AT&T (T 3.65%) will report its first-quarter earnings after the bell on Wednesday. After posting better-than-expected earnings and revenue for the fourth quarter, as well as a surprising 329,000 postpaid phone subscribers, the company will look to continue its momentum into 2018. Analysts currently expect AT&T to report $0.88 in earnings per share on revenue of $39.29 billion.
Investors should certainly pay attention to AT&T's top and bottom lines, but AT&T's first-quarter earnings report and subsequent conference call will provide an opportunity to see how the various business segments are performing, and what the future may hold for the company. Here are a few things to keep an eye on when AT&T reports.
AT&T's consolidated operating margin fell precipitously in the fourth quarter last year. In fact, the company barely posted an operating profit -- largely due to a one-time write-off of its copper wire assets worth $2.9 billion. Even accounting for that loss and a smaller write-off in the fourth quarter last year, AT&T saw a dramatic decline in operating margin.
Those results were echoed throughout the business. EBITDA margin on AT&T's mobility segment fell 3 percentage points in the fourth quarter. The entertainment group saw EBITDA margin decline 170 basis points.
The declining margin at AT&T is a signal that the competition is negatively impacting its business. T-Mobile US, in particular, has put pricing pressure on the rest of the industry over the last five years. AT&T has seen its service revenue decline continuously over the last four years as it's faced pricing pressure and lost subscribers.
The good news: Competition in the wireless industry over the last six months hasn't been as intense as it was a year ago. Look for improved EBITDA margin in AT&T's wireless segment, to ensure that it's getting its share of the profits.
Net additions (postpaid phone and video)
Last quarter AT&T surprised investors with 329,000 net postpaid phone subscriber additions. It's still not clear how AT&T managed to add so many when analysts were expecting it to lose customers, but it appears many additions came from prepaid plans. So AT&T may experience higher credit risk and increased churn on its postpaid subscriber base, making it more difficult to continue adding new customers.
Watch for AT&T's postpaid phone addition number and its churn. For reference, fourth-quarter postpaid phone churn came in at 0.89%.
Also, pay attention to video-subscriber additions. AT&T has continually lost traditional linear-TV subscribers over the past few years, but it's starting to offset those declines with DIRECTV Now subscribers.
Those net additions may subside in the first quarter, since AT&T decreased its bundling discount for subscribers to its unlimited wireless data plan by $10 per month. The segment also faces pressure from seasonality, as the fourth quarter is seasonally strongest for video net additions.
Keep an eye on total video net additions, as well as on how the combined losses between DIRECTV and U-verse compare to last year.
Everything else: Time Warner, 5G, next-generation DIRECTV Now platform
During the earnings call, listen for further commentary from management about the progress of the Time Warner case with the Department of Justice. AT&T said closing the Time Warner deal is its top priority for 2018, and it plans to develop an advertising platform with the media assets. Closing the deal would also enable it to expand consolidated margins across its existing business segment, by bringing some of the costs of its bundling strategy in-house (like free HBO with any unlimited wireless data plan).
AT&T also plans to roll out its 5G network in 12 markets by the end of the year, so check for any update on its progress there. Management sees 5G as an eventual replacement for fixed broadband internet. Using 5G would reduce the need for AT&T to build fiber to homes, and allow the company to rapidly expand its broadband footprint to match DIRECTV's nationwide availability -- yet another bundling opportunity.
Finally, AT&T promised to roll out a next-generation DIRECTV Now platform this spring, which will include additional streams and a cloud DVR as well as user-interface enhancements. Look for additional details on when that's going to happen, and whether AT&T will charge extra for those benefits. Charging more opens the opportunity for the company to expand margins on its video subscribers even as it shifts customers to DIRECTV Now from its legacy video services.
AT&T is a rapidly expanding business with a lot of different facets. Paying attention to a few key numbers and looking for additional commentary from management can help you understand the health of the company beyond the headline earnings and revenue numbers.