YOU ARE AT:CarriersTop 5 takeaways from AT&T Q1 performance

Top 5 takeaways from AT&T Q1 performance

AT&T mixed results showed own customers love unlimited data, 2G network turn down remains on track for year-end and software improving financials

Story updated to correct AT&T CTO as John Stephens

AT&T this week reported mixed first quarter results, somewhat muddled by its current state of operations. The telecom giant is in the process of absorbing its $48.5 billion acquisition of DirecTV as well as integrating wireless assets purchased in Mexico.

Both of those moves were front and center as AT&T CTO John Stephens spoke with industry analysts about the carrier’s latest financial quarter. Here, we provide a list of the most interesting topics from that discussion.

1. As previously mentioned, AT&T had a somewhat mixed Q1, with the carrier reporting relatively flat overall revenues, but managing to improve profit margins. The carrier also posted robust overall cellular connection growth, though most of that came from lower-valued segments like connected devices and prepaid.

The carrier reported nearly 1.8 million total net connection additions during the first quarter, which was a sizable increase compared with the 1.2 million net connection additions posted last year. The latest growth was on the back of nearly 1.6 million net connected device additions and 500,000 direct prepaid net additions.

Those segments made up for a dip in direct postpaid growth, which dropped from 441,000 net additions last year to just 129,000 net additions this year; and growing defections in its reseller business, which witnessed net losses increase from 266,000 net losses last year to 400,000 net losses this year. The drop in postpaid net additions was somewhat boosted by 344,000 tablet and computing device net additions, though also highlighted the carrier lost postpaid “phone” connections during the quarter.

AT&T management seemed to acknowledge the modest quarterly results, using subdued terms in describing performance.

“It was a good start to the year,” said AT&T Chairman and CEO Randall Stephenson. “We had solid financial results and executed well on our strategy to be the premier integrated communications provider for businesses and consumers. We’re seeing good momentum with our initial integrated wireless, video and broadband offers. And we’ll expand the integrated choices for customers in the fourth quarter when we launch our new video streaming services.”

2. AT&T’s move to offer customers taking a DirecTV package access to unlimited cellular data looks to have solidified a hold on some of its higher value customers, but did not appear to be a disruptive presence in the market.

The carrier noted more than 3 million customers had signed up for the package by the end of Q1, with “thousands more being added every day.” Those customers were touted as some of the highest ARPU subscribers who are even more “valuable to us now that they have combined these services.”

Stephens did note most of the wireless customers taking the offer were already AT&T video customers and in many cases also took the company’s broadband bucket, which further entrenched them with AT&T. “We have been able to use this as an opportunity to add video customers for the wireless customers who want to get this opportunity,” Stephens said.

As for any sort of network impact these customers might have in taking advantage of streaming video content over AT&T’s cellular network, Stephens said the carrier was still seeing 80% of video traffic being offloaded to Wi-Fi.

“So, while the impact is convenience for the customers, so far, it looks like it is going to be a manageable exercise for us,” Stephens said. “We are continuing to evaluate it, and we’re going to continue to learn. But the common place where people use this video still allows us to have Wi-Fi supplement for it, and that is providing us some measure of opportunity for success.”

3. Speaking of its wireless network, AT&T said it remains on track to shut down its GSM/GPRS-based 2G network by the end of this year. As part of the move, Stephens said the carrier “has taken steps” to migrate those customers to its 3G and LTE network, and expects “most to take this transition.”

Most of those connections at this point are machine-to-machine or connected devices, with Stephens claiming the carrier has migrated approximately 6 million connections from its 2G network over the past year. However, AT&T does realize it will lose some of those connections through the transition.

“We expect to continue to see manageable pressure in the last half of the year from subscribers, mostly connected devices, choosing not to make this migration,” Stephens said. “While this might have a slight impact on revenues, we also see the cost benefits from shutting down the network; and the spectrum will be redeployed to help meet the growing data demand of our customer base.”

Most of the spectrum currently supporting 2G services is in the 850 MHz band, with some support in the 1.9 GHz band. Stephens noted that with the ongoing turn down of 2G services, it was seeing dwindling data traffic on that network, which has allowed the carrier to trim spectrum support to just 10 megahertz in some markets.

4. In terms of its overall spectrum position, Stephens said AT&T was in position to begin taking advantage of 40 megahertz of resources in the 2.3 GHz band as well as recently acquired AWS-3 spectrum in the 1.7/2.1 GHz bands. AT&T has solidified its 2.3 GHz spectrum holdings through various acquisitions and agreements, while it spent more than $18 billion early last year on AWS-3 spectrum licenses.

Stephens noted that in combination with AT&T’s recent work in bolstering its fiber footprint, the carrier was in a position to support growing mobile data traffic on its network.

“We are now in that position of taking that spectrum and rolling it out and putting it to use over top of this very high-quality, dense, fiber-rich network that we have already built,” Stephens said. “That allows us to deal with the capacity needs of our business for a long period of time and continue to then position us, as appropriate, to do software upgrades as we move onto the next group of technologies.”

AT&T is also expected to be an aggressive player in the Federal Communications Commission’s ongoing 600 MHz incentive auction process, having previously said it would bid at least $9 billion on licenses as part of garnering approval for its DirecTV acquisition. Licenses from the proceedings are expected to be available for use by mobile carriers about three years following the auction’s conclusion.

5. Finally, software remains an area of focus for AT&T, which is on record as stating it plans to virtualize and control more than 75% of its network using software architecture by 2020. This is expected to be accomplished through the use of cloud, software-defined networking and network functions virtualization technologies.

AT&T had previously stated it reached 5.7% control at the end of 2015, which was ahead of its 5% target. Stephens said its software moves have allowed the carrier to trim more than $300 million in spending year-over-year, due to “excess costs efficiencies, automation efforts in service delivery, IT rationalization and software savings.”

“Our drive to have the industry-best cost structure also is continuing on track,” Stephens said this week. “Efficiency initiatives and our software transformation are driving productivity gains and expense savings. … Our virtualization and software-defined networks are already delivering material [capital expense] savings. We will be adding 2.5-times more capacity at 75% of the capital costs compared to just a few years ago.”

Stephens also noted AT&T was seeing lower call volumes and “improvements in cycle times for our efforts to improve the sales experience.”

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