AT&T (T) reported in-line Q1 results but didn’t blow anyone away. Wireless subscriber growth was a touch weak, but AT&T signed up more subscribers to its U-Verse Internet TV service than UBS analyst John Hodulik predicted.
Not much to take away from the conference call. Management didn’t give tangible guidance, but sounded upbeat about potential growth in wireless data services and U-Verse, which it expects to hit 1 million subscribers by year-end.
That recession? AT&T didn’t want to talk about it — perhaps they learned their lesson — other than to say that “softness” in residential phone lines was offset by growth in broadband and video. “I think I’ll not enter the debate with the experts on the state of the economy and I’ll let our numbers for the quarter speak for themselves,” CFO Rick Lindner said.
One disappointment: AT&T didn’t share how many iPhones it activated during Q1, so that early Apple (AAPL) indicator we were looking for isn’t happening.
Revenue: $30.7 billion, up 6.1% year-over-year and in line with $30.7 billion consensus.
Adjusted EPS: 74 cents, in line with 74 cents consensus.
Net income: $3.5 billion, up 21.5% year-over-year.
Wireless net subscriber additions: 1.3 million, slightly below avg. estimate of 1.32 million according to seven analysts polled by Reuters, and below 1.35 million UBS estimate.
U-Verse Internet TV net subscriber additions: 148,000, well ahead of 135,000 UBS estimate.
Q2 guidance: $31.25 billion revenue/78 cents adjusted EPS Street consensus.
LIVE Earnings call notes:
10:02 Waiting for call to begin.
10:03 Call begins.
10:05 Standard disclaimers.
10:05 12th consecutive quarter of double-digit EPS growth.
10:06 Rick Lindner joins. Major highlights: Revenue pro forma up 4.6%. Wireless revs up 18.3%, ebitda service margin up to 41.7%. Acquired spectrum from Aloha, FCC auction.
10:07 Enterprise strong. Recent contract win with Shell. Broadband net adds strong at nearly 500,000. U-Verse video adds 148,000 for quarter, bringing base to nearly 400,000.
10:08 Share buybacks topped $4 billion.
10:09 Wireless, enterprise driving revenue growth. Substantial improvement in wholesale during Q1. Wireless now represents 38.5% of AT&T’s total revenue. Subscribers up 14.7% in past year. Seven consecutive quarters of year-over-year wireless ARPU gains. Substantial growth in wireless data, which is 21.5% of total service revenues.
10:10 Prepaid data revenue growth up more than 50%, makes up nearly 20% of prepaid ARPU. Gross adds up 15.7%. 1.3 million net adds up, but impacted by full shutdown of TDMA shutdown, which reduced subs by 330,000. Postpaid churn was down 1.2%. Over 71 million wireless subscribers.
10:11 Wireless data growth includes both consumer and enterprise usage. Internet access revs up more than 100%, email more than 60%, data access 50%, media bundle 40%. Approx 16% of postpaid subs use integrated devices. 11 million 3G devices in service. ARPU of smartphone customers nearly double of company average. So lots of growth left.
10:12 Spectrum roadmap: 700 MHz spectrum in 100% of top 200 markets, average 90 MHz of spectrum in top 100 markets. 2008: 3G, HSPA Release 6 with “DSL-like” speeds. 2009-2010: HSPA Release 7 up to 28 Mbps. Beyond 2010: LTE 4G w/ peak speeds to 100 Mbps. Backward-compatible with older networks.
10:15 Wireless margin expansion: Adjusted operating margin 29.8%, service 41.7%, both up y/y. Continued operations changes in billing, customer care.
10:16 Moving on to enterprise.Demand solid for VPN, managed services, hosting. Providing service to Starbucks (SBUX) and operating wi-fi in their stores.
10:18 Total regional business revenues up 2.6%. Small/mid-size results solid, up 5%. Regional business voice revs growing in low single digits, business data revs up 6.3%. Bundling more aggressively, including wireless. New product called “Business in a Box” for small firms w/ VPN, etc.
10:20 Regional consumer trends: Selling more broadband and wireless bundles, expanded wi-fi reach following Starbucks agreement. U-Verse obviously key.
10:22 Network now reaches 9 million homes, getting more than 10% penetration in market areas in less than 12 months. On track for 1 million subs by year end. In Q2, launching 2nd HD stream. Every set-top box is HD-capable. Can grow without CPE cost or tech dispatches.
10:23 Consolidated margins improving thanks to wireless, merger synergies. Restructuring some operations. Moving to single, national approach instead of regional.
10:25 Recap. (Patting selves on back.)
10:25 Q&A begins.
10:26 Wireline margins a bit lower than expected. Any issues? Still sticking for guidance for flat wireline margins y/y? Expected wireline margins to be relatively flat. In predicted range but lower end. Some integration costs from BellSouth merger. Thought appropriate to stop normalizing integration costs even though we knew we would have some costs. Also some impacts from weather and some storms in midwest, southwest — tends to increase overtime rates as well as material costs.
10:29 New agreement with Yahoo will start to help margins in Q2-Q3-Q4. Expecting wireline margins to increase somewhat as we go into Q2 and Q3. I think we’re comfortable with saying we expect wireline EBITDA margins to be relatively flat and in mid-30% EBITDA range.
10:30 Any economic weakness? I think I’ll not enter the debate with the experts on the state of the economy and I’ll let our numbers for the quarter speak for themselves. In wireless, continue to see very strong growth in revenue, ARPU, data revenue growth, increases in both postpaid and overall net adds. In enteprise, total revs and recurring service revenues. Positive and continuing to ramp. Some softness in consumer access lines, offsetting with broadband and video growth. Our business continues to be more defensive than most when economy is weak and under stress.
10:34 Wireless: Churn moving in right direction. Thinking internally about target or goal on churn? On flow share on wireless? iPhone meaningful impact? In terms of wireless churn: We’re pleased with churn. Trending down. Some impact from TDMA shutdown. Worth 5-6-7 basis points. Expect overall churn, especially postpaid, to continue to decline. Want to get down to industry leading level. See a clear path to do that. In many markets, we’re at sub-1% in postpaid churn.
10:37 Feel good about gross “Flow share” today. Gross adds very strong — 5 million is best Q1 we’ve ever had. Key for us in terms of net adds and market penetration is getting the churn number down, and that’s where our focus is.
10:38 iPhone continues to be very popular with customers, feedback is very good. ARPUs are in the mid to upper 90s across the base. We continue to see customers adopting iPhone. Over 40% are new to us. Nothing really new in trends there. Continued, solid growth. Through Q1 stable.
10:39 Cable competition on wireline side? In our territory cable is fully deployed, were in late 2007. What we see when they launch a market… tends to ramp up over first six months and starts to flatten out. Overall, in terms of cable competition on voice side… still adding customers, but adding customers seems to be flattening out. We’ll see those numbers as they’re reporting for this quarter. What we are seeing, which is a litle different from our expectation: Continued ramp in wireless substitution. Could be driven by economy or just how certain segements want to handle their voice and data communications. Good news for us: With substantial wireless assets, can provide alternatives.
10:42 Small-medium business side: Cable has launched in majority of markets. Some impact there, but pretty small. Would estimate that cable has 2-2.5% share of voice in that customer segment.
10:44 Any comments on wireless unlimited plans or Sprint’s attemtps to re-engage market? Results so far better than expected. Prior to pricing changes, about 1.5% of new customers would sign up for rate plans at $99 or above. Since that, about 4% of new customers are signing up at $99. Number of new customers coming in at those price points is up 2.5-3x. Obviously customers are choosing to buy up to get piece of mind of unlimited pricing. In terms of customer migration, some have left higher plans for $99 about in magnitude we had expected. But more migrating up to $99 than we had anticipated. My expectation today is that… I don’t think we’ll see a significant impact at all related to price changes.
10:46 Sprint obviously has their own price changes and plans out there, new ad campaigns. Throughout Q1, we continued to be, if we look at porting numbers, net porting positive with all the carriers, but the most with Sprint.
10:47 Progress in U-Verse stalled after good xmas week? Maybe there’s a little bit of disconnect betwene our plans and expectations for ramp that we expect to see in net adds this year versus what some in the market may have modelled for the year. I would tell you that we’re on (in fact a little bit ahead) of plan for Q1. If you go back and look at ramp… two quarters ago added 75,000, Q4 105, this quarter 148. On a pretty good trajectory that we expect to continue ahead. More comfortable with guidance of over a million by end of this year. As it ramps, there are weeks where we had strong installations and some periods where we went a little slower to make sure software upgrade performed well. Have some puts and takes. If you look at quarterly trend, accelerated somewhat the ramp versus last quarter. Comfortable where we are there. Will vary as we open up new markets.
10:51 And spectrum auctions… talk us through strategy of aggregating regionally vs. why didn’t buy C block? Looked what we had. Will use 700 MHz spectrum combined with AWS spectrum from last auction to roll out LTE. Good footprint across top 200 markets. Won’t need to clear spectrum to roll out. Also have majority of markets where we have 20 MHz in either 700 or AWS to roll LTE out. We’re very happy with what we achieved in auctions. We’ve got a very clear logical path to roll out LTE.
10:56 No immediate impact from Shell contract. Look at them over multiple years… in first year, margins will be pretty low. Generally bringing business in first, may be bringing employees in, a lot of work to do in rationalizing the access and how traffic is carried.
11:00 Decided to front-end load share repurchase plan. We’ll continue to be in the market throughout this year, next year. Will complete the 400 million share authorization next year. We’re well on the way.
11:03 More comments on wireline margins, etc. from enterprise deals. On DSL price increase: Rolling that across the base. Saw some in Q1, will continue to roll it as customers come up for renewal or come out of initial commit periods. Will take effect during the year. Intial reaction from base as well as reaction from new customer adds has been very good.
11:05 As increased prices, churn rate actually dropped.
11:06 D&A trends: Amortization of customer intangibles from merger is dropping. Used an accelerated method to amortize those assets. If you look at adjusted numbers, still see a decline in D expense in first quarter. First, in wireline business: When did ATT and BLS deals, certain assets both in network and in IT and in support systems that we knew we would use for an interim period of time but as integrated, would come out of service. We accelerated dep. of those assets, did over short lives.
11:10 3G devices: Still have opportunities to ramp up. We’ve got two things going on in wireless base: Growth in 3G devices but also growth in smartphones. Both of those are positive to us from standpoint of ARPU and of data revenues. Certainly integrated devices moreso. Think of BlackBerry and iPhone, both of which are EDGE devices. Just starting to see BlackBerry 3G come out. As those integrated devices move to 3G, that will drive stronger 3G growth. New customers today… many times going to 3G. If buying an integrated device in the future, they will be going to 3G. That will increase penetration there.
11:11 Q&A over.
11:11 Closing comments: Thanking IR VP Rich Dietz who is retiring at end of month after 38 years with AT&T/SBC/SW Bell. More self-back-patting.
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