AT&T (T, Financial) is on the path to growth with its multi-year plan to transform its business that focuses on higher equipment revenue, rather than lower service revenue and average revenue per user (ARPU). These strategic initiatives certainly demonstrate a great perspective for the telecommunication company in the future.
The long-term focus
The U.S. telecom service provider is aggressively deploying various value-added synergies such as mobile share value plan, Next plan, U-Verse and VIP-Network transformation plan that will not only drive its growth in the industry, but also increase the value for shareholders in the long run.
Further, moves like this should help the company to build competitive advantage over its peers such as Verizon (VZ, Financial) and Sprint (S, Financial).
AT&T is now half-done with its VIP network transformation plan, spending about $14 billion in the next three years for the deployment of its LTE network, U-serve expansion, and fiber construction. AT&T has built strong relationships with Amdocs (DOX, Financial) and Juniper Network (JNPR, Financial) as its vendors, that should supplement its vision of achieving cloud-based modern architecture for its user-defined network.
In addition, its 4G LTE network now covers approximately 290 million people, and its project VIP broadband build is expected to take fiber to more than 400 million new business customer location by the end of ongoing quarter. This will positively increase its margin for wireless segment, and help the company to offset the margin for its wireline that is under pressure due to content cost increases, fiber expansion, and high-speed broadband subscriber growth and $48.5 billion bid on Direct TV.
Focus on mobile plans
AT&T has remodeled itself with its mobile share value and Next plan which has certainly enhanced its wireless revenue that are now shifted to equipment and service, generating higher equipment revenue for the telecom service provider as these smartphone will hardly carry any discounts. The company has now 57% of its smartphones that are currently integrated with its LTE capabilities. Moreover, the company has sold out nearly 3.2 million “AT&T Next” smartphones in the last quarter and expects this number to account more than 50% of the total sales.
AT&T now expects at least two-third of its post-paid wireless customers to its NEXT pricing plan which will unbundle device payments from mobile service payments. AT&T has witnessed a strong movement of customers to this plan due to transparency and simplicity of the plan that is driving its growth. The communication company further expects no service revenue growth in the second quarter and lower average revenue per user. Its net subscribers are expected to exceed 800 million for the second quarter which is well above the consensus estimate of 525 million.
Apart from this, AT&T is expected to benefit from its another growth initiatives such as U-Verse in the Wireline segment despite unfavorable climate and fewer migration from DSL, as the telecom giant has tremendously improvised its services on this ground. The giant now offers strategic solutions, where customers can prefer buying broadband and pay TV service together as it shares strong relationship with DIRECTV and the acquisition for the same is just around the corner.
U-Verse now represents nearly 60% of its consumer revenue with approximately 11 million subscribers are now on U-Verse broadband that offer highest speed and highest quality product.
AT&T looks solid with these turnaround strategies that continue to drive its growth and are helping the company to remain on the top in the industry. AT&T also increased its revenue guidelines for the year. It now expects its revenue to be more than 5% as compared to last year, which is 1% higher than projected growth of 4% earlier. AT&T also expects its EPS to grow 8% for the year. Analysts are estimating a revenue growth of 3.6% for the year. Also, AT&T expects its capital expenditure for the year will grow approximately $21 billion, and free cash flow is estimated to be in around $11 billion for the year.
Conclusion
AT&T currently trades at forward P/E of 12.73 which is higher than its trailing P/E 10.21, indicating the company is a little expensive. But investors should look at the tremendous growth aspects that company has in the future with growing demand for smartphones and tablets, and an equipment revenue model that continue to supplement its growth. Also the company has solid operating margin of 20.61% and delivers profit margin of 14.92% which is quite impressive. The analysts have estimated CAGR of 5.6% for the next five years, which will rise as the company is executing various turnaround strategies to take its business to a next level.
