AT&T loses 215K postpaid smartphone subs, but wireless margins grow

AT&T's strategy to target high-end customers was underscored Tuesday when the company posted a net loss of 215,000 branded postpaid phone subscribers in the first quarter but a notable increase in margins in consumer wireless.

And the company said 3 million customers have signed on to its unlimited mobile data plan, which is available only to DirecTV subscribers.

The No. 2 wireless carrier in the U.S. reported 2.3 million overall net adds in North America driven by connected devices, prepaid phones and its expansion in Mexico. It posted 712,000 branded postpaid and prepaid phone net adds.

But while the company was widely expected to post losses in the important postpaid phone segment, AT&T's results were worse than Wells Fargo Securities' projection of a loss of 200,000 postpaid phone customers.

Overall wireless revenues were down slightly due to the industry-wide trend of decreasing device sales, but AT&T reported wireless service EBITDA margin of 49.5 percent, marking a record for the quarter.

And while AT&T's move to software-defined networking is still in its early days, the transition is already paying benefits, CFO John Stephens said during an earnings call with analysts.

"Our virtualization and software-defined networks are already delivering material capex savings," Stephens said, "adding two and a half times more capacity at 75 percent of the capital costs compared to just two years ago."

Stephens added that AT&T is on track to completely decommission its 2G network by the end of the year, although that move will not be completely painless. "We expect to continue to see manageable pressure from subscribers choosing not to make this migration" to newer networks, he said.

Here's a closer look at some key quarterly metrics from AT&T:

Subscribers: AT&T's prepaid gains were substantial – Cricket smartphone users generate ARPU of roughly $41, Stephens said – and its other net adds show traction in tablets and other connected devices. But the carrier once again lost share in the important segment of postpaid smartphone customers, bleeding customers primarily to T-Mobile. Total mobility subscribers increase 7 percent year over year, and postpaid customers inched upward 13 percent, however.

Financials: The telecom giant slightly exceeded expectations with an overall quarterly revenue of $40.54 billion, up 24 percent from the prior year, and earnings per share of 72 cents. First-quarter wireless EBITDA margins increased more than $600 million over the prior year, and business wireless revenues were up 2.3 percent due largely to new tablet and smartphone sales.

Spectrum: AT&T has been migrating customers off of its 2G network for years, refarming the freed-up airwaves for LTE use. That will continue as it shuts down 2G completely by the end of the year, increasing capacity. And like Verizon, it touted its ability to leverage its spectrum via its fixed-line networks.

Unlimited data: AT&T's plan to entice DirecTV customers to sign on to AT&T for wireless service continues to pay off, with 3 million customers subscribing to the new unlimited data plans. And "thousands more are being added every day," Stephens said.

Summary: AT&T is in the midst of major expansions both in terms of geography (its growing presence in Latin America) and markets (as it develops video offerings). It has made major strides in the IoT, which will become a massive market, and its prepaid business is thriving. But its core business of providing mobile connectivity to consumers – particularly lucrative, postpaid smartphone consumers – continues to struggle mightily as T-Mobile's momentum grows.

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