The second largest U.S. carrier AT&T (T, Financial) reported its fourth-quarter results on Tuesday, sending company shares up 1.6% in aftermarket trade which closed at $32.81 at the New York Stock Exchange. Strong revenue growth, healthy wireless net additions and best-ever postpaid gross adds are the highlights of the quarter. Apart from this, the company’s also building long-term strategies to sustain growth momentum while contesting existing wireless players more effectively.
Taking a look at the quarterly performance
The company finished the year on a good note with strong revenue and earnings per share growth. Top line increased by 4.5% to $34 billion during the quarter. The rise is attributable to strong wireless revenue growth of 7.7% to $19.9 billion. This revenue growth trickled down to the bottom line with earnings per share of $0.55 excluding the significant items, an increase of 4% over last year same period. However, due to non-cash charges, the telecom player registered a net loss of $4 billion or $0.77 a share in the fourth quarter compared with last year’s net income of $6.9 billion. Postpaid churn rate increased to 1.22% while average revenue per phone user plunged 10.7% over last year.
AT&T added around 2 million subscribers during the period, surpassing estimates of 1.79 million. The addition was led by postpaid and connected devices. The increasing popularity of tablets resulted in strong postpaid addition of 854,000 that helped to compensate for the decline in feature phone subscriber. Postpaid smartphone base grew by a good million during the period.
Tackling competition
The wireless industry is now all about intense competition from fellow players. And to tackle this, AT&T adopted equipment financing plan, which was the highlight of the period. So far, wireless players were competing with each other by offering more attractive promotional techniques and making subscribers enter into a two-year contract. However, companies have now moved on to equipment-financing arrangements, whereby the carriers’ service revenue would be hit but it would simultaneously eliminate the concept of subsidies on such devices. At the earnings call transcript company CFO John Stephens said:
“Already more than a quarter of our postpaid smartphone base are on equipment installment plans and more than half of our smartphone base has moved off the subsidy model pricing.”
Such financing plans along with aggressive price slash to fight increasing competition from T-Mobile (TMUS, Financial) and Sprint (S, Financial) did bear an impact on the company’s margin. The Dallas-based telecom player’s wireless margin contracted from 42% a year ago to 36.7%. However, the move is part of the company’s long term plan.
Capital expenditure for the entire year came in at $21 billion. The company is heavily investing in building and expanding its network infrastructure. Such investments going in the right direction solidify future growth and earnings prospects of the company and investors at large. And as far as returns to shareholders is concerned, the company rewarded shareholders with more than $11 in 2014 through buybacks and dividends. For the current fiscal year, the wireless carrier expects to see margin expansion and adjusted earnings improvement.
Transforming the business
AT&T has larger plans, too. Since the U.S. wireless market is nearing saturation, AT&T is increasing its operations in Mexico to maintain the growth momentum. The company announced its plan of acquiring NII Holdings Inc (NIHDQ) for an amount of $1.875 billion. This deal is expected to conclude by the middle of this year. Through the purchase, AT&T will be able to establish the first North American mobile service area in Mexico and the U.S. covering more than 400 million of the population. Besides, the DirecTV (DTV) merger is also going to transform the company’s capabilities in a big way. As said by CEO Randall Stephenson:
"We'll be unique in the industry because we'll be able to offer integrated capabilities across a diversified base of services, customers, geographies and technology platforms."
The current year should be quite eventful for the company, leading the transformation AT&T is seeking.
