FBR Research: Analysis of AT&T’s latest earnings report + much greater wireless competition ahead!

From FBR Research Analyst David Dixon:

AT&T reported mixed 2Q13 results as the company responded to increased competitive intensity. Wireless churn deteriorated sequentially, offset by impressive postpaid net adds, largely driven by tablet growth. Management remains focused on prioritizing LTE network parity with Verizon to lower postpaid churn and expand wireless margins.

Smartphone adoption continued to increase nicely as AT&T sold 6.8 million smartphones, the highest level for the company in the second quarter, and also had the best-ever Android sales. At 88% of sales and 73% of the base, continued momentum is expected.

However, we believe AT&T (and Verizon) will experience increased competition in both the lower-end prepaid market (T-Mobile in FY13 and Sprint in FY14) and the higher-end postpaid market (Verizon). This may result in more-than-expected cost pressure.

More importantly, if Sprint can differentiate through Clearwire (something we will not see until mid FY14 at the earliest), AT&T may need to reconsider the acquisition of DISH Networks to improve its LTE spectrum position.

Note: Earlier this month, Clearwire shareholders approved Sprint buying the ~50% of Clearwire that it didn’t already own.   Clearwire offers a nationwide wireless broadband network using spectrum in the 2.5GHz band. Sprint, which had previously owned about 50 percent of the company, is the only customer that Clearwire has for its wholesale network business. The company also has a retail business that offers wireless broadband service to consumers.   http://news.cnet.com/8301-1035_3-57592700-94/clearwire-shareholders-approve-sprint-takeover/

Selected data points:

LTE buildout progressing well toward completion; what’s next for AT&T?

Management expects to “substantially complete” its initial LTE buildout by next summer. In comparsion, Verizon’s LTE network now covers 500 markets, and more than 99% of the company’s 3G coverage, with additional LTE capacity to be added in key markets.

AT&T benefits from a highly invested and high-performance 3G HSPA+ network, but 3G traffic will not slow as rapidly, limiting refarming potential.

Competitive intensity beginning to ratchet up. Both Sprint and T-Mobile have closed deals that provided capital and spectrum, creating a path forward for the two smaller players to better compete. We expect that Sprint may take until early 2014 to reposition, but T-Mobile should see churn improvement in FY13, which will affect Sprint, AT&T, and Verizon, in that order.

Competitive intensity will affect both margins and capex costs as the four major operators compete on price and network quality, not on device exclusivity. Higher data usage will keep pricing rational, but if Sprint differentiates with Clearwire, AT&T may need to acquire DISH Networks.

The proposed Leap Wireless acquisition will help AT&T’s spectrum position and may crimp T-Mobile in key LTE markets. Given public DOJ comments supporting a four-player wireless market and plans to restrict AT&T or Verizon in the incentive auctions, AT&T was wise to seek spectrum to improve its PCS spectrum position, increase leverage on Sprint to sell WCS spectrum in Texas, and potentially crimp T-Mobile US in key markets. Recall that Leap’s spectrum holdings cover the PCS and AWS bands covering 137M points of presence (POPs).

Note:  Mr. Dixon didn’t discuss AT&T’s Project Velocity IP (VIP), which has 3 components:  fiber to over 1K commercial buildings, U-Verse high speed Internet/TV service and IP-DSLAM high speed Internet but no TV.

At the June 12, 2013 IEEE ComSocSCV meeting, AT&T’s Shiyama Clunie presented the highlights and progress of AT&Ts Project Velocity IP.  It’s a major effort to expand AT&T’s wireless and wireline broadband network.  Under this initiative, which is underway now, AT&T expects to bring fiber to 1 million additional business customer locations, and its wireline IP network is expected to cover 57 million customer locations, by year-end 2015. These locations will have either U-Verse (video, Internet and voice) or U-Verse IP-DSLAM (high speed Internet and voice). AT&T also expects that its 4G LTE wireless network will cover 300 million people nationally by the end of 2014, and 99 percent of customer locations in AT&T’s wireline service area are expected to have high-speed Internet access through either IP wireline and/or 4G LTE wireless by year-end 2015. 

During its earnings call, AT&T reported on U-Verse progress:

“Total U-verse subs reached 9.4 million, while video subs topped 5 million customers for the first time. Total U-verse revenues grew better than 30%, and U-verse now represents more than 50% of consumer revenues. And even with little help from the economy, business wireline showed sequential revenue improvement and strategic business services grew by more than 15%. All this resulted in improved revenue growth, continued EPS gains and strong free cash flow even while investing more in our customers and in our Project VIP.”


1.  AT&T Perspective on its most recent earnings report: http://www.att.com/gen/investor-relations?pid=282

2.  Transcript of AT&T Management Discussing most recent earnings: