If there was one thing AT&T's (T 0.18%) fourth-quarter earnings report highlighted, it is just how few people are still actually using traditional telephones. The wireless carrier took a $24 billion charge in goodwill related to its legacy landline business in the quarter, while also taking a $1.4 billion asset abandonment charge tied to wireline conduits no longer needed to support its copper and fiber networks.
Since narrowing its business focus last year by spinning off its entertainment unit into Warner Bros Discovery, AT&T has committed to growing its wireless and broadband internet services. It's going to be spending about $24 billion in capital expenditures this year, about the same as in 2022, and with its new Gigapower joint venture with BlackRock launched in December, fiber could be another big part of the picture in the future.
Yet mobile remains AT&T's biggest revenue generator, accounting for 69% of quarterly sales, or $21.5 billion. It may not be the fastest-growing segment, but it is the straw that stirs the drink and is why investors should be paying attention.
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Dialing in growth
Although AT&T was hemmed in by the 21-state footprint of its wireline business, centered mostly in southern and central states, the wireless opportunity lets the telecom stock offer service anywhere, any time. The carrier maintains its wireless service is the largest digital and data network in the U.S., and it has been able to grow the business to over 217 million mobility subscribers at the end of 2022, a 7.7% increase from the prior year.
It added 656,000 new postpaid phone subscribers in the fourth quarter, far more than Verizon (VZ -0.10%) at 217,000, but fewer than T-Mobile (TMUS -0.19%), which crushed it with 927,000 net additions.
Yet even as AT&T has used discounts and trade-in offers to entice people to sign up, T-Mobile is trying to launch a price war by cutting prices to lure new customers in. It announced its Price Lock plan last year that guarantees to never raise customer bills, though that was also a necessary component for it to gain regulatory approval of its Sprint merger.
AT&T and Verizon, on the other hand, have raised prices to offset the impact of inflation, and AT&T CFO Pascal Desroches noted average mobile revenue per user came in at $55.43, an increase of $1.37, or 2.5%, from last year. At the same time, AT&T's customer churn dropped to 0.84%, despite being less promotional than the competition.
That puts AT&T (and Verizon) at a financial and competitive advantage to T-Mobile since it proved it could raise prices and not lose customers. Its rival had to give up margin to grow, and now it can't gain it back.
A bundled benefit
Some analysts remain concerned the U.S. mobile market is simply too mature to see significant additional growth, that it's more a game of stealing customers between the major carriers. And with the prospects of a recession in the year ahead, cost-cutting is the watchword while talk of growth takes a backseat.
However, AT&T CEO John Stankey told analysts that while he has a conservative view of the economy, he believes it's "relatively stable right now." By providing consumers with greater and better service, such as the addition of new fiber offerings, AT&T will create an unbeatable value proposition. That's the purpose of Gigapower, the new joint venture it started, which will be a wholesale provider of fiber services for internet service providers.
Stankey isn't expecting the venture to show much progress this year, but he expects 1.5 million locations will be added on top of the 30 million locations AT&T is already targeting for its existing fiber business by 2025.
Still ringing up opportunity
AT&T is no longer trying to be all things to all people, but rather is focusing on its area of expertise in the telecom market. Wireless mobile is the foundation upon which the future is built, but by continuing to invest in next-generation capabilities like 5G networks, while adding new, potential lucrative ones such as fiber, the telecom stock is positioned for significant future growth.
Investors no longer complain about the dividend cut AT&T made when spinning off Warner Media, and the payout still offers a generous yield, about 5.7% annually. That's a nice income stream to bank or reinvest while patiently watching AT&T roll out its strategy for future market share wins.
