NEW YORK (Reuters) — AT&T Inc on
Tuesday raised its forecast for full-year revenue growth to reflect
its acquisition of LEAP wireless in March and the popularity of a
new handset pricing model that charges customers for devices
separately from their wireless plans.
Like other carriers, AT&T <T.N> is seeking growth in a nearly
saturated environment, making strategies such as alternate pricing
plans more crucial to attract customers.
The company raised its forecast for full-year revenue growth to at least 4 percent from 3 percent.
A higher-than-expected 35 percent of wireless customers transferred
to NEXT, its new pricing plan, boosting quarterly revenue 3.6
percent from the year-earlier quarter.
"We are very pleased with the take rates," John Stephens, AT&T's
chief financial officer, said of NEXT in a conference call following
the earnings release. "I believe the 35 percent will become a new
standard."
AT&T added 625,000 postpaid net wireless subscribers in the quarter,
the company's strongest post-paid growth in the first quarter in
five years, blowing past Jefferies Equity Research expectations of
173,000.
Yet the growth in subscribers was somewhat offset by weak service
revenue growth as customers who moved off of the traditional device
subsidization model were eligible for Mobile Share, a plan that
includes unlimited talk and text and allows for shared data in up to
10 devices.
Mobile share accounts tripled year-over-year and reached 11.3
million customers with an average of three devices per account,
which lowered revenue per user. Despite the increase in subscribers,
phone-only average revenue per user increased only 0.4 percent per
year compared with the year-earlier quarter.
"They did not expect this large of an uptake," said Kevin Smithen, a
managing director at Macquarie Securities Group in New York.
"Though they saved a lot of money on the NEXT plan by lowering the
expenses of subsidies, the service revenue came in light because
they have re-priced 11 million subscribers at a lower average
revenue per user."
In response to growing competition from smaller rivals such as
fourth-ranked T-Mobile US Inc <TMUS.N>, AT&T introduced its NEXT
pricing plan in July 2013, eliminating down payments for devices and
instead allowing customers to pay in installments.
The company previously paid heavy upfront subsidies to phone makers
in order to offer customers device discounts and tie them into
two-year contracts. It then recouped the cost of the phone over the
span of the contract through its service fees.
Under NEXT, AT&T unbundles the cost of the device from customer's
wireless plan. It can then achieve a limited-term boost to revenue
by booking device purchases upfront as immediate revenue, despite
the fact customers continue paying in installments over the duration
of their contract period.
The company maintained its estimate of free cash flow for 2014 in
the $11 billion range and capital expenditures in the $21 billion
range, easing analysts' worries that NEXT could tie up capital in
financing installment plans.
"The uptake of the NEXT program should have a positive impact on the
profitability of the company. They came in fine on cash flow this
quarter, with a bit of a working capital swing, but they are
maintaining their full-year guidance and I find that to be pretty
constructive," Jefferies analyst Michael McCormack said.
Earnings were also boosted by AT&T's acquisition of Cricket
Communications Inc's <LEAPC.UL> LEAP wireless, which brought in $3
billion in new spectrum, key to supporting increasing demand for
wireless data services, Stephens said.
AT&T expects about $1.2 billion of integration costs in the next two
years and $0.05 earnings per share dilution in 2014.
AT&T, the No. 2 U.S. mobile provider, earned $3.65 billion, or 70
cents a share, in the first quarter, compared with $3.70 billion, or
67 cents a share, in the year-ago quarter. Excluding items, earnings
totaled 71 cents a share, beating Wall Street's expectations by 1
cent, according to Thomson Reuters I/B/E/S. Revenue rose to $32.48
billion compared with Wall Street's view of $32.47 billion,
according to Thomson Reuters I/B/E/S.
AT&T shares fell to $35.51 in late trading after closing at $36.29
in the regular New York Stock Exchange session.
(Reporting by Marina Lopes; editing by Steve Orlofsky, Nick
Zieminski and Andre Grenon)
