AT&T (NYSE:T) reported its fourth-quarter earnings last Tuesday, meeting expectations with $0.55 per share in earnings. The company brought in $34.4 billion in revenue, just beating analysts' projections by $100 million. Overall, 1.9 million net subscribers joined AT&T's wireless service during the quarter, including 800,000 connected cars. U-verse broadband and television helped carry the wireline segment, gaining 405,000 Internet subscribers and 73,000 video subscribers.
After the earnings release, CEO Randall Stephenson and CFO John Stephens spoke with analysts to provide more color on the earnings results. Here are key takeaways from the fourth-quarter earnings call.
Still increasing smartphone penetration
We also grew high quality postpaid smartphone base by another million in the quarter. This includes upgrades and migrations which we don't include in our net add number.
-- CFO John Stephens.
Despite only adding 864,000 net postpaid phone customers, AT&T saw a record number of smartphone sales. For the quarter, the company sold 10 million smartphones, and 94% of all postpaid phone sales were smartphones.
Growing smartphone customers is no easy accomplishment, as 83% of the company's postpaid subscribers already have a smartphone. However, AT&T is also seeing success selling more data to its smartphone and tablet customers. Accounts on plans of 10GBs of data or more nearly doubled year over year, with half of accounts on such plans as of the end of the year. This helped drive an 18% increase in data billings for the company.
Not worried about churn
The fourth quarter traditionally sees increased levels of churn for all carriers. And when you add in the intense competitive activity in the quarter, it's no surprise to see churn at these levels.
--CFO John Stephens
Churn increased to 1.22% in the fourth quarter, which is up from the 1.11% churn rate the company posted in the fourth quarter of 2013. However, Stephens says that we should be comparing this number to two years ago, which was the last time Apple released a complete iPhone refresh. In the fourth quarter of 2012, AT&T had a churn rate of 1.19%. The slightly higher churn rate may be more attributable to all four carriers offering the iPhone this time around, versus just three last time.
Still, the company is going after more high-quality customers with longer lifespans. While management didn't come out and say it's going to let low-quality customers leave, as Verizon has, its focus is on customers like businesses -- which have the lowest churn rates -- and smartphone customers -- which churn much less than feature-phone customers.
AT&T Next adoption is growing rapidly
Our average monthly Next billings were up about $28 per month even with the introduction of the Next 24-month plan. As the Next pace grows so does the impact of billings. Nearly 27% of our smartphone base is now on AT&T Next.
-- CFO John Stephens
For the quarter, the overall take rate for Next was 58%. Next separates out equipment billings from service billings, which led to a 72% increase in equipment billings. Next makes it easier to transition users to smartphones and tablets by offering $0 down and 0% interest financing. The drawback is that cash flow suffers.
Management has a solution for the cash flow problem, though. Since Next receivables are high quality, banks have expressed interest in buying those receivables. AT&T is able to securitize those Next receivables and sell them to the bank to raise cash if necessary. (Think of it like mortgage-backed securities, but without the subprime loans.)
Next customers have some of the lowest churn and highest average revenue per user among AT&T's wireless base. In the second quarter, the company noted Next customers have an average lifespan that is a year and a half longer than customers on the subsidy model.
New acquisitions will change the shape of the company
Post DIRECTV our revenues will come from four areas. Our largest will be business solutions. ... The next area will be our consumer TV and broadband business. Then third will be our consumer mobility business. Then, obviously, our Latin American businesses where satellite TV and then the Mexican mobility businesses will be our fastest growing area.
-- CEO Randall Stephenson
DirecTV (NYSE:DTV.DL) will transform AT&T's business, providing a significant boost to its residential wireline business. Stephenson noted that the company expects even higher multiyear synergies between its current business and DirecTV after reviewing more details of DirecTV's current business and contracts with content owners. So AT&T sees a higher potential to save money with content contract renegotiations.
Additionally, DirecTV's brand in Latin America, along with its spectrum holdings, provide an excellent opportunity for AT&T to expand in Latin America starting with its acquisitions of Nextel Mexico and Iusacell. That provides a significant revenue synergy for AT&T. As a result, management sees no negative impact from its upcoming acquisitions.
AT&T is looking to join in on over-the-top video
We're looking at multiple channels and channel line-ups that we'd be able to accommodate into our wireless customers' both tablet as well as handsets.
-- CEO Randall Stephenson
Another synergistic opportunity for AT&T is to use DirecTV's content rights to start delivering more video over the Internet. Whether it packages it with a pay-TV bundle or offers it as a stand-alone service, AT&T wants customers to be able to "walk out of our stores with content available to them on devices that they have purchased in our store."
Verizon (NYSE:VZ) has announced plans to offer an Internet-delivered video service this summer for its customers, aiming to attract cord-cutters and cord-nevers. AT&T could follow suit in an effort to further differentiate its service from the low-price providers. Adding 20 million DirecTV subscribers will give AT&T significant leverage over content owners to gain the digital streaming rights to valuable content.
A path toward the future
AT&T has a clear vision of what the company will look like after its round of acquisitions go through in 2015. It's using Next to drive smartphone adoption and combat churn rates, and if it causes a cash flow problem it has a plan in place to monetize those receivables. There are lots of opportunities ahead for AT&T despite the competitive industries (pay-TV and wireless) it's participating in.