AT&T Earnings Preview: Wireless Growth And Acquisition Plans In Focus
January 23rd, 2013 by Trefis Team
AT&TRate | votes | Share AT&T (NYSE:T) is set to announce its 4Q12 earnings on January 24, after the market close. During the earnings call, we will take a close look at subscriber additions to see how the carrier is performing amid an industry-wide saturation in wireless growth. Increasing smartphone penetration should however enable the company to post a sequential increase in postpaid ARPU levels, bolstered by data average revenue per users (ARPUs). The company’s wireless margins will be of special interest given its record smartphone sales during the recent holiday season.
In addition to the company’s financials, we will also take special interest in the uptake in LTE subscriber numbers as AT&T will look to promote LTE widely this year, challenging Verizon (NYSE:VZ) and Sprint (NYSE:S), in the wireless market. We feel much of the earnings call will focus on AT&T’s acquisition plans for 2013 and its strategy for financing these deals.
See our complete analysis for AT&T here
Alltel Acquisition
In an interesting development, AT&T announced a $780 million all cash acquisition of Atlantic Tele-Network’s rural retail business that operates under the brand name Alltel, just two days prior to earnings announcement. Alltel has a rural presence spanning six states: Georgia, Idaho, Illinois, North Carolina, Ohio and South Carolina. As part of the deal, AT&T will acquire the 585,000 existing subscribers along with wireless, network access and retail stores.
Profit Margin Pressure
In a prelude to upcoming fourth quarter earnings release, AT&T (NYSE:T) had announced it sold a record 10 million smartphones in 4Q12, and we estimated around 8 million of these to be Apple’s (NASDAQ:AAPL) iPhone (see AT&T’s Smartphone Sales Point To A Strong Holiday Quarter For Apple). While this indicates a growing smartphone penetration, the impact on margins are considerable. An entry level iPhone without subsidy costs around $650, while AT&T sells the same for $200 under a two-year contract. This translates to $450 subsidy on an iPhone or nearly $3.6 billion for 4Q just on iPhone. Surely, AT&T hopes to recover this investment over the two-year contract period through higher internet revenue per subscriber, and we feel the pressure on margins will continue as manufacturers continue to launch high-end smartphone models, and AT&T will be forced to subsidize it to hold its ground in a fiercely competitive market place.
Expensive Acquisition Is A Distraction
According to the Wall Street Journal, AT&T (NYSE:T) is scouting for an acquisition or merger in Europe. The company is looking at international markets as the U.S. wireless market is saturated, and with Verizon gaining market share in the wireless segment, the company is forced to look across the Atlantic for growth. AT&T has been facing significant difficulties growing in America and its long history of haven’t helped either. (see AT&T’s Challenges In Innovation And Competition)
The names of two potential acquisition targets have been floating around since the news broke. One is U.K.-based Everything Everywhere (EE) and the other is Netherlands-based Koninklijke KPN NV (KPN). EE is a 50:50 joint venture between France Telecom and Deutsche Telekom, it is rumored to be valued at nearly $13 billion. KPN has current market value of $8.5 billion. Either acquisition would be expensive for AT&T, which already has $60 billion of long term debt on its books.
We feel that now isn’t the time for AT&T to divert its focus off the U.S. market to pursue European acquisitions. With competition in the U.S. heating up between AT&T and Verizon, coupled with a newly invigorated Sprint (NYSE:S), and a potential DISH Network (NASDAQ:DISH) entry into the wireless game, AT&T will be better served to invest its additional capital in the United States, to defend market share, or return capital to its shareholders.
Landline Business
With increasing penetration and usage of cell phones, landlines are experiencing a slow and painful death. AT&T’s legacy business in this segment has been steadily declining over the years. We expect this trend to continue, adding pressure to the wireless business to outperform. Margins have been deteriorating as the American consumer shifts from a traditional family landline to individual cellphones.
This trend has a far reaching impact because a large number of AT&T landline users are also AT&T wireless customers. These customers enjoy loyalty discounts coupled with the benefit of shared data plans and ease of billing that has made them stick to AT&T wireless. With landlines disconnected, these customers now have the freedom to shop around for better wireless deals and service. Verizon which is perceived in the market place as technologically superior in the wireless category will gain market share from AT&T. We expect the fourth quarter results to reflect this trend, and would be interested if the company has a strategy to retain its old landline customers onto its wireless business.
With Verizon close on its heel and quickly closing the gap, AT&T will be under immense pressure to meet market expectations. As long as management doesn’t make hasty strategic decisions or lose focus, the company should be able to navigate the bumpy ride ahead.