Summary:
AT&T's combination of U-verse, DIRECTV’s satellite TV and GigaPower Internet
service can now provide traditional cable TV as well as mobile video streaming
services. The company is also moving full steam ahead with its objective to roll out
ultra high-speed Internet service across the country. Moreover, plans to offer three
Internet TV packs for the different categories of viewers bode well. Also, the field test
of the next-gen 5G wireless technology, initiatives in the IoT space and investments in
the Mexican telecom market and fiber arena raise optimism. Yet, a saturated wireless
market, spectrum-related issues, persistent losses in access lines, intensifying
competition and regulatory concerns remain potent headwinds.
Reasons To Buy:
- Acquisitions and strategic collaborations have played a major role in shaping AT&T’s growth story. In Jul 2015, the company scaled up to the highest position in the U.S. pay-TV market with the acquisition of DIRECTV. The deal will not only boost AT&T’s earnings and revenues through enhanced video offerings but also reduce programming costs over the long haul. AT&T expects to derive an impressive $2.5 billion worth of cost synergies from the DIRECTV deal on an annualized basis, from the third year of acquisition. Most of the synergies will likely generate from a significant reduction in content costs, which as a percentage of video revenues, is currently much higher for AT&T than for DIRECTV. Moreover, a large customer base of the merged entity will lend AT&T a better position to bargain with media companies (content developers).
- In March, the company announced plans to offer a version of its DIRECTV satellite TV service through the Internet which would not require customers to have a satellite dish, set-top box or annual contract. The company will be offering three affordable video plans in order to appeal to all types of viewers, ranging from those who want the full package to a streamlined bundle. With DIRECTV Now, the company plans to offer a full range of live channels and on-demand shows. DIRECTV Mobile will be providing a package of premium and made-for-the-Web video service, particularly intended for smartphone users. Meanwhile, DIRECTV Preview is a free, ad-supported video service designed for the teens and millennials. We believe that the new endeavor will help AT&T attract cord cutters and boost revenues. Also, offering of two-year guaranteed pricing for its new DIRECTV, home internet and digital phone customers is expected to aid in expansion of its satellite offering in the residential services segment.
- In Aug 2015, AT&T provided a three-year forecast with respect to certain financial metrics from 2016 to 2018. Consolidated revenue growth is expected to be in line with GDP growth or higher while adjusted earnings per share growth is projected in the mid-single digit range. The company also expects free cash flow to improve and adjusted consolidated margins to increase from existing levels. Capital intensity, including merger-related items, is forecasted to comprise about 15% of revenues or lesser. Recently, the company provided its guidance for full-year 2016. AT&T expects double-digit consolidated revenue growth. Adjusted earnings per share growth will likely be in the mid-single digit range or higher. Consolidated margins are likely to remain stable. Capital expenditure will be around $22 billion. Free cash flow growth with a dividend payout ratio is expected in the 70% range.
- AT&T has revealed plans to field test the next-gen 5G technology. The company has tied up with the likes of Ericsson and Intel Corp. to kick-start the development process. The next-gen 5G network will provide 50 times the throughput of the currently available standard 4G LTE network. Latency period of data delivery will be in single milliseconds. Moreover, superfast 5G mobile networks will be of utmost necessity in managing the exponential growth of Internet-connected devices, popularly known as Internet of Things (IoT). A faster network in the form of 5G will boost Internet speeds, giving the companies a reasonable advantage over the traditional cable industry. Thus, if AT&T succeeds to bring 5G to the U.S. market before any of its peers, its quest to be the numero uno in the domestic market will definitely see a positive direction.
- AT&T forayed into the Mexican telecom industry last year with the acquisition of Gurpo Iusacell and Nextel de Mexico for approximately $4.4 billion. Since then, the company has been actively bridging the gap between the U.S. and Mexico. Meanwhile, AT&T is gradually expanding its 4G LTE wireless network in Mexico. Currently, the service spans across 42 Mexican cities catering to around 45 million subscribers and is likely to cover 75 million subscribers by the end of 2016. Furthermore, the company aims to provide 4G LTE service to 100 million Mexican customers by the end of 2018. Management has decided to invest $3 billion toward the expansion of high-speed mobile Internet network in the country. Notably, Mexico is the largest economy in the Latin-American region and holds massive growth potential as the wireless penetration rate in the country is relatively low. Thus, AT&T’s investments in the region are expected to reap significant benefits.
- AT&T boasts the best Internet speeds in the industry as it is the only U.S. carrier that provides 4G network through both Long Term Evolution (LTE) and High-Speed Packet Access Plus (HSPA+) technologies. AT&T’s LTE network serves as the benchmark of mobile technology and the sole source of income for many operators across the world. AT&T has completed the buildout of its LTE network and now aims to cover more than 385 million people and businesses by the end of this year. Meanwhile, AT&T has also announced the completion of buildout of fiber to 1 million additional customer locations, proceeding with its fiber-to-the-building (FTTB) program. Notably, AT&T now provides high-speed Internet products to business customers on its fiber network in every important metro across the company's 21-state footprint. AT&T is also moving full steam ahead with its objective to roll out ultra high-speed Internet service across the country. The company has expanded its Gigabit internet network to 22 Tenesse communities and 17 South Carolina markets. The fiber optic network is becoming the most sought-after technology for secure and fast data transmission. Thus, we believe that such lofty expansion plans have lent AT&T an upper hand in the fiber arena.
- AT&T Business Solutions, a division of AT&T, has decided to introduce an innovative Managed Internet Service on Demand under its Network on Demand platform which will allow large business customers to add or change network services in near real-time. The company is aiming to extensively use software defined networking (SDN) and network function virtualization (NFV) techniques to enrich its network-on-demand offerings. AT&T’s Managed Internet Service is designed to run on its Switched Ethernet Service via Network on Demand platform. AT&T aims to control 75% of its network using software (instead of hardware) by 2020. Meanwhile, AT&T is also forging ahead in the Internet of Things (IoT) space with its strategic partnerships and initiatives, which should allow it to boost the performance of its enterprise segment and also enhance service offerings. The company has been signing agreements with industries like automotive, agriculture, energy, healthcare, aviation, security, supply chain logistics and transportation, thereby gaining a leading position in the space. AT&T now has over 28 million devices connected to its network. Moreover, the company is a leader in connected cars space and the company has completed a deal with Ford that it believes is going to connect at least 10 million cars over the next five years.
Risks:
- In a saturated wireless market, spectrum crunch has become a major issue in the U.S. telecom industry. Most of the carriers are finding it increasingly difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become even more acute with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services. The new spectrum auction by the Federal Communications Commission (FCC) will be available this year. However, in May 2014, FCC approved a plan, which will reserve part of the spectrum for carriers having nominal low frequency airwaves. These could restrict incumbent players like AT&T from owning a substantial part of the spectrum, in turn, hurting the company’s business prospects.
- AT&T’s LTE, which has become the principal next-generation global standard, also poses a major risk to the wireless segment. Other wireless service providers may delay LTE deployment or change their selection and adopt next-generation technologies, which may be incompatible with AT&T systems. Thus, there are chances that LTE may not become the principal next-generation global standard as 4G infrastructure might become an obstacle in case other service providers shift to different generation technologies. Further, arch rival Verizon remains the undisputed leader in LTE deployment, which provides it with a clear advantage over its rivals.
- AT&T has increased the prices of its voice and U-verse video services with effect from 2016. Rising operating costs, especially in programming and service delivery, as well as increasing content costs were the main factors that drove the price increment. Notably, AT&T is challenged by aggressive pricing plans of direct competitors such as Verizon and Sprint, designed for iPhones and smartphones. Further, smaller wireless carriers offer cost-effective voice and data plans. This may negatively influence subscriber retention in the near term.
- The company’s wireline division is struggling with persistent losses in access lines as a result of competitive pressure from voiceover-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by the cable companies. These are weighing on the company’s revenues and margins. Moreover, AT&T’s quest for faster growth will increase subscriber acquisition cost in both consumer and SMB (Small and Medium Business) businesses and put pressure on wireline margins.
- For the successful completion of the DIRECTV deal, AT&T had made a few commitments to the FCC. Per the agreement, AT&T will provide its fiber-based Internet service to a minimum of 12.5 million locations. The company will also offer low-priced fixed broadband service to all low-income families who are eligible for the government's Supplemental Nutrition Assistance Program across the 21 states. The retail terms put forth for AT&T's fixed broadband Internet services will have little advantage for its own online video programming services. However, AT&T may continue the discounted integrated bundled services of video and highspeed Internet. Most importantly, AT&T will no longer challenge the net neutrality laws recently adopted by the FCC.
