Speaking at a Bank of America analyst event this morning, AT&T’s Chief Financial Officer Pascal Desroches said that AT&T expects its postpaid phone net adds in the second quarter to be about 100,000 less than the adds the company reported in its first quarter.
In Q1 2023, AT&T reported 424,000 postpaid phone net ads. But Desroches said in Q2 that number will be closer to the low-300,000s.
He said there are a couple of factors causing postpaid phone net adds to drop. One is that AT&T walked away from a government contract that it determined wasn’t sufficiently profitable, and that contract included 75,000 postpaid phones.
Presumably, one of the other big wireless carriers picked up that contract and will reflect those phones in its Q2 earnings.
Desroches also said AT&T has seen slightly elevated churn during this quarter due to new pricing constructs from its competitors, although that churn is beginning to fade back to previous levels.
Spinning the news in its most favorable light, Desroches said the third and fourth quarters of the year are typically higher because of holiday sales. And he said average revenue per user (ARPU) is still attractive and growing.
AT&T reported postpaid phone ARPU of $55.05 in the first quarter.
Desroches said, “What's important to me is when I look at our overall wireless service revenue, that is expected to grow 4%-plus. In fact, for the first half of the year I would anticipate us delivering around 5%. And so overall this is a really healthy share of the dollars coming into the industry.”
He said AT&T has garnered some additional revenues via handset insurance. “The team has done a really nice job of deeper penetration of handset insurance, and that is part of the equation in our improving ARPU.”
Free cash flow
After its Q1 earnings call, AT&T’s stock dropped significantly because Wall Street was stunned that the company produced only $1 billion free cash flow in the quarter, when it had forecast $16 billion for the year.
AT&T CEO John Stankey has since said that he thought management was communicating its free-cash-flow cadence clearly, but apparently it was not, given the strong reaction from investors.
Today, Desroches said, “The billion dollars we produce in Q1 was in line with our expectation.” He said it reflected peak payments for capital investments the company made for devices from last year's holiday season. And it also reflected the annual incentive compensation paid to executives. “We said Q1 was going to be the lowest, and it would gradually improve from there.”
Moving forward, the company won’t have to pay incentive compensation for the rest of the year, and it expects lower device payments both sequentially and year over year. He said capital investments should also moderate some.
“What you should see is free cash flow for Q2 in the $3.5 billion to $4 billion range,” said Desroches. “We expect continued acceleration as we make our way through the balance of the year.” He said the the company has confidence it will reach the $16 billion free cash flow it predicted for the full year.
Bank of America analyst David Barden did not ask Desroches this morning about cost cutting. But last week, Bloomberg reported that AT&T is mandating that 60,000 managers return to work in person in one of nine of the company’s offices, despite many employees living far away from any of those locations. Some of the workers that Bloomberg spoke to suggested that the return-to-office policy is a thinly-disguised tactic to lay off workers and save billions in costs.