AT&T (NYSE:T) reported its fourth-quarter earnings on Tuesday. The company beat analysts' estimates slightly on the top line with revenue of $34.4 billion, versus projections of $34.3 billion. Its $0.55 in earnings per share was in line with expectations.
Aside from the headline numbers, here are the key takeaways from AT&T's fourth-quarter earnings report.
The wireless segment is carrying the company
AT&T added 1.9 million total subscribers to its wireless communications segment. Of that number, 854,000 were postpaid subscribers, which is an improvement over the same period a year ago as well as last quarter. In all, 1.3 million new subscribers were categorized as connected devices, with 800,000 connected cars included in that number. The company posted a net loss of 180,000 prepaid customers.
The move from prepaid to postpaid coupled with additional connected devices led to a 7.7% increase in revenue for the segment. Service revenue, however, was down 3.7% as more customers signed up for AT&T's Next program, which allows customers to pay for smartphones in installments.
Fifty-eight percent of new postpaid smartphone customers signed up for Next, which gets rid of the subsidy cost for AT&T and increases equipment revenue while decreasing service revenue. Equipment revenue notably increased 72.3%.
But competition is having an impact
The aggressive competition from T-Mobile (NASDAQ:TMUS) and others showed its impact this quarter. AT&T's churn rate climbed to 1.22% last quarter from 1.11% in the same period last year. Verizon also saw an increase in its churn rate.
Unlike Verizon, however, AT&T is succumbing to T-Mobile's competitive pressures. It's offering bigger data buckets and sometimes copying promotions, such as the most recent Data Stash/Data Rollover plans. As a result, AT&T's wireless segment's EBITDA margin fell to 26.4% from 31.8% last year.
While AT&T expects the competition to lessen in intensity in 2015, T-Mobile's management reiterated its intentions earlier this month to keep the pressure on AT&T and Verizon.
U-verse is saving wireline
U-verse revenue grew 21.9% year over year during the fourth quarter. Comparatively, the wireline segment as a whole saw revenue decline 1%. U-verse now accounts for more than two-thirds of the company's residential wireline business, up from 57% at the end of last year.
U-verse added 73,000 video subscribers to reach nearly 6 million total subscribers (after the sale of the Connecticut wireline business). The company added 405,000 high-speed Internet subscribers for the quarter, growing to more than 12.2 million total subscribers.
The acquisition of DirecTV will add about 20 million pay-TV subscribers to AT&T's 6 million U-verse video subscribers. While AT&T still doesn't make a profit directly from video subscribers because of content costs, DirecTV's subscriber base will provide it with more leverage to turn the business profitable.
AT&T neglected to provide specific guidance for 2015 but said it currently plans to spend $18 billion on capital expenditures. That number excludes adjustments for the acquisition of DirecTV and Mexican wireless companies Iusacell and Nextel Mexico.
With free cash flow of $9.9 billion for the full year of 2014, AT&T has plenty of cash to spend on those businesses once the acquisitions close. Additionally, the company has enough cash flow to support its dividend while it spends on increasing its spectrum holdings and building out its network.
Despite the competitive environment AT&T is now operating in, it produced results above expectations. The 1.9 million net adds were certainly helped by the 800,000 connected cars, but the increase in connected tablets and the shift to more postpaid smartphones over prepaid customers are definite positives.
Margins suffered for multiple reasons, not the least of which is competitive pressures, but monthly billings for Next increased sequentially, which is a good sign for margins going forward. The company guided for "expanding margins" in 2015.
U-verse is still growing and strong and will only get stronger with the acquisition of DirecTV. But investors should look for more color on its plans for capital expenditures after it completes its upcoming acquisitions, and how that will affect its potential for a dividend payout increase.