Shares of AT&T (T 1.65%) have rallied 13% since the beginning of the year, and its solid first quarter earnings report on April 26 kept the bullish sentiment alive. Revenue, fueled by its acquisition of DirecTV, rose 24% annually to $40.5 billion and met analyst expectations.
Adjusted earnings rose 11% to $0.72 per share, beating consensus estimates by three cents. Free cash flow improved 17% to $3.2 billion, and the company remains on track to generate over $1.5 billion in synergies from the DirecTV deal by the end of the year.
Those numbers looked solid, but declines in video and wireless subscribers troubled some investors. Let's examine those two businesses to see if those concerns are justified.
The video business: DirecTV up, U-verse down
During the quarter, newly acquired DirecTV added 328,000 video customers in the U.S., but U-verse lost 382,000 -- resulting in an annual net loss of 54,000 video customers. However, that loss was anticipated. AT&T has been pivoting away from its wireline-bound U-verse Internet and TV packages toward its unlimited wireless plus DirecTV bundle, which now has over 3 million subscribers.
AT&T expects new wireless-plus video bundles and integrated products, like its exclusive NFL Sunday Ticket package, to help it finish the year with positive growth in video subscribers. The company finished the quarter with 25.3 million video subscribers.
Investors should remember that DirecTV has 12.4 million subscribers and 7.3 million Sky Mexico subscribers in Latin America, but that market remains tough. The business lost 73,000 customers during the quarter, mainly due to losses in Brazil, while revenues fell annually due to foreign exchange rates. AT&T has stated that it might sell the unit if conditions worsen, which could help it repay its debt. However, the unit's growth might return if macro and currency headwinds fade.
The wireless business: Postpaid down, total subscribers up
AT&T lost 363,000 branded postpaid wireless subscribers during the quarter, which compared poorly to Verizon's loss of 8,000 and T-Mobile's whopping gain of 877,000 subscribers.
However, most of those postpaid losses came from feature phone users, who generally pay less than half the fees of smartphone users. Looking ahead, AT&T hopes that postpaid wireless subscribers will climb as more users switch to smartphones and subscribe to its DirecTV and unlimited wireless data bundles.
Investors should note that while AT&T's postpaid subscribers fell, its total wireless subscribers -- which include postpaid, prepaid, and business users -- grew 7.2% annually to 130 million, and total wireless revenue rose 2.3% annually to $9.63 billion. Much of that growth was fueled by prepaid adds at Cricket, new subscribers in Mexico, and the addition of "connected devices" like connected cars. By comparison, Verizon's wireless revenue only rose 0.6% annually last quarter as its wireless subscriber base grew 3.7%.
Combining wireless and video
Earlier this year, AT&T announced that it will launch three new streaming options for DirecTV -- one which lets customers access DirecTV from any Internet-enabled device, one which delivers content through a mobile app, and another which offers free ad-supported content. Since AT&T is letting customers sign up for unlimited wireless plans if they also subscribe to DirecTV, it lets customers stream DirecTV anywhere without worrying about data caps.
Verizon's Go90 video app and T-Mobile's Binge On service also offer unlimited video streaming which doesn't count toward their data caps. Plans like these could convince more subscribers to use telcos' first-party video streaming apps instead of third-party ones like Netflix, making wireless/video bundles more appealing than wireline/video ones.
The key takeaway
The headlines claiming that AT&T lost video and wireless subscribers exaggerated the negative numbers. A loss of 54,000 video subscribers between U-verse and DirecTV was expected, and represents about 0.2% of AT&T's total subscriber base. AT&T lost branded postpaid subscribers, but its overall wireless base and revenue grew, indicating that its expansions into Mexico and the Internet of Things are paying off.
Therefore, I don't plan on selling AT&T anytime soon. Its free cash flow growth, hefty dividend yield, and below average valuations still indicate that it's a wonderful stock to own for the long term.