Why AT&T 4Q 2014 Results Really Don't Matter

One might argue fourth quarter 2014 AT&T results almost do not matter, if U.S. regulators approve AT&T’s acquisitions of DirecTV, Iusacell and Nextel Mexico. The reason is that the revenue and customer profile will change, overnight.

AT&T now faces shrinking legacy services revenue, in both consumer and business segments. In the consumer segment, new services continue to grow, but AT&T is reaching saturation in the consumer segment.

In the business segment, new services likewise are growing, but not enough to offset losses in legacy services. The point is that, no matter how much effort or capital AT&T throws at those problems, the firm is unlikely to make gains commensurate with the investments and efforts.

So AT&T is making rational choices about where to invest for revenue growth. In fact, the collective impact of the three acquisitions will be to boost business segment revenue and also boost growth in the service that arguably drives most AT&T consumer revenue growth, namely video entertainment.

Granted, how one aggregates and reports revenue sources matters. But AT&T, post-acquisitions, arguably will have a different revenue profile than AT&T pre-acquisitions.

In the fourth quarter, AT&T broke its revenue sources into mobility, consumer and business. Mobility represented possibly 60 percent of total revenue. Business revenues represented possibly 25 percent of total revenue, All consumer revenue was about 15 percent.

After the acquisitions, AT&T estimates its revenue will be lead by business segment revenue, followed by U.S. video and high speed access. Consumer mobile will represent something more than 25 percent.

Collectively, the business segment and U.S. broadband (video and high speed access) will represent about 75 percent of total revenue.

That is a big change in revenue sources, in a very short time, and illustrates AT&T’s “growth through acquisition” strategy. Unlike some other firms, AT&T always has grown through acquisition more than organic growth.

In fact, fourth quarter 2014 results illustrate the reasons AT&T might want to make those acquisitions. Fixed line segment revenues were a little better than flat, even if consumer U-verse revenues grew about 22 percent.

Fixed network business segment revenues fell sequentially and year over year, though new product segments grew about 14 percent.

In other words, further revenue growth in the existing fixed network business is difficult.

Mobile revenues grew 7.7 percent, driven substantially by equipment revenues that increased 72 percent. But mobile service revenues dropped 3.7 percent. In other words, the existing mobile business also is mature.

AT&T added a net 1.9 million mobile accounts, led by gains in postpaid and connected devices.

The company added 854,000 postpaid subscribers, up both year over year and sequentially.

Connected device net adds were 1,296,000, including about 800,000 connected cars.

Postpaid net adds include 148,000 smartphones and 969,000 postpaid tablet net adds in the quarter.

Also, AT&T is nearing the end of what it can do to protect its customer base from churn, using shared data plans.

Mobile Share plans, including Mobile Share Value, now represent more than 52 million connections, or almost 70 percent of postpaid subscribers. That is significant because churn rates for such customers are lower than for single device or single user accounts.

At the end of the fourth quarter, half of Mobile Share accounts had 10 gigabyte or larger data plans, up from 27 percent in the year-ago quarter. That helped drive an 18 percent year-over-year increase in wireless data billings. In total, about 85 percent of postpaid smartphone subscribers are on usage-based data plans (tiered data and Mobile Share plans), compared to 75 percent a year ago.

New products are driving revenue growth, but arguably not as fast as legacy services are declining.

Total adjusted U-verse revenues grew 21.9 percent year over year. But total fourth-quarter wireline revenues were $14.6 billion, down one percent year over year and down slightly sequentially, p 0.4 percent year over year adjusting for the sale of some assets.

Total revenues from business customers were $8.6 billion, down 2.8 percent versus the year-earlier quarter, down 1.8 percent year over year when adjusted for asset sales.

New services including VPNs, Ethernet, cloud services, hosting, IP conferencing, VoIP, MIS over Ethernet, U-verse and security services grew 13.8 percent versus the year-earlier quarter and grew 14.3 when adjusted for asset sales.

During the quarter, the company added 31,000 U-verse high speed access subscribers, helping lift consumer fixed network revenue 2.4 percent.

U-verse, which includes high speed Internet, TV and Voice over IP, now represents 67 percent of wireline consumer revenues, up from 57 percent in the year-earlier quarter. Adjusted consumer U-verse revenues grew 21.1 percent year over year.

Overall, total wireline broadband subscribers decreased by 51,000 in the quarter but slightly increased for the full year.

Total U-verse high speed Internet subscribers now represent 76 percent of all wireline broadband subscribers, compared with 63 percent in the year-earlier quarter.

U-verse TV added 73,000 net subscribers in the fourth quarter.

And though bundling has become the primary offer for consumer customers, AT&T’s ability to grow by that method is waning.

More than 97 percent of AT&T’s video customers already subscribe to bundled services.

Nearly 66 percent of U-verse TV subscribers take three or four services from AT&T.

To supply revenue growth, AT&T has to make acquisitions.
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