Source: Seeking Alpha
AT&T Inc. (NYSE:T)
Q2 2014 Earnings Conference Call
July 23, 2014 4:30 PM ET
Susan Johnson – SVP, IR
John Stephens – Senior EVP and CFO
Ralph de la Vega – President and CEO, AT&T Mobility
Mike McCormack – Jefferies
John Hodulik – UBS
Joe Mastrogiovanni – Credit Suisse
Simon Flannery – Morgan Stanley
Amir Rozwadowski – Barclays
Mike Rollinswtih – Citi Investment and Research
Phil Cusick – JPMorgan
Timothy Horan – Oppenheimer
Ladies and gentlemen thank you standing by. And welcome to the AT&T Second Quarter Earnings Release 2014. At this time phone lines are in a listen-only mode. We will have an opportunity for question-and-answer session later on. Operator Instructions]
At this time I would like to turn the conference over to our first speaker Senior Vice President, Investor Relations, Susan Johnson. Please go ahead.
Thank you, Nick. Good afternoon everyone. And welcome to our second quarter conference call. It’s great to have you with us today. I’m Susan Johnson, Head of Investor Relations for AT&T. Joining me on the call today is John Stephens, AT&T’s Chief Financial Officer; and Ralph de la Vega, AT&T’s President and CEO for Mobility. John will cover our consolidated and wireline results and Ralph will give us an update on our wireless business. And then we’ll follow with a Q&A session.
Let me remind you our earnings material is available on the Investor Relations page of the AT&T website that’s www.att.com/investor.relations. Of course I first need to draw your attention to our Safe Harbor statement before we begin which says that some of our comments today maybe forward-looking. As such they are subject to risks and uncertainties, results may differ materially. And additional information is available in our and DIRECTV’s SEC filings and on the Investor Relations page of AT&T and DIRECTV’s websites. I also wish to direct your attention to the information regarding SEC filings that is included on the slide.
Before I turn the call over to John, I would like to provide some additional context for the quarter on Slide 4. We talked with you the last few quarters about how we’ve been transforming our business for growth. This quarter we saw a significant progress, particularly with our repositioning of the wireless business model. First on the network front. Our Project VIP investment plan continues to deliver or transforming our network to a premier IP video-centric network and the results have been impressive.
Our 4G LTE build now covers more than 290 million people and we expect to complete our deployment by the end of the summer. And our fiber build out to cover more businesses is going well. We’ve now passed more than 500,000 business customer locations since we first announced Project VIP. At the same time we are investing in our network, we are investing in our customers by repositioning the wireless value proposition.
Several years ago we successfully led the transition to usage base to data pricing and now more than 80% of our postpaid smartphone subscribers are on those plans. Now we are making another successful pivot away from the traditional device subsidy model with AT&T and our Mobile Share Value plans. Customers can now pay directly for their devices and exchange for lower service pricing. That’s an equation that really works for our customers, as you can see with this quarter’s record subscriber metrics. And it’s an equation that works for us.
With this an important strategic shift away from device subsidies which has historically netted out to be a multi-billion dollar cost each year. This move away from the subsidy model it’s happening quickly and bringing about many of the expected changes in our financial results.
The shift in revenues from service to equipment and the moderation of quarterly margin trends as we achieved increased savings in device subsidies in the back-half of the year, which as you know historically is our strongest device sales season. But the key point is that we have made a deliberate discussion to go down this path and with the results we are seeing, we believe the strategy is clearly working. We see it in our results and we hear from our customers.
With that, let me turn it over to John to discuss our second quarter results. John?
Thank you, Susan. And hello everyone, thanks for joining us today and as always thank you for your interest in AT&T. Let me begin with our consolidated financial summary which is on Slide 5. Consolidated revenue grew to $32.6 billion up $500 million or 1.6%. This was driven by continued wireless growth as we change our business model. Solid consumer wireline growth once again led by U-verse and growth and strategic business services.
Revenue this quarter was impacted by the shift to no device subsidy plans and wireless. Reported EPS for the quarter was $0.68, as you know during the quarter we sold our equity position in América Móvil. After-tax we had a gain of about $0.08 on the sale. The gain was taxed at a higher effective tax rate due to accounting for deferred tax assets related to foreign tax credits.
While these accounting rules will acquire this high tax rate, we are confident we will be able to utilize existing capitalized carryforwards to maximize the after-tax cash proceeds from the sale. When you normalize to the side, our consolidated effective tax rate is about 34% or about a 100 basis points higher than last year.
Also we had $0.02 of pressure from our Leap integration cost, including our non-cash items such as the amortization of customer list. You may recall that we close that transition in March, so this is the first full quarter with these integration costs. When you exclude these items earnings per share was $0.62 compared to an adjusted $0.67 a year earlier.
Consolidated margins continue to be pressured by our investments both in Project VIP and Agile and our shift away from the subsidy model to wireless. These well for our investments are expected to drive stronger growth in the second half of the year. Cash from operations continues to be strong. Cash from operating activities in the quarter totaled to $8.1 billion and capital spending was $ 6 billion with strong investments in Project VIP. Year-to-date our free cash flow is more than $5 billion and that after are more than $1.5 billion investment in our customers through AT&T Next.
Solid churn to our operational highlights on Slide 6. As you can see, we continue to execute a high level even as we transform our business. In wireless the growing popularity of AT&T Next and the Mobile Share Value plan is having an impact on our results.
The customer transition to these plans is driving a major shift in the subsidy model and at the same time helping to reduce churn increased postpaid subscribers drive strong growth of large voice data and improve our net promoter scores or our customer satisfaction results.
However, Ralph will give you the details in just a moment. But we are very pleased with what we are seeing from our wireless repositioning and confident in our strategy. In wireline U-verse continues its steady performance of subscriber gains and increasing revenue.
It’s now approaching $15 billion in annualized revenues, growing at about 25% year-over-year. Strategic business services also continues to grow at more than 13% and is an annualized $9 billion revenue stream. We also reached a milestone in the second quarter when our U-verse high-speed broadband reached 70% of our total broadband base. Clearly the transition is underway.
While we have made great progress, we still have a lot of room for growth, as we expand our base through Project VIP and continue the bundle broadband with other valuable services. And of course in the second quarter, we announced our intention to acquire DIRECTV.
This will take our video and bundling strategies and our cost structure to a whole new level. We’re really excited about what this transaction can do. Service bundles are a proven winner for us, and we believe the ability to bundle services nationally will be a big plus. Overall, we are on track with full year guidance and look forward for trends to improve in the second half of the year.
We’d now like to turn it over to Ralph de la Vega, who will provide more insight on the strong wireless performance and the repositioning of the wireless business volume. Ralph?
Ralph de la Vega
Thank you, John and good afternoon everyone. It’s great to be with you today. I’ll start on Slide 7, as John said this was truly a remarkable quarter for our wireless business with results coming in better than expected. We’ve been very successful in repositioning the business model and it’s happening and break next speed.
The shift is in no-device-subsidy model is unmistakable, more and more customers are choosing the simplicity of Mobile Share Value plans and AT&T Next. This model shift is driving impressive results. Postpaid churn was a record low 0.86%, the best ever for AT&T and likely and industry best this quarter.
This customer loyalty help drive our largest postpaid subscriber gain in nearly five years more than a million postpaid net adds in the quarter including very strong smartphone net adds. The shift in Mobile Share Value and Next has been dramatic in transitioning our smartphone customer base. Half of our smartphone sales in the second quarter were on AT&T Next and nearly half of our smartphone subscriber base has moved to Mobile Share Value plans since we first introduced value plans in February.