Verizon has outperformed AT&T in revenue and subscriber growth in Q2 2014. Eric Costa, telecom analyst at TBR, is analyzing the financial performance and business model of two leading telecoms in the U.S.

AT&T reported over 1 million postpaid net additions in Q2 2014 and rapid adoption of Mobile Share plans will help maintain revenue and subscriber growth in H2 2014

AT&T’s Q2 2014 results are promising heading into H2 2014, with solid subscriber and wireless revenue growth.  Both the wireless and U-verse subscriber bases continued to gain traction in Q2 2014 and will drive revenue growth throughout the remainder of the year.

Although AT&T will struggle to post higher postpaid net additions than Verizon and T-Mobile in Q3 2014, the operator will focus on retaining postpaid subscribers and on executing its long term strategies to continue to increase revenue and subscriber growth over the next five years.

AT&T will achieve revenue growth in the low double digits in Q3 2014 by rapidly deploying the remainder of its initial LTE network, executing Project VIP to improve its network quality and reliability, and drawing additional subscribers to its Mobile Share plans.

These initiatives will strengthen AT&T’s business and drive higher data consumption, enabling AT&T to better monetize its offerings and gain ground on Verizon, who outperformed AT&T in revenue and subscriber growth in Q2 2014.

AT&T’s Mobile Share Value plans and AT&T Next program are driving increased postpaid subscribers at the expense of ARPU and margins

AT&T is focused on driving growth in connections as well as retaining as much of the basic phone subscriber base as possible in order to lower churn. In order to do this the operator lowered the price of its Mobile Share Value plans to help attract and retain customers. The result is a decline in Q2 2014 postpaid phone ARPU, as subscribers are choosing to adopt these lower tier plans.

In addition, AT&T Next, the operator’s device financing service is seeing rapid adoption which is causing a shift in AT&T’s business model. The result of more transactions getting pushed into the equipment segment – evidenced by the 44 percent year-to-year growth in equipment revenue in Q2 2014 – is causing margins to decline.

AT&T’s operating margin fell 290 basis points year-to-year due to higher equipment costs. TBR expects high adoption of AT&T Next to continue in H2 2014, which will continue to shift AT&T’s business model from service revenue growth towards equipment revenue growth.

AT&T is trailing Verizon in postpaid net additions, yet drawing in higher smartphone subscribers

AT&T trailed behind Verizon’s 1.4 million postpaid net additions in Q2 2014, yet AT&T did not rely as heavily upon tablet net additions compared to Verizon. AT&T added less than a third of the postpaid tablets Verizon did, 366,000 compared to 1.2 million, yet AT&T was much more successful in retaining basic phone subscribers and adding smartphones due to its Mobile Share Value plans and LTE network. TBR expects this trend to continue in Q3 2014, yet Verizon will continue to slightly outgain AT&T in postpaid net additions.

AT&T’s Value Mobile Share plans continue to rapidly grow, reaching 14.6 million accounts in Q2 2014. That is more than triple the accounts from 2Q13, and includes 41 million connections. These plans also contributed to all time company record postpaid churn of 0.86 percent and high postpaid net additions of more than 1. This is a very positive sign for AT&T as it means the operator is retaining the majority of its phone subscribers.

AT&T will continue to struggle in the prepaid segment in the short term as it begins the transition of Cricket subscribers to the AT&T network

AT&T continued to post short term subscriber losses following the acquisition of Leap Wireless in 1Q14. Prepaid subscriber losses totaled 405,000 in Q2 2014, down from a gain of 11,000 prepaid subscribers in 2Q13.

This result was expected as many of the subscriber losses are coming from customers of the Cricket brand that do not want to more over to the AT&T network. TBR expects many of these subscribers are choosing to switch over to T-Mobile and Sprint’s less expensive prepaid offerings.

AT&T’s long term goal is to revamp the Cricket brand to catch up to T-Mobile’s and Sprint’s larger prepaid subscriber bases over the next five years.

Cricket launched new smartphone plans that are a similar price to its prepaid rivals and is offering a $5/month discount for customers enrolling in auto payments, reduced rates for subscribers combining lines with friends and family, and a $50 device credit for customers making 12 payments on-time in a year.

AT&T will primarily focus on the Cricket brand going forward as it now operates Aio Wireless under the Cricket brand and is in the process of renovating Aio retail stores into Cricket outlets.

Eric Costa, telecom analyst at TBR
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