In its first post-earnings call with investors during which it has owned DirecTV for the entire period, AT&T (NYSE:T) highlighted some of the changes brought about by the acquisition.
The company reported a solid third quarter, driven by a 19% increase in consolidated revenues to $39.1 billion, mostly because of its deal to buy the satellite-television company. There was some some weakness in subscriber numbers for its own U-Verse service, but that was made up by wireless and DirecTV.
Because of costs related to the merger, the continued decommissioning of the network that once belonged to AT&T acquisition Leap, and other one-time costs, the company reported lower earnings per share ($0.50) versus the third quarter of 2014 ($0.60). Excluding those charges, EPS was $0.74 versus $0.65 a year ago, up nearly 14% year over year.
It was a decent quarter at a time when the cable industry faces increased pricing pressure and the company's wireless customers are being aggressively courted by lower-priced rivals led by T-Mobile (NASDAQ:TMUS).
It's a new company
CFO John Stephens kicked off the company's post-reporting call with analysts by delivering what he described as a "quick reset of what we have put in place at AT&T." He explained that the deal fundamentally changes the company, making it something unique in the U.S. market: "We are the first scaled communications and video provider to offer customers fully integrated nationwide products. Our focus is on profitable growth, and we believe that we have in place the products and the platforms that will enable our success."
In addition to attempting to reset how people think of the company, AT&T has also changed how it reports results. Stephens said during the call, while explaining some of the company's expenditures:
You're probably familiar with our new operating segments: Business Solutions, Entertainment and Internet Services, Consumer Mobility, and International. These segments are built on a series of investments that have set the stage for a new kind of company. Our network investments over the last three years is unprecedented. At a time when customers value and need connectivity more than ever, our integrated high-speed wireless and wireline IP networks are in place, ready to meet the growing data demand.
The CEO specifically laid out how the company has invested in what he called "a deep spectrum position." He explained that AT&T's purchase in the most recent spectrum auction paired with its existing holdings should be enough to meet growing customer demand.
Spectrum has become increasingly important as customers use more wireless data and stream heavier things to their phones and tablets. AT&T has the second highest-rated mobile network, according to the most recent RootMetrics report, ahead of Sprint and, perhaps most importantly, T-Mobile.
Maintaining its network ranking is very important for AT&T, as it gives the company justification for its higher wireless prices compared with fast-growing T-Mobile.
In addition to growing its customer base and making needed capital expenditures, the CEO made it clear that "behind all this is our focus on profitability." He credited reducing costs and better management of its customer base with improving margins across the company's various segments.
Project Agile savings are coming through. Automation and Digital First have reduced customer call volumes by an average of 2 million calls a month. Simplified offers help as well. So do the simple blocking and tackling efforts of expense controls, getting it right the first time, and working capital efficiencies.
We've exited some low-margin businesses, such as Global Hubbing. We have seen increasing capital efficiencies not just with lower trailing operating expense, but also driving lower unit costs as we continue to invest in our world-class networks. In effect, we are doing more for less. And our expected cost synergies from DirecTV give us even more runway to reduce costs.
AT&T, with the addition of DirecTV, is now uniquely positioned to offer wireless, pay television, Internet service, and even landlines very efficiently. For example, the company can combine back-office functions, customer support, and more for all of its brands.
It will take time to do that, and while it's happening, AT&T will face pricing pressure in cable from cord cutters, in wireless mainly from T-Mobile, and in Internet from the wired cable companies. Still, AT&T, which already commands high prices, may have room to discount while maintaining margins by offering better prices on bigger bundles.