What Should You Know About AT&T Inc. (NYSE:T)’s Renewal?
AT&T Inc. (NYSE:T) posted fairly strong results for 1Q2016 as the earnings met expectations and overall subscriber additions impressed. Nevertheless, the domestic market lagged in subscriber growth with the bulk of the gains being made in Mexican, a currently low profit wireless market.
Beyond Mexico narrative, AT&T is in a transformation mode. The company is looking to the Internet of Things (IoT) and bundled service offering to fuel growth. But, should you buy into AT&T’s renewal? This AT&T analysis article examines the carrier’s risks and opportunities to enable you make better investment decisions regarding the stock. But first, here is a quick recap of the company’s last quarter earnings.
AT&T Inc. (NYSE:T)’s revenue reading of $40.5 billion increased 3.8% YoY and met the consensus estimate. By segment, AT&T’s Business solutions segment generated $17.6 billion in revenue. Entertainment and Internet services unit contributed revenue of $12.7 billion. Consumer mobility business generated $8.3 billion and International operations brought in $1.9 billion.
Cost curtailment saw AT&T’s EBITDA margin jump 16bps to 32.7%. That resulted in adjusted EPS climbing 10.8% to $0.72, backing the trend of the other major carriers that have reported earnings so far.
The chart below shows AT&T’s revenue contribution by segment:
What’s exciting about AT&T?
- Subscriber gain
AT&T Inc. (NYSE:T) added 2.3 million subscribers in 1Q in North America. Mexico accounted for most of the subscriber gains in the quarter. As the U.S. wireless market matures and growth becomes more difficult, if not more expensive, AT&T has been looking abroad to drive the next phase of growth. Mexico is one of the international markets the carrier has recently expanded into through a string of acquisitions and some direct investments.
Mexico presents a huge growth opportunity for AT&T because of the low wireless penetration in the country compared to the U.S.
- International expansion
International business contributed nearly $2 billion to AT&T’s topline in 1Q2016. By expanding abroad, the company is hoping to unlock new growth opportunities. Mexico is presently the main focus of AT&T’s international expansion. The company drew a budget of $3 billion to extend its 4G LTE network in Mexico. It has an ambitious plan to reach 75 million people in Mexico with its 4G network by the end of 2016. The company further plans to take its LTE network to 100 million Mexicans by the end of 2018.
- Bundled contracts
The acquisition of DirecTV has created an opportunity for AT&T Inc. (NYSE:T) to offer a two-year plan of bundled package that includes wireless, broadband and video. The strategy should unlock more revenue and accelerate the company’s growth as it seeks to hedge against maturing U.S. wireless industry.
- Internet of Things
AT&T is seriously considering growth opportunities in the Internet of Things (IoT) industry. The management has expressed hope that AT&T can generate significant revenue and profits by connecting objects to the Internet. Among the sectors that the company is looking to unlock IoT opportunities is automotive. AT&T has already inked many car connectivity deals with auto manufacturers.
According to IDC, the global IoT market will be worth roughly $1.7 trillion in 2020, suggesting a sharp growth from $656 million in 2014. Although AT&T doesn’t currently disclose its IoT revenue, peer Verizon Communications Inc. (NYSE:VZ) reported IoT-themed revenue of $690 million in 2015, signaling 18% YoY growth.
- Internal efficiency drive
Although AT&T Inc. (NYSE:T) is on an expansion mode or what one might call diversification mode, the management is trying to be cautious about how they spend the money. The company has a stated mission to cut down costs so as to boost earnings. Among other measures, the acquisition of DirecTV opens up a huge opportunity for AT&T to rein in costs. The main area that DirecTV will help with cost curtailment is in expenses related to content acquisition. DirecTV is bringing a lower content cost structure compared to AT&T’s content cost. Additionally, the scale that AT&T has added as a result of DirecTV acquisition means that the company can secure favorable content deals with providers.
The management of AT&T is targeting that by the third year, annualized cost-savings from DirecTV deal should be in the vicinity of $2.5 billion. The bulk of the cost-saving is expected to come through content acquisition arrangements.
- Pricing lift after LTE build-out
Opportunities for AT&T to drive growth are becoming slim because of factors that include saturation of the U.S. wireless market and intensifying competition from rival carriers. However, in absence of other alternatives to drive growth, a lift in price after the company completes its LTE network rollout appears inevitable. The strategy of raising prices should boost revenue growth without significantly raising corresponding costs, thus creating a room for margin expansion.
What’s worrying about AT&T?
- Wireline business on the decline
AT&T Inc. (NYSE:T)’s legacy voice and data wireline business has been on the decline for quite some time, but deterioration of the business unit appears to be worsening. The continued pressure on wireline business is impacting revenues and profits. Weakness of the wireline operation further raises the stakes that the management would move quickly to reduce exposure to the industry.
- Spectrum contest
There will be new spectrum auction by the FCC this year and AT&T has shown interest in acquiring more spectrums to help enhance its network quality. However, the company could face spectrum purchase restriction when the auction opens because of the affirmative measures the FCC appears to be taking in the recent times. For example, the agency approved a plan that would see new spectrum reserved for industry underdogs, which means that AT&T and Verizon could have a steep hill to climb in boosting their spectrum portfolio in the future auctions.
T-Mobile US Inc (NASDAQ:TMUS) is also notorious for calling for stricter regulation of industry heavyweights in spectrum allocation.
- 2016 pressures
The year 2016 is shaping up to be a tough year for carriers, especially the incumbents such as AT&T Inc. (NYSE:T). Consider that Apple Inc. (NASDAQ:AAPL) is working toward eSIM, a move that could effectively cut off an enormous profit source for carriers including AT&T. Comcast Corporation (NASDAQ:CMCSA)’s Wi-Fi first network could also shake the revenue and profit ground for AT&T.
By expanding into Mexico, courting automakers for IoT deals and driving toward bundled services, AT&T Inc. (NYSE:T) is opening up compelling new growth opportunities. But the march forward won’t be smooth because of high costs involved in the company’s renewal as well as intensifying competition. It calls for patients to pick fruits from AT&T.
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