AT&T on Tuesday reported fourth-quarter earnings of $0.53 per share on $33.2 billion in revenue, thus beating the consensus estimate of $0.50 per share in profit sales totaling $33.06 billion. AT&T also announced that it added 566,000 postpaid wireless subscribers, which is impressive but still a long way off from the 869,000 postpaid subscribers added by T-Mobile last quarter. The 566,000 net postpaid additions also represented a decline from the 780,000 net postpaid additions the company reported in Q4 2012.
A couple of interesting data points from AT&T’s earnings report stand out. First, the carrier reported a record-low Q4 postpaid churn of 1.11%, which means that AT&T’s subscriber base on the quarter was on the whole stable. What’s more, this number is significantly lower than the 1.7% churn that T-Mobile says it had on the quarter.
Second, AT&T added around 1.2 million postpaid smartphones to its network from both new subscribers and from upgrades by old subscribers. This is important because smartphone subscriptions generation more average revenue per user than traditional wireless phones.
AT&T also says that it sold a total of 7.9 million on the quarter, significantly fewer than the 10.2 million the company said it activated in Q4 2012. While smartphone sales and activations are not the same thing, the numbers are usually pretty close to one another with U.S. carriers.
The past year has been an eventful one for AT&T that saw the wireless telecom giant go on the defensive against feisty rival carrier T-Mobile. Not only did AT&T start pushing its own Next early upgrade plan in response to T-Mobile’s Jump plan, but it also announced earlier this year that it would give T-Mobile customers as much as $450 to switch to AT&T. Although AT&T has been the most frequent target of T-Mobile CEO John Legere, the carrier that has so far taken the most damage in the wake of T-Mobile’s “Uncarrier” program seems have been Sprint.
AT&T’s press release follows below.
AT&T Inc. (NYSE:T) today reported solid fourth-quarter results with strong revenue and EPS growth driven by continued gains in the company’s key growth drivers — mobile and IP data, U-verse and strategic business services.
“2013 was the year of the network,” said Randall Stephenson, AT&T chairman and CEO. “With Project VIP, we’re delivering faster speeds and new services to millions more customers. And growth on these platforms is going strong. We exceeded build targets across the board. Our 4G LTE network is nearly complete and is the nation’s most reliable with lightning-fast speeds. U-verse is rapidly expanding, and our fiber-to-the-business build is off to a fast start.
“The next steps are to make our networks even more powerful and layer on services that will drive new growth in the years ahead. We have good momentum in areas like connected car, home automation and mobile business solutions. We’re also committed to transforming our operations to make them more responsive and efficient. To that end, we’ve launched Project Agile, a broad set of initiatives to streamline and improve every part of our business. Execution has begun and will be a focus area for us in 2014 and beyond.”
Fourth-Quarter Financial Results
For the quarter ended December 31, 2013, AT&T’s consolidated revenues totaled $33.2 billion, up 1.8 percent versus the year-earlier period. Compared with results for the fourth quarter of 2012, operating expenses were $20.9 billion versus $38.5 billion; operating income was $12.2 billion compared to a loss of $6.0 billion; and operating income margin was 36.9 percent compared to (18.3) percent. Adjusted operating expenses were $28.0 billion, compared to an adjusted $28.4 billion in the year-ago quarter, down 1.4 percent; operating income was $5.2 billion versus $4.2 billion a year ago; and operating income margin was 15.5 percent, up from 12.9 percent last year.
Fourth-quarter 2013 net income attributable to AT&T totaled $6.9 billion, or $1.31 per diluted share, compared to $(3.9) billion, or $(0.68) per diluted share, in the year-earlier quarter. Adjusting for $0.89 from the non-cash actuarial gain on benefit plans and $(0.11) from other significant items (which included charges of $0.07 from debt redemption costs and $0.06 from employee separations, and a $0.02 gain from the sale of América Móvil shares), earnings per share was $0.53 compared to an adjusted $0.44 in the year-ago quarter, an increase of 20.5 percent.
Fourth-quarter 2013 cash from operating activities totaled $7.9 billion, and capital expenditures totaled $5.5 billion. Free cash flow — cash from operating activities minus capital expenditures — totaled $2.5 billion.
For full year 2013, compared with 2012 results, AT&T’s consolidated revenues totaled $128.8 billion versus $127.4 billion; when excluding the divested Advertising Solutions business unit, revenues were up 1.9 percent for the year. Operating expenses reflect actuarial gains on benefit plans and were $98.3 billion, compared with $114.4 billion, down 14.1 percent; net income attributable to AT&T was $18.2 billion versus $7.3 billion; and earnings per diluted share was $3.39, compared with $1.25 in the prior year. With adjustments for both years, earnings per share totaled $2.50, compared with $2.31, an increase of 8.2 percent.
AT&T’s full-year cash from operating activities was $34.8 billion, down from a record $39.2 billion in 2012 reflecting higher cash tax payments, timing of working capital payments and wireless device financing related to the AT&T Next program. Capital expenditures, including capitalized interest, totaled $21.2 billion versus $19.7 billion in 2012, as AT&T began its Project Velocity IP (Project VIP) build. Full-year free cash flow was $13.6 billion.
As part of its Project VIP-related LTE deployment, the company now covers nearly 280 million POPs. The company’s LTE deployment is expected to be substantially complete by this summer.
During the quarter, the company repurchased 54 million of its shares for $1.9 billion. In 2013, the company repurchased 366 million shares, or more than 6 percent of outstanding shares, for $13.0 billion. The company expects to make future repurchases opportunistically.
AT&T is on track to deliver the financial targets laid out with Project VIP. It expects solid revenue and earnings per share growth with stable margins while returning substantial value to shareowners.
In 2014, AT&T expects continued consolidated revenue growth in the 2 to 3 percent range, including strength in wireless service and wireline consumer revenues. The company also expects stable consolidated margins with continued improvement in wireless margins helping offset Project VIP pressure in wireline. Adjusted earnings per share growth is expected to be in the mid-single digit range excluding any impact from future share buybacks.
AT&T expects capital expenditures in the $21 billion range. Free cash flow is expected to be in the $11 billion range.
2014 outlook assumes no lift from the economy and excludes adjustments such as non-cash mark-to-market benefit-plan adjustments. It also excludes any impact from the planned acquisition of Leap Wireless.
WIRELESS OPERATIONAL HIGHLIGHTS
Reflecting the quality of the nation’s most reliable 4G LTE network, AT&T delivered strong wireless revenue growth and postpaid ARPU gains, continued expansion of its high-value smartphone base and its lowest-ever fourth-quarter postpaid churn.* Highlights included:
Wireless Service Revenues Grow 4.8 Percent. Total wireless revenues, which include equipment sales, were up 4.5 percent year over year to $18.4 billion. Wireless service revenues increased 4.8 percent in the fourth quarter to $15.7 billion. Wireless data revenues increased 16.8 percent from the year-earlier quarter to $5.7 billion. Fourth-quarter wireless operating expenses totaled $14.5 billion, down 3.9 percent versus the year-earlier quarter, and wireless operating income was $3.9 billion, up 53.8 percent year over year.
Phone-Only Postpaid ARPU Increases 3.9 Percent. Postpaid phone-only ARPU increased 3.9 percent versus the year-earlier quarter. Total postpaid subscriber ARPU, which includes high-margin but lower-ARPU tablets, increased 2.1 percent versus the year-earlier quarter. This marked the 20th consecutive quarter AT&T has posted a year-over-year increase in postpaid ARPU. Postpaid data ARPU increased 15.4 percent versus the year-earlier quarter.
Smartphones and Tablets Drive Postpaid Growth. AT&T posted a net increase in total wireless subscribers of 809,000 in the fourth quarter. Subscriber additions for the quarter included postpaid net adds of 566,000. Postpaid net adds include 299,000 smartphones. Total branded smartphone net adds (both postpaid and prepaid) were 529,000. Total branded tablet net adds were 440,000.
Connected device net adds were 398,000. Prepaid had a net loss of 32,000 subscribers primarily due to declines in session-based tablets; however, prepaid revenues increased both year over year and sequentially. Reseller had a net loss of 123,000 subscribers primarily due to losses in low-revenue 2G subscriber accounts.
Record-Low Fourth-Quarter Postpaid Churn. The company had its lowest-ever fourth-quarter postpaid churn of 1.11 percent compared to 1.19 percent in the year-ago quarter. Total churn was stable at 1.43 percent versus 1.42 percent in the year-ago quarter. The strength of the network helped drive lower churn. About 90 percent of postpaid subscribers are on Mobile Share, FamilyTalk® or business plans, all of which have significantly lower churn than other postpaid subscribers.
Smartphones Reach Record 93 Percent of Phone Sales. AT&T added 1.2 million postpaid smartphones in the fourth quarter. At the end of the quarter, 77 percent, or 51.9 million, of AT&T’s postpaid phone subscribers had smartphones, up from 70 percent, or 47.1 million, a year earlier. The company sold 7.9 million smartphones in the quarter. More than 1 million of those smartphone sales were on the new AT&T Next program. Smartphones accounted for a record 93 percent of postpaid phone sales in the quarter. AT&T’s ARPU for smartphones is twice that of non-smartphone subscribers. More than half of AT&T’s postpaid smartphone customers now use an LTE device, and 77 percent use a 4G-capable device (LTE/HSPA+).
Mobile Share Passes 21 Million Connections. Mobile Share plans now represent more than 21 million connections, or about 29 percent of postpaid subscribers. The number of Mobile Share accounts reached 7.1 million in the fourth quarter with an average of about three devices per account. Take rates on the higher-data plans continue to be strong with 30 percent of Mobile Share accounts choosing 10 gigabyte or higher plans.
The number of subscribers on usage-based data plans (tiered data and Mobile Share plans) continues to increase. About 73 percent, or 37.7 million, of postpaid smartphone subscribers are on usage-based data plans. This compares to 31.7 million a year ago. About 80 percent of customers on usage-based data plans have chosen the medium- and higher-data plans: 24 percent have chosen the higher plans, compared to 13 percent in the year-ago quarter.
Wireless Margins Expand. Wireless margins reflect lower year-over-year smartphone sales and upgrades, further revenue gains from the company’s growing high-quality smartphone subscriber base and the impact from AT&T Next. AT&T’s fourth-quarter wireless operating income margin was 21.4 percent versus 14.5 percent in the year-earlier quarter. AT&T’s wireless EBITDA service margin was 37.4 percent, compared with 29.1 percent in the fourth quarter of 2012. (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)
WIRELINE OPERATIONAL HIGHLIGHTS
AT&T’s fourth-quarter wireline results were led by continued wireline consumer revenue growth, strong U-verse gains and accelerating growth in strategic business services. Highlights included:
Wireline Revenues Up Sequentially. Total fourth-quarter wireline revenues were $14.7 billion, down 1.4 percent versus the year-earlier quarter and up 0.3 percent sequentially. Wireline service revenues were down 0.7 percent year over year. Total U-verse revenues grew 27.9 percent year over year and were up 7.0 percent versus the third quarter of 2013. Fourth-quarter wireline operating expenses were $13.3 billion, up 1.0 percent versus the fourth quarter of 2012. AT&T’s wireline operating income totaled $1.5 billion, down 18.8 percent versus the fourth quarter of 2012. Fourth-quarter wireline operating income margin was 9.9 percent, down versus 12.0 percent in the year-earlier quarter, primarily due to declines in voice revenues, success-based growth, U-verse content costs and costs incurred as part of Project VIP.
Consumer Revenues Increase 2.9 Percent. Revenues from residential customers totaled $5.6 billion, an increase of 2.9 percent versus the fourth quarter a year ago and up 1.3 percent sequentially. Continued strong growth in consumer IP data services in the fourth quarter more than offset lower revenues from voice and legacy products. U-verse, which includes TV, high speed Internet and voice over IP, now represents 57 percent of wireline consumer revenues, up from 46 percent in the year-earlier quarter. Consumer U-verse revenues grew 26.8 percent year over year and were up 6.8 percent versus the third quarter of 2013.
Record-Low U-verse TV Churn. Total U-verse subscribers (TV and high speed Internet) reached 10.7 million in the fourth quarter. U-verse TV had the lowest-ever churn in its history. U-verse TV added 194,000 subscribers in the fourth quarter with an increase of 924,000 for the full year to reach 5.5 million in service. AT&T has more pay TV subscribers than any other telecommunications company. U-verse high speed Internet had a record fourth-quarter net gain of 630,000 subscribers, to reach a total of 10.4 million, and a record annual increase of 2.7 million, or 34 percent. Overall, total wireline broadband subscribers were essentially flat in the quarter but grew year over year. Total wireline broadband ARPU was up more than 7 percent year over year. Total U-verse high speed Internet subscribers now represent 63 percent of all wireline broadband subscribers compared with 47 percent in the year-earlier quarter.
About 59 percent of U-verse broadband subscribers have a plan delivering speeds up to 12 Mbps or higher. In the fourth quarter, more than 90 percent of new U-verse TV customers also signed up for U-verse high speed Internet. About two-thirds of AT&T U-verse TV subscribers take three or four services from AT&T. ARPU for U-verse triple-play customers continues to be more than $170. U-verse TV penetration of customer locations continues to grow and was at 21 percent at the end of the fourth quarter.
Strategic Business Services Revenue Growth Accelerating. Total revenues from business customers were $8.8 billion, down 3.4 percent versus the year-earlier quarter, and were essentially flat from the third quarter. Business service revenues declined 2.4 percent year over year and were down 0.3 percent compared with the third quarter of 2013. Overall, declines in legacy products were partially offset by continued double-digit growth in strategic business services. Revenues from these services, the next-generation capabilities that lead AT&T’s most advanced business solutions — including VPN, Ethernet, cloud, hosting and other advanced IP services — grew 17.4 percent versus the year-earlier quarter. These services represent a $9 billion annualized revenue stream and are more than a quarter of business wireline revenues. During the fourth quarter, the company also added 78,000 business U-verse high speed broadband subscribers.