AT&T's U-verse gains help to ease legacy losses in Q3

AT&T's (NYSE: T) U-verse services drove up consumer wireline revenue growth 3 percent year-over-year to $5.7 billion and helped to cushion the blow of legacy consumer and business service losses.

The service provider said that ongoing growth in the third quarter of 2014 consumer IP-based data services "more than offset lower revenues from legacy voice and data products."

U-verse, which includes high speed Internet, TV and voice over IP, now represents 64 percent of wireline consumer revenues, up from 54 percent in the same period a year ago. Likewise, consumer U-verse revenues grew 23.2 percent year over year. As of the end of the quarter, U-verse TV penetration was almost 22 percent and U-verse broadband penetration was 21 percent.

Despite the gains it made with U-verse, total third-quarter 2014 wireline revenues were $14.6 billion, down 0.4 percent year-over-year and down slightly on a sequential basis from the second quarter of 2014. AT&T's wireline operating income totaled $1.3 billion, down 17.2 percent versus the third quarter of 2013.

Meanwhile, AT&T's third-quarter 2014 wireline operating income margin was 8.8 percent versus 10.6 percent in the same period a year ago, primarily due to U-verse content cost increases, declines in legacy services, success-based growth costs and expenses incurred as part of Project VIP.

Here's a breakdown of AT&T's key wireline metrics:

Broadband: U-verse broadband service continued to be a star performer in its portfolio as the telco added 601,000 new subscribers, reaching a total of 12.1 million subscribers. Overall, AT&T added a total of 38,000 broadband subscribers during the quarter, reflecting customers dropping legacy DSL services. The service provider's total U-verse broadband subscribers now represent 73 percent of all its wireline broadband subscriber base, compared with 59 percent in the same period a year ago.

Video Services: The telco also continued to see the number of U-verse TV subscribers increase during the quarter with the addition of 216,000 new subscribers to reach almost 6.1 million customers in service.

Over 97 percent of AT&T's video customers subscribe to a dual or triple play bundle. AT&T said that nearly two-thirds of U-verse TV subscribers take three or four services. ARPU for U-verse triple-play customers continues to be more than $170 a month.

"Bundles continue to play a big role in our growth," said John Stephens, Senior Executive Vice President and CFO for AT&T, during the earnings call. "More than 97 percent, or virtually all of our video customers, have some kind of bundle with us most often broadband and video."   

Stephens added that "triple play bundle customers have significantly lower churn than standalone customers." 

Business and wholesale: Similar to its ILEC peer Verizon (NYSE: VZ), AT&T's strategic business services such as cloud, Ethernet and VPN rose 14.3 percent to $2.5 billion. Strategic business services now represent nearly $10 billion in annual revenues and are more than 28 percent of wireline business revenues in the third quarter. AT&T also made progress in the small to medium business (SMB) market, adding 44,000 U-verse broadband business subscribers.

However compelling the strategic gains were, total business revenues declined 2 percent year-over-year to $8.7 billion but remained stable sequentially. The service provider added that legacy product declines "were partially offset by continued double-digit growth in strategic business services."

"The shift to IP data away from legacy services as well as the economy is the story in wireline business, but within the business there are some differences," Stephens said. "Our retail service revenues actually grew year-over-year, which are service revenues from enterprise and small business."

Enterprise revenues rose 1.7 percent, which Stephens said "was its best performance in years and the sixth consecutive quarter of service revenue growth," while small business "trends also improved even with the lack of business formations." 

Similar to the second quarter, AT&T's wholesale service revenues declined 6 percent. AT&T said that its decision to exit what it calls "select low-margin wireline wholesale businesses" had an impact on overall segment revenues.

"Wholesale was again challenged by network grooming issues," Stephens said. "We also made a strategic decision to refocus the wholesale business, which reduced wholesale revenues by about $50 million in the quarter and we expect that amount to increase in the fourth quarter and thereafter." 

From an overall financial standpoint, AT&T reported consolidated revenues of $33.0 billion, up 2.5 percent versus the same period a year ago. However, operating income was $5.4 billion, down from $6.2 billion and operating income margin was 16.4 percent versus 19.2 percent.

Shares of AT&T closed at $34.50, down 12 cents or 0.35 percent at the end of trading on the New York Stock Exchange.

For more:
- see the earnings release
- hear the earnings webcast

Special report: Wireline telecom earnings in the third quarter of 2014

Related articles:
AT&T: FCC's CAF-II should just support broadband services
AT&T: DirecTV deal good for rural customers, has nothing to do with Comcast-TWC
California sheriff: Criminal act, not falling tree, caused AT&T outage
AT&T hatches plans to bring 1 Gig to 4 new cities

Suggested Articles

Verizon and Google have teamed up for a symbiotic relationship that puts Google's Stadia gaming system into the hands of new Fios subscribers.

In order to combat "data-in-motion" security threats, Privafy announced its cloud-native security application to take on legacy security vendors.

CenturyLink announced it has won a task order to provide secure connectivity to the U.S. Department of Defense Education Activity's learning network.