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Investing  | February 20, 2019

One of the largest and most pervasive publicly-traded companies in the US today is undoubtedly AT&T (T). Normally seen through the public eye as a provider of cellphone and related services, the company is actually incredibly large, diverse, and complex. Due to the nature of the firm and how big it has grown to be over the years, its growth these days has been limited, but one sizable piece of the business is serving as a robust engine of growth for shareholders. This piece of the firm has the potential, over time, to add real value for the company’s investors and, given trends in IoT (Internet of Things), will likely continue growing at a nice clip for years to come.

Taking a Dive into Mobility

The best way to understand a company like AT&T is to look at it as a collection of large companies as opposed to being one, consolidated firm. Underneath its Communications segment, for instance, the firm has multiple sub-segments, one of which is called Mobility. Digging deeper still, we can find out some information about Mobility that should encourage to look at it as one firm as well. Before we do that, though, we should briefly discuss the company’s Mobility operations so we can have some proper foundation from which to move from.

Last year, according to management, AT&T’s Mobility business had, at first glance, a decent year, but nothing spectacular. Revenue for 2018 came out to $71.34 billion. This represented an increase of only 0.4% over the $71.09 billion Mobility generated a year earlier. Profit, meanwhile, saw a similar (but much more impressive) trend, growing 7.5% from $20.20 billion in 2017 to $21.72 billion. Put in context, Mobility’s profit margin during the year was 30.4%, up from 2017’s 28.4%. This is nice progress, but margin expansion can take the company only so far, while revenue growth is what will ultimately be needed in order to drive real upside in the long run.

Fortunately for investors, there are signs of growth that should be considered encouraging. During 2018, the number of subscribers under Mobility ended at 153.01 million. This represents an increase of 8.4% over the 141.20 million subscribers seen in 2017, but it’s very important to consider that not all of Mobility even is the same. One category, classified as Connected Devices, accounted (on a net basis) for more than all of the increase seen throughout the year. Between 2017 and 2018, Connected Devices soared 31.7% from 38.99 million subscribers to 51.34 million. Stripping Connected Devices out of the equation, AT&T’s Mobility subscribers would have actually declined from 102.21 million to 101.67 million, with the drop even greater if we removed prepaid users from its roster.

Connected Devices is a Growth Machine

This now brings me to the heart of the issue: AT&T’s growth engine. While analyzing the business, I was struck by just how large the growth in this sizable category known as Connected Devices was, so much so that I was encouraged by the numbers to read deeper to understand what it all meant. According to management, Connected Devices consists of ‘session-based tablets, monitoring devices, and wholesale auto systems’. One example of this is AT&T’s HARMAN Spark, which is essentially an ‘easy to use connected car device and app that provides emergency crash assistance, vehicle diagnostics, location information, roadside assistance manager and more. It can also turn your car into a powerful Wi-Fi hotspot’.

In short, what AT&T’s Connected Devices business consists in large part of new technologies and services related to those technologies geared toward playing on IoT. So far, a major form this is taking is as partnerships that allow AT&T to include its technologies inside new vehicles and by promoting variants of said technologies geared toward retrofitting older vehicles to be compatible with its internet connectivity and other related services.

More detailed fourth quarter figures have not been provided for last year, but in the company’s third quarter 10-Q, it stated that in the first three quarters of 2018, it saw its Connected Devices added to 5.9 million wholesale vehicles. 2.2 million of these vehicle deployments occurred in the third quarter alone. For customers who already have AT&T’s services, they can use these technologies to add internet connectivity inside their vehicles for as little as $10 per month, while those who do not have the right plans are charged more. Users can, according to management, receive unlimited data from their cars for up to 50 feet from them.

This Will Be A Big Business for AT&T

Though it may seem to some that this is more likely to be a small niche business for AT&T, the fact of the matter is that this plays in perfectly with growing trends. One source I came across suggested that by 2030, there will exist around 125 billion connected devices across the world, 60% (or 75 billion) of which will be consumer devices. In what’s called the Cellular IoT segment of the market, it’s believed we will see, from today through 2023, annual growth of 30%, eventually hitting 3.5 billion devices.

Sadly, 2.2 billion of these devices will be set up in North East Asia (mostly China), which means that AT&T might lose out on a nice chunk of the market’s upside, but even capturing the United States will likely result in many billions in added revenue per year, if not more. AT&T, for its part, believes that the total IoT market could grow to 80 billion devices by 2025.

You see, I have written in the past about IoT, and if there’s one takeaway I have of it, it’s that nobody really is sure of just how large the space will get. The only thing understood is that the industry is large, will grow rapidly for many years, and will be somewhere between hundreds of billions of dollars and over a trillion dollars per year in size. Take a report by Bain & Company for example. The firm concluded that by 2021 we will see annual revenue in the IoT space of $520 billion.

Some Problems do Persist

On the whole, it looks like AT&T's Connected Devices operations present the company and shareholders with excellent prospects, but it would be a mistake to think that everything with the company is fine and dandy. Like some other firms in the telecommunications space, AT&T has some problems of its own. Some of these include declining customer counts elsewhere for the firm. Satellite, for instance, has suffered as of late, with customer count falling from 20.46 million in 2017 to 19.22 million last year.

The business's Retail Consumer Voice Connections have also dropped, falling from nearly 10 million to 8.55 million in just one year, and the company's Latin America segment has reported a 7.5% decline in revenue while its net loss grew 2.7 times. Add to this the company's Reseller operations, which have fallen 16.9% in one year alone and it becomes clear why revenue for the business on the whole is not growing at a nice clip.

These changes could be happening for a number of reasons, but the likely explanation is that it has to do with stiff competition and changes in industry trends. In order to properly serve shareholders and deliver value to them, management will need to navigate these waters, but while this may prove difficult, fortunately for now, the firm appears to have ample resources. Yes, debt at the business has grown by $12.16 billion between 2017 and 2018, but the surge in equity value for AT&T has actually pushed the firm's debt/equity ratio down from 1.16 to 0.91.

Not only that, but operating cash flow last year was a hefty $43.60 billion, up 14.7% from 2017's $38.01 billion. So long as the business can continue to generate these strong cash flows, AT&T will have the means necessary to innovate, but investors who expect the road forward to be an easy ride should look elsewhere for value.


As the IoT industry continues growing at a strong pace, AT&T’s management team is making the proper moves necessary to take advantage of this opportunity. With more and more devices being connected every year, and with all of those devices requiring some form of access to the internet, AT&T is in a prime spot to facilitate that. Even though cars may not sound like a great space for it, they are perfect because they will enable, even more than what we have today, the access of connected devices as needed.

Add to these strong growth prospects the fact that margins are still high and growing, and it seems clear to me that AT&T and companies like it will fare quite well, capitalizing on new and expanding revenue opportunities while passing down attractive sums to shareholders in the form of bottom line profits.

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