AT&T Earnings: A Very Mixed Quarter

Source: AT&T.

AT&T reported earnings results for its first quarter of 2015 on Wednesday, beating analysts' estimates on the bottom line but falling short on the top line. For the quarter, AT&T earned $0.63 per share on revenue of $32.6 million. Analysts were expecting $0.62 in EPS on $32.84 million in revenue.

Postpaid net adds totaled 441,000, more than the 400,000 AT&T guided for, but still less than most analysts' initial expectations.It's also a decline from the 625,000 postpaid net adds from the first quarter of 2014. The trend indicates continued pressure from Sprint and T-Mobile on the company's wireless segment.

Here are the key takeaways from AT&T's first-quarter earnings report.

On to the Next oneAT&T has had a lot of success with its Next plan, which has replaced its phone subsidy plans. The result has been a significant drop in service revenue, since Next bills the equipment revenue separately. Equipment revenue increased 36% year over year to $3.4 billion, while service revenue fell 3.7%.

The take rate on Next climbed to 65% of all postpaid gross adds in the quarter up from 40% a year earlier and 58% in the prior quarter. Next provides some relief for AT&T's expenses since it doesn't require a subsidy. However, it can have a negative impact on the company's cash flow since it accounts for a large percentage of a device sale upfront before collecting payments over a two-year period.

For the quarter, AT&T reported $6.7 billion in operating cash flow, a 24% year-over-year decline.

Combining Next payments with service revenue, AT&T still saw a decline in average revenue per user of 1.9% year over year. However, the company notes that its ARPU has improved for three straight quarters. One reason for the decline in ARPU has been competitive pressure from T-Mobile and Sprint, which offer lower price service. AT&T copied T-Mobile's rollover data plan last quarter, which may have affected consumers' plan choices.

Adding more smart devicesAT&T added more than 500,000 new postpaid smartphone subscribers during the quarter (including subscribers upgrading from basic phones). Additionally, the company added 711,000 postpaid tablets and 684,000 connected cars. While phone subscribers remain relatively flat, adding more tablet and connected device subscribers is key to the company's growth going forward.

Despite AT&T's likely loss of phone subscribers, it's seeing a larger percentage of its postpaid customers adopt smartphones. For the quarter, the company reported 84% of its postpaid phone subscribers were using a smartphone. That's up from 78% in the same period a year ago. Additionally, 75% of smartphone customers are using LTE devices, up from 57% a year ago.

Naturally, as customers move up from basic phones to 3G to LTE, their plans get more expensive. AT&T says its ARPU for smartphone customers is twice that of basic phone subscribers. So while AT&T might be losing some postpaid phone customers, it's shifting more of its customers to higher-priced plans.

AT&T is also doing an excellent job adding tablet devices to customers' plans. Each additional device makes AT&T's service stickier, and AT&T posted a postpaid churn rate of just 1.02% -- its best first quarter result ever.

Improved synergy expectationsAT&T reported that it expects cost synergies from its deal to acquire DirecTV to reach at least $2.5 billion on an annual run rate after three years. That's an increase from its initial expectations of $1.6 billion.

DirecTV will work in conjunction with AT&T's wireline segment, which saw a decline in revenue of 3.3% year over year after adjusting for the sale of its Connecticut-based assets. Customers continue to shift from AT&T's legacy DSL service to U-verse, which includes IP-based TV and voice service.

Overall, the company added 69,000 new broadband subscribers (440,000 on U-verse) but gained just 50,000 television subscribers. Last year, AT&T added 200,000 net video subscribers. Still, AT&T is doing better than most other pay-TV operators, which are losing subscribers. The DirecTV purchase will help as it, too, continues to add subscribers. Additionally, the acquisition should help AT&T gain leverage in its content costs, which it attributes as one of the main reasons its wireline segment's margins remained flat year over year.

Feeling the pressureDespite its lowest first quarter churn rate ever, it's clear that AT&T is feeling pressure from Sprint and T-Mobile. It's most noticeable in its postpaid phone subscribers and the decline in ARPU year over year. However, AT&T is making up for it partially with more tablet subscribers, as well as deals to get its service pre-installed in connected cars.

On the wireline front, the company continues to see a slowdown in the number of customers adopting U-verse TV even as they transition to U-verse broadband from the company's legacy DSL service. The purchase of DirecTV should help the company continue growing its subscriber base and result in better-than-expected cost synergies in the long-run.

Overall, AT&T delivered a very mixed quarter.

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