Both AT&T (T 1.02%) and Verizon (VZ 1.17%) are dealing with consumers who have become less willing to upgrade their smartphones and more willing to switch wireless providers. For Verizon, this has led to elevated churn and chronic subscriber losses.
AT&T has also seen churn tick up a bit, but not nearly as much as Verizon. And while AT&T's subscriber growth has cooled, the company is still winning over customers. Verizon lost 136,000 net consumer wireless retail postpaid phone subscribers during the second quarter, while AT&T gained 326,000.
AT&T also fared far better in the prepaid phone arena. While Verizon shed 304,000 net prepaid subscribers in the second quarter, AT&T tacked on 123,000. AT&T offers prepaid plans directly and through its subsidiary Cricket, and the company noted that Cricket managed "substantially lower" churn than the 2.5% rate for the prepaid business as a whole.
Verizon has used price increases to drive wireless service revenue higher despite subscriber losses, while AT&T has seemingly struck a better balance. On top of the subscriber gains during the second quarter, AT&T was able to boost postpaid phone average revenue per user by 1.5%.
Making progress on multiple fronts
While AT&T's total revenue rose by just 0.9% in the second quarter, that sluggish growth was the result of declines in the business wireline segment. Both the wireless business and the consumer wireline business grew revenue.
Wireless revenue was up 2%, with service revenue up 4.9% and equipment revenue down 7.2%. Consumers are upgrading phones less often in a tough economy, and that's impacting how many smartphones AT&T sells.
The consumer wireline business is a mix of declining legacy services and fiber internet. Total revenue in this segment grew 2.4%, driven by 28% growth in fiber revenue offset by a 13.7% decline in non-fiber broadband revenue.
AT&T added 251,000 fiber customers during the quarter, bringing the total to 7.7 million. Fiber now generates quarterly revenue of $1.5 billion thanks to new subscribers and steady growth in average revenue per user. ARPU jumped 8.2% in the second quarter to $66.70, and the intake ARPU for Fiber is roughly $70.
AT&T is sticking with its guidance calling for at least $16 billion of free cash flow this year. The company expects to use this free cash flow to reduce its debt by about $4 billion in the second half of the year. The plan for the next few years is to use most of the cash generated after paying dividends to reduce debt further. AT&T is targeting a net-debt-to-adjusted-EBITDA ratio of 3.0 by the end of this year, and 2.5 in the first half of 2025.
Helping this debt reduction crusade is a supersized cost-cutting program. AT&T has already found $6 billion in cost savings, and the company is now increasing that target to $8 billion. That additional $2 billion in savings will be realized over the next three years.
A better buy than Verizon
Both AT&T and Verizon stock look cheap. Both telecom giants trade at forward price-to-earnings ratios around 7, and both stocks sport dividend yields around 7.5%.
Both companies are exposed to potential liability from the recent discovery that many miles of lead-coated cables are potentially polluting soil and water across the U.S, although it's impossible to say how big of a deal this will be in the long run. Looking at financial performance, AT&T is clearly winning right now. As Verizon struggles to keep consumers on board, AT&T continues to grow its customer base.
Just as consumers are choosing AT&T over Verizon, investors would be wise to do the same.
