Below is TBR’s commentary on AT&T’s 2Q17 earnings. Contact Steve Vachon at +1 (603) 929-1166 or [email protected] for additional commentary.
AT&T is improving its value proposition as competition within the mobile and video markets intensify
AT&T’s consolidated revenue fell 1.7% year-to-year to $39.8 billion in 2Q17 due to declines across all of the company’s core businesses, with the exception of its International division. AT&T’s profitability improved in the quarter, however, as operating margins rose 220 basis points year-to-year to 18.4%, aided by the company’s emphasis on non-subsidized wireless device plans.
Pricing pressures, smartphone saturation and stronger competition from OTT providers are creating obstacles for AT&T to grow its mobility and video businesses, which is spurring the carrier to become more reliant on bundles combining both services to improve its value proposition. Though TBR believes AT&T trailed all of its Tier 1 competitors in postpaid phone net additions in 2Q17, the launch of its unlimited data plans helped to mitigate declines as the carrier’s postpaid phone losses improved in the quarter to -89,000, compared to -180,000 in 2Q16.
In June AT&T Unlimited Choice customers gained the option to add DirecTV Now to their accounts for $10 per month, a benefit previously offered only to Unlimited Plus customers. TBR believes the move will boost wireless and DirecTV subscriber additions, but will come at the expense of limiting postpaid phone ARPU as customers now have less incentive to select AT&T Unlimited Plus plans, which have a starting price point that is $30 more expensive than Unlimited Choice plans.
AT&T is relying on the low price point and flexibility of DirecTV Now, which gained 152,000 customers in 2Q17, to help offset declines within its U-verse TV and DirecTV satellite businesses, which lost a combined 351,000 subscribers in the quarter. Though AT&T increased Video Entertainment revenue by 2.1% year-to-year in 2Q17, TBR believes sustaining revenue growth in the segment will be increasingly challenging as total video subscribers decrease and the company trades linear TV subscribers for lower ARPU DirecTV Now connections.
New features such as the inclusion of additional live local channels and upcoming 4K HDR and cloud DVR support provide added incentives to attract DirecTV Now customers, but addressing the platform’s streaming capacity is critical as recent service interruptions will drive some subscribers to switch to rivals such as SlingTV and Hulu Live.
AT&T deepens emphasis on the public sector and software-mediated network services to improve Business Solutions revenue
To improve Business Solutions revenue, which decreased 2.7% year-to-year in 2Q17 due primarily to lower legacy voice and data revenue, AT&T is targeting growth from government customers. In April AT&T announced it is consolidating its government and education operations, which generated about $15 billion in sales in 2016, into the new Global Public Sector division to improve cohesiveness and foster partnerships across agencies in different sectors. Additionally, AT&T will be able to provide first responders with more reliable connectivity through its collaboration with First Net, which has already attracted contracts from five states as of July.
AT&T will improve the profitability of Business Solutions long-term by adopting NFV and SDN technologies. Integrating open-source technologies and white box hardware will provide cost savings by enabling the carrier to become less dependent on more costly, proprietary infrastructure. Additionally, TBR expects the acquisition of Brocade’s Vyatta network operating system will enable AT&T to meet its goal of virtualizing 75% of its network by 2020.
In addition to cost savings, AT&T is creating revenue streams by introducing new software-mediated network services to its portfolio, including an upcoming SD-WAN service in collaboration with VeloCloud. However, AT&T will be disadvantaged by its relatively late entry into the SD-WAN market as competitors including Verizon and CenturyLink have already begun to cement leading positions within the segment.
http://edge.media-server.com/m/p/gz5k2iq4/lan/en (Recording of earnings call)