Competitive pressures impact revenue, churn
The domestic market’s dynamic nature was apparent in the latest quarterly results from AT&T, which showed its wireless business attracting more connections despite increased churn.
AT&T Mobility reported a more than doubling of net connections added during the fourth quarter, surging from 809,000 in 2013 to 1.9 million last year. That growth was mainly on the back of connected devices that saw an increase from 398,000 connections in 2013 to nearly 1.3 million net connections last year, and to a lesser extent on postpaid services that jumped 50% to 854,000 net connections last year.
AT&T Mobility also managed to trim losses in its resale business, which dipped from a loss of 123,000 connections during Q4 2013 to a loss of just 65,000 connections in 2014. However, AT&T Mobility’s prepaid operations continue to struggle, with that segment’s net losses growing from a loss of 32,000 customers in 2013 to a loss of 180,000 connections last year. AT&T Mobility has been attempting to integrate its prepaid operations under the Cricket brand it acquired from Leap Wireless last year, but has so far not been able to show any growth.
For the full year, AT&T Mobility managed to add 5.6 million net connections through regular operations and another 4.6 million net connections through acquisitions, ending last year with 120.5 million total connections on its network.
AT&T Mobility’s overall connection growth came despite increased customer churn, which for Q4 moved from 1.43% in 2013 to 1.59% last year, while full-year churn was up from 1.37% in 2013 to 1.45% last year. Mobile operators had braced the market for increased churn results, noting aggressive pricing moves that included offers to buy customers out of their contracts has caused a surge in customer defections.
More concerning for AT&T Mobility is that its Q4 postpaid growth was driven exclusively by tablet devices, with traditional phones and smartphones posting a net loss of 115,000 connections during the quarter. Tablets are typically added to a customer’s shared data service at a much lower per-line rate than smartphones, which analysts noted will begin to impact average revenue per user.
“Although we believe the two largest carriers are performing admirably in the face of intense competition, we believe it will become increasingly difficult to retain ARPUs (with or without equipment revenue included) as more and more is added to the offering for free by smaller competitors seeking to gain share,” explained Canaccord Genuity analyst Gregory Miller, in a research note. “As was the case in the most recent quarter, we expect it will continue to weigh on the wireless operating trends and AT&T while being partially offset by the dramatic growth of other connected devices – as was the case in the quarter.”
Rival Verizon Wireless showed similar trends with its Q4 results, which included strong tablet growth at the expense of traditional phones and ARPU.
The fiscal impact was seen in the 3.7% year-over-year drop in service revenue, which came in at just under $15.1 billion for Q4. Increased interest in the carrier’s Next device financing program – which provides customers with lower monthly rates in return for giving up a device subsidy – resulted in a 72.3% increase in equipment revenue and helped push segment revenue up 7.7% to nearly $19.9 billion. For AT&T Mobility’s bottom line, the Next program is reliant on customers upgrading to new devices close to the end of their paying off those devices so the carrier can continue to offset the lower service revenue with monthly device payments.
While overall segment revenue increased, expenses outpaced that growth, jumping 14.8% year-over-year to $16.6 billion. That increase resulted in an 18.7% drop in segment income to $3.2 billion. Quarterly adjusted earnings before interest, taxes, depreciation and amortization also dipped from $5.9 billion in 2013 to $5.5 billion last year, even though full-year adjusted EBITDA climbed from 41.3% to 42%.
Companywide, AT&T reported a 65.9% drop in net income to just $6.2 billion for 2014, with most of that coming from a previously announced one-time $10 billion charge related to its pension obligations and abandoning some copper assets.
The market seemed prepared for the impact as AT&T’s stock (T) was trading up 1.5% early Wednesday.
AT&T also moved on its previous announcement to trim capital expenditures, with companywide capex dropping 18.8% year-over-year to less than $4.4 billion during Q4. That dip was specific to the end of the year, as full-year capex was up 1.2% to $21.2 billion. AT&T late last year said it expects 2015 capex to come in at around $18 billion, although analysts noted that the operator has several moving parts in terms of 2015 spending tied to its moves in Mexico, plans to acquire DirecTV and funding tied to the ongoing Federal Communications Commission’s spectrum auction.
AT&T ended 2014 with a 243,620 total workforce, an increase of 260 employees compared to the end of 2013.
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