continue to be strong, with 30 percent of Mobile Share accounts choosing 10 GB or higher plans. About 15 percent of Mobile Share subscribers came from unlimited plans, AT&T said. The company added that 72 percent, or 36.4 million, of postpaid smartphone subscribers are on usage-based data plans.

AT&T recently confirmed that as of Oct. 25, it will make all new customers sign up for its Mobile Share plans, in effect doing away with its traditional voice and data plans.

Smartphones: AT&T said it sold a third-quarter record of 6.7 million smartphones, up from 6.1 million in the year-ago quarter and down only slightly from 6.8 million in the second quarter. Smartphones accounted for a record 89 percent of postpaid phone sales in the third quarter of 2013, AT&T said. AT&T said 75 percent of its postpaid phone business is on a smartphone, and the company added 1.2 million new smartphone subscribers in the quarter. AT&T said its average revenue per user for smartphones is more than twice that of non-smartphone subscribers, and around 42 percent of AT&T's postpaid smartphone customers now use an LTE device and 70 percent use a "4G-capable" device (LTE or HSPA+).

LTE: AT&T said its LTE network now covers around 250 million POPs, and its goal remains to cover 270 million by the end of the year and 300 million by the middle of 2014.

ARPU: AT&T said total postpaid ARPU, which includes high-margin but lower-ARPU tablets, increased 1.5 percent compared to the year-earlier quarter. Postpaid phone-only ARPU increased 3.1 percent compared to the year-ago quarter.

Churn: Postpaid churn was down slightly to 1.07 percent, compared to 1.08 percent in the year-ago quarter and up from 1.02 percent in the second quarter. Total churn was 1.31 percent, compared to 1.34 percent in the year-ago quarter and 1.36 percent in the second quarter. AT&T said around 90 percent of postpaid subscribers are on its FamilyTalk, Mobile Share or business plans, and that churn levels for these subscribers are significantly lower than for other postpaid subscribers.

For more:
- see this release
- see this Seeking Alpha transcript
- see this CNET article
- see this Bloomberg article

Special Report: Wireless in the third quarter of 2013

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AT&T to shutter Aio Wireless prepaid brand if Leap acquisition is successful
AT&T to make all new customers sign up for Mobile Share plans
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AT&T adds 551K postpaid subs in Q2, points to Mobile Share momentum

Article updated Oct. 24 at 11:15 a.m. ET with additional information and commentary.