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Monday
Nov142011

ILEC 3Q11 Results Summary: AT&T

AT&T Riding the Mobile Broadband Wave

AT&T’s third quarter results were impressive. The company led the major wireless carriers in terms of subscriber growth—without a new iPhone launch and with no LTE coverage to speak of in the period. And now that it’s launching LTE and selling the iPhone 4S, management is extremely confident that its fourth quarter results will be even stronger. On the wireline side of the business, U-verse continues to perform well and the company now generates more than half of its revenue from broadband, video and VoIP products; voice and “other” accounted for the remainder of wireline revenue.

In the company’s conference call, Ralph de la Vega, ceo of AT&T Mobility, gushed about the progress and potential of its LTE network: “I am thrilled about what we're seeing with the LTE launch. I have been a part of many network and device transformations. And this technology quite frankly is the best I have ever seen in my career. The network technology is fantastic. The devices are fast. They're thin. They have great battery life. It's the first time that I think a network transition is going to be a home run right off the bat.”

He noted that smartphones make up 52% of the base now and opined that virtually all subscribers will be using smartphones within two or three years. He continued, “And then you add on top of that these new devices like tablets and MiFis and e-Readers and telematics. And the growth opportunity is off the charts on this. And then you add to that the cloud, the fact that all of these devices in the future are going to want connectivity to the cloud, which means they need to have great bandwidth, great data capability…And the great thing about doing all of that is that we're doing it with a technology, LTE, that provides a reduced cost per megabyte, that is we can produce the megabyte a lot cheaper on LTE, and it's also more spectrally efficient. So lower cost, lower spectrum requirements and great revenue potential. I'm very bullish on what we're seeing in data, and I think we've only seen the tip of the iceberg because customers love the devices that are coming out and they love using high-speed data.”

When one analyst questioned de la Vega on the possibility that smartphone ARPU may begin eroding as lower end customers migrate over, he disagreed, and added that the company expects to add higher tier plans down the road: “In terms of the capability to grow ARPU, I think that we're going to see customers use more data, not less. I don't see an environment going into the future where customers are going to use less data. These products are too good. There's an incredible amount of streaming content that's available. So we're going to continue to see customer data usage increase. We have not seen a decline, and I don't see it any way to decline. That's why I feel so bullish about our position of having 50% of our base already on tiered plans, and we plan to make available more tiered options for customers in the future so they can enjoy the data services that they want. So what I see is exactly the opposite of the scenario you suggested, where everybody is actually using more data. I see it across every product category we sell and that more handsets that we get into a customer's hands that are smartphones, the more data that they use, not the less.”

He added that they are seeing overage from both tiered plans, but that the overage is small today: “I can't give you an exact number, but we do have overage from both plans...like I said before, we plan to make available more options to customers that may need higher usage categories in the future, so they can feel comfortable in stepping up but not feeling that they're having to pay an exorbitant amount. We want to encourage customers to use more and incur a little more cost if that's what they want to do…The other thing that I feel so bullish about is what is happening in the tablet arena. I mean, it's very obvious to me that this tablet revolution is going to continue. I don't see anything in the horizon that stops it, and I think customers are going to want both, some smartphones and a tablet. And they're going to see their content on the tablet in ways that's going to make them use more and more data. So I think the future of tablet computing is going to be very good for our industry.”  De la Vega also said that the free iPhone 3GS, which AT&T is offering with a 2-year contract, has sold out, “We've seen a tremendous, tremendous demand for that device even though it's a generation old. And actually, we're getting more new subscribers coming on the 3GS on the average than other devices.”

AT&T also did well in the prepaid segment in the quarter, adding more than 100k net new prepaid subscribers. De la Vega noted that the new $50 GoPhone plan has been very well received and “we’re just getting started…We put in that plan some handsets that are very attractive. They're low cost, but they've been a huge hit in the marketplace, so we're seeing that business resurge for us...We have a very strong fourth quarter lineup, so I think we're going to continue to do well with GoPhone sales in the fourth quarter.”

On the wireline side of the business, cfo John Stephens was asked about margin trends given that the U-verse margins are generally lower than in the legacy business. The company has been cutting costs in an effort to strengthen wireline margins, but management said that the numerous storms as well as a technology upgrade affected the results in the quarter—adjusted for those factors the EBITDA margin for the wireline business was 32%.

AT&T has been aggressively working to move its legacy DSL customers onto U-verse. Stephens noted, “The most encouraging piece of the DSL story [is that] while our net adds for the quarter were about in the 5,000 range, we had 500,000 high-speed U-verse/IP DSLAM net adds. So we were able to convert a huge piece of our legacy DSL base into U-verse/IP DSLAM, and we saw gains in small business with that IP DSLAM product for the first time. We'll continue to focus on transforming those DSL lines into high speed. We get great speeds, great service to our customers, good ARPUs.” Stephens also noted that the company will promote its wireless broadband service, which it will deploy to 97% of the country, in those areas where it doesn’t have U-verse. “We believe that's going to be able to provide a wireless solution at a high speed, good quality, good cost, on a profitable basis for us. That's the long-term solution to the non-U-verse areas.”

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