AT&T 4Q2014 Earnings Review & Analysis + Future Growth from DTV & Mexico wireless companies

AT&T announced its 4thQ2014 earnings yesterday which slightly topped estimates.  

  • AT&T’s Wireless segment reported operating revenues of $19.9 billion, up 7.7% from the fourth quarter of the previous year. The Wireline segment had revenues of $14.6 billion which was down 1.0% year-over-year.
  • In the fourth quarter, AT&T had 405,000 U-verse high speed Internet subscriber net adds, which would make a grand total of over 12 million U-verse high speed Internet subscribers.  73,000 U-verse TV subscribers were added.
  • Total revenue at of AT&T’s wireline segment was $14,572 million, down 1% year over year (yoY). Also, Service revenues were down 1.3% to $14,240 million. Equipment revenues grossed $332 million, up 17.7%. Operating expenses increased 1.2% to $13,107 million. Meanwhile, the operating income increased 0.8% to $1,465 million. Quarterly operating margin stood at 10.1% against 9.9% in the year-ago quarter.
  • At the end of fourth-quarter 2014, AT&T had 24.778 million voice connections, down 13% year over year. In the reported quarter, the company lost 1.442 million voice connections, down 78.7%. At the end of the preceding quarter, AT&T had 16.028 million high-speed broadband connections, down 2.4% year over year. The company also lost 0.458 million broadband connections compared with a loss of 0.002 million connections in the prior-year quarter.
  • Similarly, at the end of 4Q-2014, AT&T had 5.943 million video connections, up 8.8%. However, the company lost 0.124 million video connections in the said quarter. 

  • The company expects continued consolidated revenue growth and  earnings growth should be in the low-single digit range. Margins are expected to expand across all of AT&T’s segments.
  • For fiscal 2015, AT&T expects adjusted earnings per share to grow in the range of low single digit. Capital expenditures are expected at around $18 billion.

Randall Stephenson, AT&T chairman and CEO, commented about AT&T’s future during a fourth quarter earnings call that was broadcast online:

“Our transactions with DIRECTV and Mexican wireless companies Iusacell and Nextel Mexico will make us a very different company. We’ll be unique in the industry because we’ll be able to offer integrated capabilities across a diversified base of services, customers, geographies and technology platforms. After we close DIRECTV, our largest revenue stream will come from business-related accounts, followed by U.S. TV and broadband, U.S. consumer mobility and then international mobility and TV.”

“We will be the only company with mobile Internet spanning both countries,” Stephenson said of the company expanding into Mexico. “We have the makings for strong and very viable Mexico strategy. We like these assets. We think these assets are sufficient to go in there and compete and take share.“

Stephenson was talking about the diversification of AT&T’s revenue stream through it’s pickup of DirectTV, as well as recent acquisitions of wireless players in Mexico. When asked whether AT&T might be considering moving into the Canadian wireless market, Stephenson said he had enough on his plate. “On Canada, I think right now we have about as much as a company can handle,” he said.

Aside from moving into different geographies, Stephenson stressed that AT&T’s DirecTV acquisition will allow it to deliver video content across devices. 

“We’re looking at multiple channels and channel lineups that we’ll be able to deliver to our wireless subscribers,” Stephenson said. “Stay tuned…this is of high priority to us.” 

Stephenson made the comments as both AT&T and Verizon are under pressure to find new revenue streams. AT&T’s fourth quarter subscriber numbers leaned heavily on tablets, which have picked up the slack as smartphones reach saturation. AT&T added 854,000 net postpaid subscribers, a 51 percent increase over the same quarter last year. AT&T added just 148,000 net postpaid smartphones and 969,000 postpaid tablets in the quarter.

For reference, Verizon added about 600,000 smartphones and 1.4 million tablets in the fourth quarter.  Stephenson said AT&T would update more specific guidance once the DirecTV purchase is approved. 

FBR’s David Dixon wrote in a note to clients (and this author):

 AT&T reported 4Q14 mixed results as it continues to face stiff competition from Verizon and its smaller rivals – Sprint and T-Mobile.  While the company was able to achieve 3.8% YoY revenue growth in 4Q2015, adjusted wireless service EBITDA (Earnings before Interest, Taxes and Amortization) margins declined by approximately  60 bps YoY, driven by a higher number of smartphone upgrades and gross subscriber adds. Although AT&T was able to deliver net adds of 854,000, surpassing consensus expectations of 793,000, much of the growth was driven by lower-ARPU tablet net adds of 969,000. Postpaid churn increased by 11 bps YoY to 1.22%.

During the fourth quarter, AT&T increased LTE network coverage to over 300 million PoPs. Despite improvement in network quality and root metric ranking results, AT&T still faces the challenge of being a premium-priced provider amid customer perception of an inferior network to that of Verizon (this takes time to change), which will likely continue to affect churn. Diversification into DTV, the growing Mexican market, and mobile video delivery will likely alleviate some churn pressure.  AT&T management expects to close the DTV transaction in 1H15.

    * Diversification is key to growth. AT&T has embarked on diversification into the Mexican wireless carrier market in the face of domestic competitive pressures that are unlikely to abate.  We see a favorable Mexican regulatory environment and view AT&T’s desire to mitigate churn risk in the U.S. market positively.  AT&T management believes DTV and Mexican acquisition will achieve adjusted EPS in the single-digit range and deliver multi-year synergies that are higher than previously announced.

    * Project VIP (Velocity IP) completion drives capex reduction. With the majority of Project VIP milestones complete, management expects FY15 capex to be around $18 billion, a decline of approximately $3.2 billion compared with FY14. The company will shift focus to free cash flow generation to help pay down debt (from DTV acquisition).

Our strategic concerns for AT&T in 2015 and beyond include:

   (1) Apple eSIM impact should Apple be successful striking wholesale agreements;

  (2) Google MVNO impact, which could strip the company of the last bastion of connectivity revenue; and

  (3) a WiFi first network from Comcast, coupled with a wholesale agreement with a carrier, which
  would enable a competitor and increase pricing pressure. 

Author’s Note: Cablevision has already announce a VoIP/WiFi network in New York. Called Freewheel, the service will offer unlimited data, talking and texting worldwide for $29.95 a month, or $9.95 a month for Cablevision’s Optimum Online customers — a steep discount compared with standard offerings from traditional cellular carriers. Freewheel customers initially must use a specific Motorola Moto G smartphone, which is being sold for $99.95. The service goes on sale next month, and no annual contract is required.