Archives for April 1, 2019

AT&T's Cash Cow Is Changing

AT&T (T), as one of the largest telecommunications companies in the world, is a large and complicated enterprise. It has multiple operating segments, some of which have multiple sub-segments, which make up the enterprise, and each of these are important to the firm, its future prospects, and its shareholders. When you really drill down deep into the business though, while it really is an aggregation of smaller (but still very large) firms, the core of what makes AT&T the behemoth it is today is also its largest cash cow: Mobility. In recent years, growth there has been essentially non-existent, but that’s only at face value. When you consider the paradigm shift taking place in the industry, it becomes clear that growth for the business should resume, but it will take a little time.

Mobility is significant

Mobility is, in the simplest terms I can conjure, AT&T’s sub-segment listed under its Communications segment that offers customers across the US with wireless services and related equipment. If you envision AT&T as primarily a cellphone and cellphone services provider, then Mobility is precisely what you’re thinking of and your thought process would be correct. While Communications as a whole would make for an interesting discussion, though, my primary emphasis in this piece is to discuss Mobility specifically.

Over the past few years, anybody looking at Mobility’s revenue would be certainly underwhelmed. Sales back in 2016 came in at $72.59 billion. They dropped modestly to $71.09 billion in 2017 before ticking up to $71.34 billion last year. Though technically down over this three-year period, the extent of the decline is such that it’s about the same as saying sales are essentially flat.

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What’s really interesting about these revenue figures is how they break down on a service vs. equipment basis. Service sales have dropped materially since 2016, declining from $59.15 billion then to $54.93 billion today. Equipment sales have mostly made up for this, soaring from $13.44 billion to $16.41 billion. Though this may seem odd, I’ll explain later in this article why this likely is.

On the bottom line, things are going quite well for AT&T’s Mobility operations. Segment profits have actually ticked up, rising from $20.74 billion in 2016 to $21.72 billion last year. On a margin basis, this translates to improvement over time, with the segment profit margin climbing from 28.6% in 2016 to 30.4% as of last year. What’s really remarkable about Mobility is the fact that, despite it accounting for just 41.2% of the company’s overall revenue during 2018, it accounted for an impressive 56.3% of the business’s segment profits and for 67.3% of AT&T’s Communications segment’s profits. Given how integral this is to the business, there’s no doubt in my mind that you can consider Mobility to be a cash cow.

The picture is distorted

Sometimes when you look at a company’s financials, the first glance gives a great view of how things really are going, while other times the picture is distorted. AT&T is a case of the latter. If you looked solely at sales, and even segment profits, you would think the business has stagnated and that, perhaps, the future will be worse (or at least no better) than the past. This thought might be strengthened, even, for investors who look at AT&T’s wireless subscriber count and see that from 2016 to 2018 it fell from 77.37 million accounts to 76.89 million.

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When you really dig deep, though, you see that the composition of these wireless subscribers is looking favorable for the company long-term. Between 2016 and 2017, for instance, the business saw the number of postpaid smartphone subscribers rise 2.7% from 59.10 million to 60.71 million. Its postpaid feature phone subscribers, meanwhile, were responsible for the decline, falling 11.5% from 18.28 million to 16.18 million. The difference between smartphone and feature phone subscribers is that the latter are those customers who own a cheaper phone, one with limited functionality but that comes at a budget price point. What this trend indicates is that more and more consumers are shifting toward the premium smartphone market and away from cheaper alternatives.

In the past, I have written about the Connected Devices operations within the Mobility sub-segment and those too are undeniably helpful for the firm’s operations, both now and for the future. Because I have dug into that area before, though, I will not rehash those details here, but will refer you to my latest article on the topic. Outside of Connected Devices and postpaid smartphones, however, another hot market for AT&T is the prepaid side. The company’s subscriber count there grew much higher between 2016 and 2018, climbing 25.6% from 13.54 million to 17 million. Should this trend continue as well, it will help to offset the decline in prepaid feature phone subscribers.

This brings me back now to the company’s service revenue vs. its equipment revenue. Equipment revenue is rising for two reasons. The first, according to management, was a change in accounting principles that affected how it recognizes sales from bundled contracts, and the second was due to the sale of higher prices. As fewer featured phone subscribers exist and shift more toward smartphones, a trend that is simply inevitable, this should continue. On the service side, the firm benefited from higher prepaid service revenues, but what more than offset these sales increases were shifts toward more unlimited plans by customers, combined with an accounting policy change that affected the picture in a negative way for Mobility to the tune of $1.74 billion in 2018 compared to 2017.

Takeaway

Right now, the picture facing AT&T’s Mobility operations is complex and multi-faceted, but contrary to potential concerns that the company’s core business, its cash cow if you will, is doing poorly, we have data that suggests that the issues in recent years can be chalked up largely to one-time changes and a shift of consumers to unlimited plans and away from low-priced phones and toward higher-priced ones. As postpaid feature customers wind down, negative pressure on Mobility’s sales will ease and the sub-segment should benefit not only from its higher-margin activities, but also from the new sales mix that will lead it into the future. For long-term investors, this looks set to create a bullish scenario for the firm, but it will require a great deal of patience and a true long-term mindset.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Facebook Had a Busy Weekend, From News Feed to Livestream Changes

While millions of Americans were enjoying a warm spring weekend, Facebook employees were hard at work responding to an avalanche of news about their company. After an already busy week for the social media platform—including a lawsuit from the Department of Housing and Urban Development, as well as a policy change regarding white nationalist and separationist content—five major Facebook stories broke over the last few days, including a Washington Post op-ed in which CEO Mark Zuckerberg calls for the social network to be regulated. Here’s what you need to know to get caught up.

Facebook Explores Restricting Who Can Livestream

The torrent of Facebook news began Friday, when COO Sheryl Sandberg said the company was “exploring restrictions on who can go Live depending on factors such as prior Community Standard violations.” The decision came less than three weeks after a terrorist attack in Christchurch, New Zealand, that killed 50 people was livestreamed on Facebook. The social network, as well as other companies like YouTube, struggled to stop the shooter’s video from being reuploaded and redistributed on their platforms.

In 2016, Zuckerberg said that live video would “create new opportunities for people to come together.” Around the same time, the company invested millions of dollars to encourage publishers like Buzzfeed to experiment with Facebook Live. The feature provided an unedited, real-time window into events like police shootings, but it was also repeatedly used to broadcast disturbing events. After the Christchurch attack, Facebook is now reexamining who should have the ability to share live video, which has proven difficult for the company to moderate effectively.

Sandberg also said Facebook will research building better technology to “quickly identify edited versions of violent videos and images and prevent people from re-sharing these versions.” She added that Facebook had identified over 900 different variations of the Christchurch shooter’s original livestream. Sandberg made her announcement in a blog post published not to the Facebook Newsroom but to Instagram’s Info Center, indicating Facebook wants its subsidiaries to appear more unified.

Old Zuckerberg Blog Posts Disappear

Also on Friday, Business Insider reported that years of Zuckerberg’s public writings had mysteriously disappeared, “obscuring details about core moments in Facebook’s history.” The missing trove included everything the CEO wrote in 2007 and 2008, as well as more recent announcements, like the blog post Zuckerberg penned in 2012 when Facebook acquired Instagram.

Facebook said that the posts were mistakenly deleted as the result of technical errors. “The work required to restore them would have been extensive and not guaranteed, so we didn’t do it,” a spokesperson for the company told Business Insider. They added that they didn’t know exactly how many posts were lost in total.

This isn’t the first time Zuckerberg’s content has gone missing from Facebook. Last April, TechCrunch reported that some of the CEO’s messages were erased from people’s private inboxes. (Facebook later extended an “unsend” feature to all Facebook Messenger users.) And in 2016, “around 10” Zuckerberg blog posts also disappeared from the social network. The deletion was similarly blamed on a technical error, but in that case the blogs were later restored.

Zuckerberg Calls for Regulation in Four Areas

In an interview with WIRED last month, Zuckerberg said, “There are some really nuanced questions … about how to regulate, which I think are extremely interesting intellectually.” On Saturday, the Facebook CEO expanded on that idea in an opinion piece published in The Washington Post. “I believe we need a more active role for governments and regulators,” Zuckerberg wrote, calling for new regulation in four particular areas: harmful content, election integrity, privacy, and data portability.

In the piece, Zuckerberg acknowledged that he believes his company has too much power when it comes to regulating speech on the internet. He also mentioned Facebook’s new independent oversight board, which will decide on cases where users have appealed the content decisions made by Facebook’s moderators. (On Monday, Facebook announced it was soliciting public feedback about the new process.)

Zuckerberg also said the rest of the world should adopt comprehensive privacy legislation similar to the European Union’s General Data Protection Regulation that went into effect last year. There’s currently no modern privacy law in the United States, though California passed a strong privacy bill last summer, which Facebook originally opposed. Now a number of lawmakers, and lobbyists, are jockeying to get a federal privacy law in place before the state-level rules take effect next year.

The op-ed arrives as Facebook faces a looming Federal Trade Commission investigation over alleged privacy violations. Lawmakers on both sides of the aisle have also recently expressed an interest in regulating or even breaking up the social media giant. Zuckerberg’s op-ed provides a sketch of the kind of regulation that his company would be comfortable adopting. Some critics have also argued that legislation like GDPR can strengthen the dominant position of companies like Facebook and Google.

Facebook Opens Up About How News Feed Works

How Facebook chooses what content to feature in the News Feed has consistently remained mostly a mystery. As Will Oremus wrote last week in Slate, “For all of Facebook’s efforts to improve its news feed over the years, the social network remains as capricious and opaque an information source as ever.”

But on Sunday evening, Facebook quietly announced that it will begin revealing more about why users see one post over another when they scroll through their feeds. The company will soon launch a “Why am I seeing this post?” button, similar to the one it launched in 2014 for advertisements. It will begin rolling out this week and will be available for all Facebook users by the middle of May, according to Buzzfeed.

“This is the first time that we’ve built information on how ranking works directly into the app,” Ramya Sethuraman, a product manager at Facebook, wrote in a blog post. The new feature might tell users, for example, that they’re seeing a post because they are friends with someone on Facebook or because they joined a specific group. But the button will also provide more granular information, such as telling users they’re seeing a specific photo because they’ve “commented on posts with photos more than other media types.”

Facebook is also making updates to its preexisting “Why am I seeing this ad?” button. It will now tell users when an advertiser has uploaded their contact information to Facebook. In addition, it will show users when advertisers work with third-party marketing firms. For example, an ad for a shoe company might reveal the name of the marketing agency it hired to sell its new sandals.

Pivot to Paying Publishers?

On Monday morning, Zuckerberg suggested he might create a new section of Facebook dedicated to “high-quality news.” Details are scarce, but it may feature content Facebook pays publishers directly to share. The remarks were made during an interview Zuckerberg did with European media executive Mathias Döpfner, which the CEO posted to his personal Facebook page. The announcement comes a year after Facebook said it would begin deprioritizing news stories in its News Feed in favor of content from friends and family.

Last week, Apple announced it was launching a $10 per month paid news aggregation service called News+ (it features content from WIRED). But unlike Apple, Facebook doesn’t appear to be getting into the subscription business. “We’re coming to this from a very different perspective than I think some of the other players in the space who view news as a way that they want to maximize their revenue. That’s not necessarily the way that we’re thinking about this,” Zuckerberg said in the interview.

Facebook’s earlier attempts to partner with media organizations have been a mixed bag. The social network also previously explored creating a dedicated feed for publishers but abandoned the project. Without knowing more, it remains to be seen what, if anything, is going be different this time.


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