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Is AT&T Able To Overcome Competitive Pressures?

August 28, 2014 | About:
Suravi Thacker

Suravi Thacker

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AT&T (T) is the second-largest wireless carrier in the U.S. and faces stiff competition from the larger rival Verizon Communications (VZ). However, it is making a large number of efforts to outpace its competitor. Its promotional strategies and adoption of new plans are helping in its growth efforts. Still, the company is unable to outperform Verizon.

AT&T reported its second-quarter results, which were neither as per Street’s expectations nor on par with its rival. This led to a fall in its share price after the announcement. Let us explore it in detail.

The mixed bag of numbers

Revenue inched up 1.6% to $32.6 billion over last year. But the analysts were expecting the top line to be at $33.2 billion. The increase in revenue was mainly because of 1 million monthly wireless subscribers added during the period. Customers were attracted to the carrier because of its new Next plan, which offers a smartphone financing plan in monthly installments. This enables customers to forego one time large payment for devices. Moreover, the Next plan offers instant upgrades to the devices for free along with discounted data plan offers. This helped the company overcome competition from smaller carriers such as T-Mobile (TMUS), the first company to introduce mobile financing.

One of the key drivers of the increase in revenue was a jump of 3.7% in Wireless revenue, clocking in at $17.9 billion. AT&T added 634,000 customers in this category during the quarter. The number of post-paid smartphone users added was 700,000. Out of the total post-paid phone sales, 92% were that of smartphones as people adopted more of iPhones and Google’s android-based phones.

However, the major drawback of the installment plan, or the no-subsidy plan, is that it lowers the revenue and profits of the company. Also, higher promotional activities affected the bottom line. Thus, earnings plunged to $0.62 per share from $0.67 per share a year ago.

In fact, AT&T’s strategy of providing discounted plans along with Next resulted in a lower ARPU. Its post-paid ARPU dropped 8% over last year. But if we combine it with Next monthly billings, the decline stood at 4.5%.

Nonetheless, the company’s 10GB data plan is a hit and its penetration has increased to 49% from 27% two quarters ago. Hence, this was one of the bright spots in the quarter.

On the other side

Although AT&T’s performance was decent in the last quarter, rival Verizon did a better job. Its revenue surged 6% over last year and was higher than the Street’s estimates of $31.1 billion. Even the bottom line was higher than the expectations, clocking in at $0.91 per share. The greatest strength for Verizon is its FiOS segment, where AT&T is a laggard. The FiOS segment registered double digit growth, resulting in a 5.3% increase in the consumer business. Verizon’s quantum service provides high speed internet service, which has attracted most of customer attention. On the other hand, AT&T’s Wireline segment revenues dropped 0.9%to $14.6 billion.

Nonetheless, AT&T’s U-verse, a fiber optic based triple play communications service, is doing well. Revenue from U-verse rose 25% and should be able to help wireline revenue grow.

Further, there are some acquisitions, which should help the retailer grow. For instance, the company’s recent acquisition of LEAP Wireless should be one of the key drivers, adding to the top line. Also, it is in talks to acquire DirecTV, a satellite provider, which will not only help AT&T expand its footprint, but will also help in lowering its costs and register growth in this segment.

Winding up

Although AT&T is still unable to outperform its largest competitor, it has been doing very well. Growing 4G LTE adoption, new acquisitions and strategies such as the launch of Next plan, aggressive promotions and U-verse, should be some of the key drivers going forward. Moreover, the company reaffirmed its outlook for the year. Thus, AT&T looks like an interesting pick for the future.


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