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Commentary

Shift in Wireless Plans Creates Messy Quarter for AT&T

Although the move away from subsidized rate plans is an overall positive for AT&T, changing customer behavior could create bumps, especially around cash flow.

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 AT&T's (T) second-quarter results were messy, resulting from the aggressive shift away from traditional wireless device subsidies. The benefits of this transition were clear, as the firm posted strong customer growth, especially relative to  Verizon Communications (VZ), on record-low customer defections. 

On the other hand, wireless revenue was hit harder than we had expected. Nearly one third of AT&T's smartphone customer base has shifted to cheaper no-subsidy rate plans without enrolling in the Next handset financing plan. We continue to view the move away from subsidized rate plans as an overall positive for AT&T. However, the full financial benefit of this shift will take time to materialize, in the form of lower phone subsidy costs or, for those customers who ultimately enroll, higher Next revenue. Changing customer behavior could create bumps, especially around cash flow, during the remainder of 2014 as phone-upgrade activity ramps up, but we believe AT&T remains well-positioned. Our narrow economic moat rating and fair value estimate are unchanged.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.