AT&T (NYSE:T) is set to announce its Q2 FY2012 earnings on October 24. 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 ARPUs. The company’s wireless margins will be of special interest now that opportunities to grow subscribers are limited. In addition to the company’s financials, we will also take special interest in the uptake in LTE subscriber numbers. With the recent iPhone 5 launch, AT&T will look to promote LTE widely this year, challenging Verizon (NYSE:VZ) and Sprint (NYSE:S) in the wireless market.
Saturated Wireless Market
The U.S. wireless market has become increasingly saturated recently, with wireless connections having exceeded the population in mid-2011. This has made the acquisition of new subscribers, especially those that pay for the higher-margin data plans, very tough for the wireless carriers. Last quarter, AT&T added about 320,000 postpaid subscribers -- a tad shy of the 331,000 added in the year-earlier quarter. But the figure was boosted by the number of tablet connections (bolstered by the first full quarter of the new iPad availability) the carrier managed to add that quarter. For the first half of 2012, AT&T’s numbers show that around two-thirds of its postpaid net adds came from tablets. While tablets are more profitable due to the lower subsidies on offer, they bring in a lot less revenue per user.
As the wireless industry gets more saturated, the focus has shifted from acquiring new subscribers to converting more of their existing base to smartphones and increasing profitability. Aside from controlling subsidies, AT&T is also trying to lengthen the handset replacement cycle by levying additional upgrade fees. At the same time, new growth areas in non-smartphone connected devices such as M2M, telematics, tablets, and e-readers are being explored. One of the major reasons why wireless penetration has exceeded 100% is because of these connected devices, and their market is growing really fast.
This bodes well for AT&T, which is currently the market leader in the connected device category. However, these are early days and the equation could change in the coming years, with Verizon also getting serious about this segment, as evidenced by its acquisition of Hughes Telematics last quarter.
Data Share Plans
Therefore, AT&T will look to fuel the demand for these connected devices with the recent launch of data share plans that make it easier for users to add more such devices to the carrier’s wireless network. While this might decrease the average revenue per device -- since these connected data-only devices consume much less data -- AT&T revenues from each individual subscriber will rise as users connect more devices to its wireless network. Moreover, since their data consumption is low, it will help shore up the service margins for AT&T.
Sometime in the future, it is also likely that AT&T, which has been a vocal critic of unlimited plans in the past, will follow in Verizon’s footsteps and prohibit its unlimited plan users from availing smartphone subsidies in case they want to continue using their plans. This, we believe, will be a step in the right direction, since it will help AT&T more efficiently manage its limited network resources better and monetize every bit of data that is transferred on its pipes.
With AT&T’s LTE coverage expected to lag Verizon’s well into the next year, it is looking to double its current coverage by the year-end and close the gap. AT&T has already been investing heavily in its LTE infrastructure, rapidly rolling it out in new markets to make up for its relatively late entry into the space, and we expect this to continue in the future.
While AT&T’s LTE network may not have a country-wide presence right now, we do not see it impacting AT&T much in the longer-term since LTE adoption has been sluggish so far. As of last quarter, Verizon had converted only 12% of its subscriber base to LTE, despite having such a wide lead in terms of LTE coverage over others. AT&T plans to complete its LTE rollout and be on par with Verizon’s LTE coverage by the end of 2013. We expect LTE adoption to start picking up only now that the iPhone 5 is launched, and strengthen in 2013. So longer term, AT&T may not miss out by a lot, so long as it continues to deliver on its current rollout plans.
An increased adoption of 4G in the long term will reduce dependence on AT&T’s 3G networks, which are under great strain due to the heavy data usage of smartphones such as the iPhone. Also, LTE as a network technology not only supports higher speeds, but is also more efficient than current 3G networks at handling data, reducing maintenance and handling costs. Further, higher LTE speeds will see subscribers increasingly using data-intensive applications on their smartphones.
This will drive data revenues, thereby increasing ARPU levels for AT&T over the coming years. In the near-term, limited LTE coverage may be a deterrent for many, but a fallback option in the form of the carrier’s HSPA+ network -- which provides higher speeds than 3G and has a wider coverage area than its LTE network -- should offer an interim solution.
Disclosure: No positions