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The Core

AT&T clarifies Dish, Microsoft deals – and that free phone promotion

AT&T executives had much to discuss Thursday during their quarterly conference call with analysts. The company is fresh off a massive MVNO agreement with Dish Network, a groundbreaking core network deal with Microsoft and an earnings report – buoyed by a seemingly endless free phone promotion – that one analyst firm described as "spectacular." And all of that doesn't even include the company's billion-dollar deals in recent months to offload its WarnerMedia video operation and its pay-TV business.

It's enough that even some Wall Street veterans are feeling the strain. "It's always difficult to parse the market reaction to such a tangle of businesses (we are looking forward to AT&T being a telecom company again)," wrote the financial analysts at New Street Research in a note to investors.

Investors appear to have the same feelings. AT&T's stock remained relatively unchanged after the release of its second quarter results Thursday, trading at around $28 per share. Nonetheless, AT&T executives managed to shed some light on the company's recent gyrations in its core profit center: Mobility.

That Dish MVNO agreement

"We expect Dish to be successful in the market," explained Jeff McElfresh, the CEO of AT&T Communications, which houses the company's 5G and fiber operations. "And so the competitive dynamics aren't changed here. Rather, we get to participate in their success at this point."

AT&T just last week inked a deal with Dish Network worth at least $5 billion that makes AT&T the primary network services partner for Dish's MVNO customers, and casts Dish's erstwhile wireless partner, T-Mobile, further toward the outskirts. "I don't think anyone around here is upset about taking $5 billion out of a competitor's pocket," noted AT&T CEO John Stankey.

AT&T officials explained that the company's network will be able to handle the additional traffic generated by the Boost Mobile, Ting and Republic Wireless customers that Dish may move onto the AT&T network. However, they noted that an unspecified number of Dish's roughly 9 million mobile customers will need a new phone in order to access AT&T's network. Others will at least need a new SIM card.

AT&T's executives also explained that the deal carries a minimum annual commitment where Dish will pay AT&T for wholesale access to the company's network, and that those fees are "more front end loaded" toward the early years of the ten-year agreement.

Further, Stankey acknowledged that "there are a lot of options we can explore," including the potential for AT&T to access some of Dish's spectrum holdings. Company officials said AT&T might be able to add some of Dish's spectrum into AT&T's network without making any physical changes to its network. Indeed, Light Reading recently reported that both AT&T and Verizon continue to access spectrum tied to Dish as part of an FCC effort to expand wireless network capacity in response to the COVID-19 pandemic.

However, AT&T officials declined to discuss whether the company's activation of Dish's spectrum would help Dish meet its FCC-mandated network-buildout goals. "I'm not going to comment on that," McElfresh said. Dish executives will undoubtedly discuss the company's new agreement with AT&T during their own quarterly earnings call, which will likely happen next month.

That Microsoft deal

Just a few weeks ago, AT&T said it would transition its 5G core network operations into Microsoft's Azure cloud over the next three years. The announcement has been widely viewed as representing a seminal shift in the global 5G industry as operators increasingly move their core network operations from their own internal systems and into the public cloud.

According to AT&T's McElfresh, the operator has "a very deep and wide ranging relationship" with Microsoft, and this new agreement stems from that.

"We're going to enjoy some anchor tenant benefits from that," he said of the company's new deal with Microsoft. "We're not disclosing any specific financial details, but one thing that we are not doing ... we're not outsourcing our core network functions. We are relying upon Microsoft to develop a scaled compute and storage capability at the edge while we retain control of our network stack and the kinds of services that we're going to offer to the market." He explained that the transaction will allow AT&T to focus on its services rather than the nitty gritty details of maintaining its network operations.

That free phone promotion

While AT&T's agreements with Dish and Microsoft certainly will have major ramifications in the future, most investors were focused squarely on AT&T's performance in the second quarter. And that performance was impressive, according to most analysts.

"AT&T added 789,000 postpaid phone subs in the quarter, well ahead of our 325,000 forecast, with the beat roughly evenly split between better gross adds and lower churn (0.69% vs our 0.80%), indicating that the company's retention efforts continued to be effective in the quarter," wrote the financial analysts with Evercore in a note to investors. "Taken together, the business that will constitute the future AT&T beat on revenue and subs (phone adds spectacular)," added the New Street analysts.

Analysts attributed much of AT&T's success during the second quarter to its ongoing offer of a free phone to new and existing subscribers. The company began offering that promotion late last year and it's still available today. That's noteworthy considering Verizon discontinued its own free phone promotion earlier this week, having just introduced it at the beginning of June.

"It just continues to prove to be sustainable," McElfresh said of the promotion, which has not dragged down AT&T's earnings or profits. "We've remained consistent in our offer construct... This model is sustainable."

The continued success of AT&T's free phone promotion was part of the reason the operator raised its financial guidance for the full-year 2021. The company increased its wireless service revenue forecast from a previous 2% in growth to a new 3% in growth. And it said it now expects its adjusted earnings per share to grow in the "low to mid" single digits, which represents an improvement from the company's previous expectations.

"AT&T is doing its level best to make hay while the sun shines," wrote the financial analysts at MoffettNathanson in a note to investors, adding that the operator's "promotionality has left their subscriber base growing at blistering pace."

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Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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