AT&T Q3: Wireless Booming, Telco TV Catching On

Post-Call Analysis: [Release, Slides (PDF)]

AT&T’s wireless business is thriving, and the iPhone isn’t its only driver. During Q3, the company added 2 million net wireless subscribers, finishing the quarter with almost 66 million subs. Apple sold 1.1 million iPhones last quarter, and both companies confirm that 15% or more were never activated on AT&T’s network. Therefore, we estimate between 800k to 900k iPhones were added to AT&T’s network last quarter. But AT&T says only about 40% of iPhone activations are coming from new customers, so about 60% of iPhone subs wouldn’t be included in “net addition” statistics. So we estimate that the iPhone only accounted for about 350,000 of AT&T’s 2 million new wireless customers last quarter.

3G wireless networks are delivering on their revenue promises. AT&T says the 7 million wireless subscribers on its fastest network spend about $20 per month on data services (text messaging, Web access, email, games, ringtones, etc) — that’s about twice what its customers on slower networks spend. Data services represent about 30% of 3G customers’ phone bills. This is great news for AT&T, which — like its peers — has to find new growth areas as people spend less money on plain-vanilla mobile phone calls. Note that these stats do not include big-data-spending iPhone subscribers or many BlackBerry subscribers, whose phones only connect to AT&T’s slower “EDGE” data network. So as more smartphones get 3G chips, expect data revenue to increase even more. The most important question: Is 3G only successful so far because of early adopters? Or will mainstream wireless users increase their data spend once they get faster Internet access?

Telco TV is alive. AT&T finished the quarter with 126,000 subscribers to its new U-Verse fibre-optic digital TV platform, just beating our estimates. U-Verse grew by about 75,000 net subscribers during the quarter, or an average of about 6000 per week. But the company says it is now approaching 10,000 installs a week. At that run rate, the company could add 130,000 U-Verse subscribers by the end of the year and double its subscriber base to almost 260,000. That equation doesn’t factor in churn, but given that almost two-thirds of U-Verse customers signed on in the last quarter, it can’t be significant — yet. The bad news: cable companies are stealing phone subscribers faster than phone companies are stealing cable TV subscribers. We’ll update our Telco TV industry growth projections when Verizon reports its TV subscriber growth next Monday.

Conference call notes after the jump.

Conference Call Notes:

  • 10:05 Rick Lindner (SVP, CFO) 2 million wireless net adds, best Q3 ever.
  • 10:06 Growth coming from mobile data, enterprise, convergence. Expanding wireless and spectrum position through Dobson, Aloha deals. U-Verse video approaching 10,000/week install rate.
  • 10:10 Ahead of schedule on ATT/BLS/Cingular merger. $1.1 billion in savings last year, $2.8 billion in Q1-Q3 this year. 70% expense-related, rest is capital. 95% of company-owned retail stores rebranded, expect 100% by December. $6+ billion syndergies by 2009.
  • 10:13 Wireless data rev up 64% y/y. Fifth quarter of wireless data rev growth above 60%. Both consumer and business data usage. Data now more than 18% of total service revenues, $11 postpaid data ARPU.
  • 10:15 About 1/3 of postpaid customers have data plans. 3G growth: 7 million customers using 3G devices, nearly triple number from two quarters ago. 3G data ARPU almost double 2G customer. (Nice! Now the big question: are those early adopters or will this trend continue as 3G becomes ubiquitous?)
  • 10:16 Activated 1.1 million iPhones so far, more than 40% are new customers to AT&T. (So approx 300k of 1.4 million total iPhones are missing, backing up Apple’s estimate that 15% or so are purchased to be unlocked from AT&T’s network.)
  • 10:23 Broadband penetration (consumer) to 37%. Above 44% in West region. Satellite + U-Verse penetration to 6.7%.
  • 10:24 499k broadband net adds. Expanding wireless/broadband bundle sales after good trial in August.
  • 10:25 126,000 U-Verse (fibre TV) subs. Now in portions of 33 markets. Install rates climbing. Already at year-end goal (10k/week), up from 5500/week three months ago. (Will VZ + ATT hit 1 million?)
  • 10:28 Q&A: How many homes expect to cover with U-Verse? Video: Plans to build U-Verse would cover 55% to 60% of households in footprint. What’s addressable? Within footprint, 80% or more of homes are at 3,000 feet or less from fibre node. Standard service offer could be offered within 3,000 feet without extra work. Will you buy a satellite company? No comment on M&A rumours.
  • 10:33 3G wireless customers running in low $20 data ARPU range. Data about 30% of their total ARPU. Those first 7 million tend to be early adopters, but does help set potential data plan pricing.
  • 10:40 How are wireless EBITDA margins growing? Two drivers: customer growth + ARPU growth, largely driven by data. Good network management helping margins.
  • 10:44 Falling behind in data cards? Hamstrung by HSDPA 3G rollout? (High ARPU, low churn for these subs.) Building 3G footprint and capacity, more markets in Q4 and expanding footprint in existing markets.
  • 10:46 U-Verse: cost trends? No real change in guidance on cost side. Build cost per home running low $300 range per home. Acquisition/installation cost? Trying to move install time down to 4 hours. Across base about 7 hours now. New back-office tech will help take time off install. Now pre-installing software on set-top boxes. (Seems like a no-brainer. Why not doing this before?) More than 60% of customers taking top two data speeds.
  • 10:49 Satellite: one partner or two? Will continue to honour contracts with both satellite companies. Expect announcement of refreshed plans near end of year, beginning of next year.
  • 10:51 Wireless sub adds and margins: Increase in gross adds has some impact on margins. (Subsidizing phones.) Also 4 million upgrades during quarter. Wireless margin growth will continue to come from growth in data ARPU and network cost management.
  • 10:57 Figured out last weekend’s U-Verse outage? Sunday outage caused by software load on Saturday night. Impacted the database with info re: which channels people subscribe to. Most customers didn’t have to do anything to get channels restored. Good news: Had nothing to do with basic platform or scaling of platform.
  • 11:03 Expect continued growth in free cash flow. Dividend growth, share repurchases.
  • 11:08 Call winding down.

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