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AT&T Inc. posted its lowest-ever postpaid smartphone upgrade rate in the first quarter in what could be a distressing sign for smartphone manufacturers.
The pandemic has forced people to change their smartphone-buying behaviors as wireless carriers and other retailers temporarily closed physical locations and tried to drive online sales.
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“Often times customers just had this desire that they wanted to come in and touch and feel a device and compare it and look at it and pick up a couple other items while they were there,” AT&T T, -1.25% Chief Operating Officer John Stankey said on the company’s earnings conference call Wednesday. While he expects customers will “start to experiment” more with online transactions, he acknowledged that the store closures have disrupted a way many consumers were used to making these big purchases.
That dynamic helped drive AT&T’s upgrade rate on postpaid smartphones to 3%, a record low, according to Wells Fargo’s Aaron Rakers. AT&T had a 4.8% postpaid upgrade rate for smartphones in the fourth quarter and a 3.5% upgrade rate in last year’s first quarter.
Rakers argued that this decline could be a warning sign heading into Apple Inc.’s AAPL, +2.16% earnings report next Thursday as AT&T also saw a roughly 25% drop in mobility equipment revenues this March.
“We would reiterate our belief that consensus iPhone ship estimates are too high at ~41.1 million” for the March quarter, he wrote. Rakers thinks that iPhone shipments “could be in the low/mid-30 million range” and has a 36 million estimate in his model.
AT&T “disclosed 3.9 million postpaid smartphone gross adds and upgrades in 1Q20, which we estimate to imply over a 30% quarter-over-quarter decline and down more than 10% year-over-year,” Rakers wrote.
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Executives at AT&T also admitted that the outbreak could continue to weigh on smartphone upgrades later in the year, even after stores reopen, due to the economic pressures that many consumers are facing.
“Service is indispensable, but the choice to possibly get that next handset and maybe defer it, given it’s an outlay in a household that is trying to make some decisions on discretionary income, is likely to have a downward bias on it,” Stankey said. There might be “a little bit of suppression” on smartphone sales in the back end of the year, in his view.
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Apple shares are up 2% in Wednesday trading, while AT&T shares are down 1%. Apple’s stock has declined 13.8% over the past three months, as AT&T’s has fallen 24.1%. The S&P 500 SPX, +1.96% is down 15.9% in that span, while the Dow Jones Industrial Average DJIA, +1.73%, of which Apple is a component, has fallen 19.6%.
