AT&T holds onto wireless customers, adds 800K postpaid phone subs in Q4

AT&T’s focus on customer retention and strong promotions seems to be paying off as the carrier reported near-record low churn in the fourth quarter, alongside 800,000 net phone postpaid additions.

In total AT&T reported adding 1.2 million net postpaid connections in Q4. The 800,000 figure compares to 229,000 phone subs it added in Q4 2019. It’s also well above Verizon yesterday which reported 279,000 net phone subs in the last quarter of 2020, while T-Mobile’s preliminary Q4 results boasted slightly above AT&T at 824,000.

And it was a record-low fourth quarter and the second-lowest quarter ever for AT&T’s postpaid phone churn, which was at 0.76%, versus 1.29% a year prior. Postpaid phone churn for the full year 2020 was 0.79%

Switching activity has been lower industry-wide with AT&T focused on keeping the high-value customers it has. That includes extending aggressive device promotions (like the 5G-capable iPhone 12) to its existing customer base, as well as new. It’s a strategy that CFO John Stephens previously acknowledged comes with costs, but had categorized as “a very reasonable investment specifically for the impacts on lowering churn.”

Stephens is retiring in March after nine years as AT&T’s finance chief and Wednesday marked his last earnings call at the carrier.

AT&T plans to continue investing in customers, citing the retention programs and higher device adoption as driving Q4’s strong postpaid subscriber metrics. AT&T added 5.9 million wireless subscribers in the quarter, for a total of 182.6 million in service.

“To be the industry leader in churn this quarter, I think we called it right,” said CEO John Stankey about the strategy, speaking on the company’s fourth quarter earnings call. He noted an attractive gross add pool and treating embedded customers well, who have then sign on for another 30 months with the carrier via equipment installment plans. “It’s a very appropriate exchange for the franchise right now given everything we have in front of us,” he said.

While AT&T likes the momentum so far in growing customer relationships, Stankey said, the carrier would like to be more efficient with it.

“I think we’ve done some really good stuff and had some really good progress on self-funding a lot of what we’ve been doing in the market but we’re not self-funding all of it yet,” Stankey said.

For 2021 AT&T expects consolidated revenue growth of about 1%, with wireless service revenue growth of about 2%.

In Q4 AT&T’s mobility revenues were up 7.6% since the year ago period to $20.1 billion, including a 0.5% increase in service revenues to $14 billion and 28.3% jump in equipment revenues to $6.1 billion.

Despite subscriber gains, AT&T saw ARPU (average revenue per user) decline $1.06 to $54.46, citing loss of international roaming revenue as travel remains low.

With higher equipment sales, AT&T saw a 6.5% smartphone upgrade rate in the fourth quarter. The carrier also added 4.8 million connected devices, including 40,000 postpaid tablets, contributing to a total of 5.9 million total wireless net adds.

Revenues were up but so were costs. AT&T reported $15 billion in mobility operating expenses, a 13.9% increase year over year, citing higher costs for equipment and commission, and content associated with HBO Max. Operating income in the mobility segment was down 7.5% to $5.1 billion.

Wireless EBITDA of $7.09 billion was down 5.8%, and EBITDA margin was 35.3%. Wireless EBITDA service margin in Q4 was 50.6% versus 54% a year ago.

New Street Research in a note to investors Wednesday wrote the firm had expected AT&T to pull back on aggressive retention offers in 2021 but after the earnings call “it doesn’t seem likely they will.”

“We expect T-Mobile to increase share gains as we progress through 2021, driven by a powerful network advantage. AT&T may slow these efforts somewhat with aggressive handset offers; however, T-Mobile’s better network and cheaper price will prove a tough match,” wrote New Street analyst Johnathan Chaplin, noting cable’s wireless ambitions as well. “We would expect to see sub growth recede at AT&T despite their investment; if growth slows and costs remain high, it will be difficult to sustain.”

Update planned after C-band quiet period

Executives on Wednesday’s earnings call weren’t able to discuss anything related to the blockbuster C-band auction due to the FCC’s quiet period, but plan to give an update at a virtual analyst event later this quarter with a revised leverage outlook and longer-term debt ratio target once the auction quiet period ends.

The C-band assignment phase is slated to start February 8, following the clock phase which generated nearly $81 billion in gross proceeds.

AT&T already had a lot of debt prior to the C-band auction. It cut down about $33 billion in net debt since acquiring Time Warner’s media assets, and at the end of Q4 had $147.5 billion in net debt with about $10 billion cash on hand.

Analysts are predicting AT&T spent heavily at Auction 107 where bidding for mid-band licenses soared well beyond expectations, and the carrier reportedly looked to borrow $14 billion to help pay for 5G spectrum as prices.

New Street Research previously upped its forecast for AT&T C-band spending to $27 billion, not including clearing costs. On Wednesday New Street pointed to the carrier’s comments about revised leverage targets as further suggestion AT&T “went big” at Auction 107.

“This seems to support the view that they will invest more than their current leverage thresholds permit, and gives us more confidence in our estimates for the distribution of spectrum across the group,” wrote New Street. The firm projects Verizon spent $29 billion and T-Mobile at $13 billion.

New Street also maintains the view that AT&T, like other carriers, needs the key midband spectrum offered at auction 107 to compete in 5G.

“We would reiterate that AT&T is far better off with higher leverage and more spectrum than the reverse. It would have been a colossal mistake to underspend in this auction. None of the carriers can do without 3GHz spectrum,” Chaplin wrote.

In a Wednesday note to investors, MoffettNathanson analysts said that AT&T is shifting back toward growth versus profitability – but that short-term impacts to do so in both its wireless and HBO Max/Warner Bros ambitions mean less cash flow to pay down debt.

“AT&T is clearly pivoting back towards growth over profitability (their -10.3% consolidated Adj. EBITDA YoY decline is all the proof one needs). In doing so, however, AT&T is bumping up against, and through, the ratings agencies’ leverage ceiling,” wrote senior analyst Craig Moffett. “Selling DirecTV will help slow the overall rate of EBITDA decline, but it won’t solve the basic problem. AT&T’s leverage is too high for a shrinking company, and their dividend is too high for them to do anything serious about lowering it. Something’s gotta give.”

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