While the wireless business is the largest contributor to AT&T‘s (NYSE: T) revenue by far, the fiber internet business is proving to be a potent growth opportunity. Capturing that growth comes at a cost: Building out a fiber network is capital-intensive, requiring vast outlays with no guarantee that consumers and businesses will sign up for service.
AT&T operates a vast legacy wireline network that serves consumers and businesses, but that business is in perpetual decline. Even the company’s non-fiber broadband service is slowly eroding as subscribers flee. Wireline service revenue from businesses is dropping particularly quickly, down 11% year over year in the fourth quarter of 2023.
AT&T’s fiber internet business is already big enough and growing fast enough to push overall consumer broadband revenue and consumer wireline revenue higher. AT&T expects broadband revenue to rise by at least 7% in 2024, more than twice as fast as wireless service revenue growth.
Expanding the opportunity
Fiber networks are expensive to build, but they last a long time and can be upgraded to improve capacity relatively easily. AT&T puts the useful life of its cable, wiring, and conduit at anywhere between 15 and 50 years. In early 2022, the company boosted the expected useful life of its fiber assets based on its experience so far and the lack of any viable alternative technology that could supplant fiber.
AT&T’s fiber network now passes 26 million locations, including homes and businesses. At the end of 2023, the service had 8.3 million consumer subscribers. The company’s long-stated target is to pass 30 million locations by the end of 2025. It’s still on track to do that, but because its fiber investments are generating better-than-expected returns, the company now sees an opportunity to grow the network to as many as 45 million passed locations.
Fiber brings some important benefits to AT&T. As CEO John Stankey explained in the fourth-quarter earnings call, fiber is more energy efficient than legacy wireline networks, requires less maintenance, and is stickier. In many areas, AT&T’s fiber service will be the best option for home internet. It’s no surprise, then, that consumers are sticking around for longer compared to legacy services.
Those customers are also paying more. Fiber average revenue per user on the consumer side was $68.50 in the fourth quarter of 2023, compared to $61.38 for non-fiber broadband. That number has been growing swiftly. Consumer fiber ARPU has increased by 15% over the past two years.
Billions in additional revenue
AT&T’s fiber business generated $1.7 billion of revenue in the fourth quarter of 2023, putting it on a $6.8 billion annual run rate.
If AT&T successfully grows its fiber network to 45 million passed locations, maintaining the same fiber penetration rate and ARPU, annual fiber revenue would nearly double to $11.8 billion.
The consumer penetration rate for fiber is currently 39%, meaning that 39% of passed locations are paying customers. Each one percentage point improvement would yield 450,000 additional customers and about $370 million of additional annual revenue, assuming that ARPU doesn’t increase and AT&T fully builds out its network. If AT&T can keep ARPU moving higher, there’s even more opportunity for growth.
Once AT&T builds all the fiber it’s going to build, the capital requirements of the fiber network drop precipitously. There will be competition from wireless home internet services, but the reliability of fiber will be tough to beat. For decades, AT&T’s fiber network will be churning out high-margin revenue. While fiber revenue will still be far smaller than wireless revenue, it will become a significant contributor to the company’s free cash flow.
Wireless is AT&T’s bread and butter, and that will remain the case for the foreseeable future. But fiber is going to be growing much faster, and it has the potential to be a highly profitable business for AT&T in the long run.
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AT&T’s Fiber Investment Is Turning Into a Home Run was originally published by The Motley Fool
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