Analyst Takeaways from June 6th AT&T Management Meeting + 3 AT&T Talks @June 12 ComSocSCV Meeting!

AT&T has benefited from growing wireless revenue, as more of its customers switch over to smartphones. But the company has been falling behind Verizon Wireless in wireless subscriber numbers, as the two rivals battle each other for new U.S. customers. AT&T had 70.7 million contract wireless subscribers at the end of the first quarter.
The carrier now expects to add about 500,000 wireless contract customers in the current quarter, more than the 320,000 it added in the year-ago quarter. The company maintained its forecast for full-year revenue to grow more than 2%, higher than the average analyst estimate for 1% growth.   AT&T also touted strong growth in its U-verse broadband and television subscribers vs a year earlier.

“In the wireless segment, the company launched several successful promotions in the quarter which are driving strong sales, higher gross adds and smartphone upgrade rates similar to the first quarter,”  according to a press release on the company’s website

Quotes from Analysts that attended the June 6th meeting with AT&T Management:
Last Thursday, sell-side analysts were invited to meet with AT&T’s senior management, who provided a business overview and key insights and updates across a broad range of areas affecting the business.  Several of those analysts wrote research notes which contained several key takeaways from that meeting with AT&T’s management.
1.  FBR Capital’s David Dixon wrote:
“AT&T’s management reiterated top-line revenue guidance of above 2% for FY13, but we believe a key strategic challenge for AT&T (and other network operators) is how to drive wireless ARPU up from today’s levels (across the business and consumer segments), leveraging the high quality network in an environment where the market is mature, competition is intensifying, and further wireless consolidation is now unlikely in the near term, based on our latest regulatory checks.”
“As many anticipated, AT&T has increased promotional activity in the wireless segment in response to weaker than expected subscriber growth and we believe there will be an increased level of advertising spending going forward.”
“During the session, management reiterated its satisfaction in the improvement of AT&T’s macro radio access network which has been significant over the past three years evidenced by vendor checks and third party testing. The challenge is that both T Mobile USA and Sprint are also improving network performance on a relative basis.”

Other Key Points (by David Dixon):
■ Increased competition from T-Mobile likely to continue. We expect T-Mobile to pressure both AT&T and Sprint in the prepaid market as it completes its 4G network upgrade (which shows better performance, versus T and VZ, according to our vendor checks), launches its LTE network, and markets its new “nocontract” plans with a reinvigorated device lineup.
■ Zealous versus pragmatic DOJ stance is cause for concern. As approval approaches for SoftBank’s investment in Sprint, and following recent shareholder approval of T-Mobile and MetroPCS, we see a new zealous stance by the DOJ and now see less potential for a merger between Sprint and T-Mobile USA. The DOJ appears excited by the fact that wireless network operators have no choice but to invest, even if incremental returns are poor. This is coupled with the DOJ looking to limit access to spectrum in upcoming auctions.
■ Too soon for a change in capex intensity, but do not discount the potential for a “hard pivot” away from incumbent vendors. AT&T is deploying SDN (Software Defined Networking) outside the datacenter, including Central Offices, to best serve U Verse and LTE-based features and applications (such as cached video) at low latency. We see a laser-sharp focus on open and flexible white box switches, with Broadcom cited as a company in focus. The era of simply driving lower costs from incumbent vendors appears to be over.

2.  Jonathan Chaplin of New Street Research (UK): 
AT&T CEO Randall Stephenson indicated that the company’s capital expenditures had a “downward bias” and that capex could decline in absolute terms over time.
“The key driver of the shift is that they are only investing in the ‘target architecture’ in both wireless and wireline networks,” Chaplin wrote. “For example, they expect 3G wireless traffic to peak in 3Q13, which means they will not have to invest anything more in 3G capacity. LTE capacity investments are 50 percent more efficient.”
AT&T executives “suggested that there are a host of factors that could drive lower subsidy expense and higher margins, including: extending the upgrade rate as Verizon has done; shifting the mix; declining handset ASPs; and ‘other factors’ still to be announced.”
AT&T indicated in March it is open to selling some of its non-core assets, which might include wireless towers. Chaplin wrote that AT&T management “seemed to suggest that conditions for a tower sale could get worse if rates continued to rise. We interpreted this to suggest that a sale is more likely.” He estimates potential proceeds of $4 billion to $5 billion from a tower sale, which he noted would likely be used for share repurchases.
AT&T executives also said that “Europe is attractive,” although it was not clear what exactly that meant. “They believe that many of the sources of revenue pressure have run their course and that there is a significant opportunity going forward as smartphone adoption and data usage follows similar trends to the U.S.,” Chaplin wrote. “They reject the claim that ARPU in Europe is lower because of ‘cultural factors.’ They blamed lower ARPU on a host of factors that are correctible, including a lack of investment, poor pricing strategies and regulation.”

3. Jefferies’ analysts Thomas Seitz, Kunal Madhukar and Ankit Sharma:

“AT&T CTO John Donovan put some meat on that bone by indicating that the cloud based, session based, SDN network that [AT&T] was building today would be far more capital efficient than the connections and raw steel based network from which they are converting,”
“There probably was way more discussion on Europe than was warranted at present,” the Jefferies analysts added.
“Nevertheless, [AT&T] senior management continues to say intriguing things regarding the opportunity they see overseas. In their view, many of the cloud based, session based platforms they are building in the U.S. are globally scalable. Consequently, they are exploring both network and non-network based ways of potentially deploying some of these platforms.”

June 12th IEEE ComSocSCV meeting (Santa Clara, CA) will feature talks on AT&Ts Palo Alto Foundry, Innovation Platform, and Wireless Infrastructure.