AT&T may have beaten Wall Street expectations during Q4 2014, but stiffer competition in the US mobile market is squeezing margins and making it more difficult for the company to hold onto customers.

Wireless service revenue was down 3.7 per cent during Q4, year-on-year, to $15.1 billion. AT&T attributed the drop to the growing popularity of AT&T Next (a smartphone instalment plan) and Mobile Share Value plans (unlimited talk and text for the family, as well as shared data).

To try and fend off competition from disruptive T-Mobile US, as well as a much more aggressively-priced Sprint under the stewardship of Marcelo Claure (appointed CEO in August 2014), AT&T has been forced to respond, but it has come at a price.

Phone-only post-paid ARPU, said AT&T, slid 10.7 per cent year-on-year during Q4. After adjusting for integration costs, AT&T’s wireless EBITDA margin was 27.9 per cent (compared to 31.8 per cent during Q4 2013).

Wireless operating income was $3.2 billion, down 18.1 per cent over the same period, although AT&T says the drop was partly down to integration costs associated with its purchase of Leap, a regional carrier.

More worryingly, perhaps, postpaid churn is on the rise, suggesting that rival offers are still catching the eye of AT&T customers, despite its attempts to keep them happy. The level of monthly service cancellations were 1.22 per cent in Q4 2014, up from 1.11 per cent a year earlier.

AT&T CFO John Stephens, perhaps predictably, was keen to play down the significance of rising postpaid churn.

“As expected, postpaid churn was up in the quarter,” he said at the company’s Q4 earnings call. “The fourth quarter traditionally sees increased levels of churn for all carriers. And when you add in the intense competitive activity in the quarter, it’s no surprise to see churn at these levels. But even with all this noise in the market, postpaid churn levels were comparable to two years ago, the last time a fully refreshed iPhone hit the market. And this was the first time that all major carriers were able to sell that phone during the busy fourth quarter.”

Quarterly wireless revenue overall, however, grew by 7.7 per cent, to $19.9 billion. The increase was helped by a large jump in wireless equipment revenue – up 72.3 per cent, to $4.8 billion – as more customers opted for equipment instalment plans subsidised devices.

Wireless subscriber growth, however, remains strong. AT&T posted a Q4 net increase in total wireless subscribers of 1.9 million, 854,000 of which were postpaid, helped by price cuts and promotions on tablets and smartphones. Analysts expected 819,000, according to an average of seven estimates collected by Bloomberg.

Although the postpaid net additions included 148,000 smartphones, it wasn’t enough to make up for the exodus of older feature phone users. As AT&T had 969,000 postpaid tablet net additions during the quarter, it suggests that AT&T had an overall net loss of postpaid phone customers in the region of 100,000 (which explains the lower overall figure of 854,000).

Connected device net additions were 1.29 million, including about 800,000 connected cars.

With competition growing at home, AT&T is keen to expand – a purchase of DirecTV (a pay-TV provider which has a large presence in Latin America) is on the cards, as is further expansion in Mexico through the purchase of NII Holdings’ wireless business there.

“We will exit 2015 a very different company,” AT&T CEO Randall Stephenson said on the Q4 conference call.

At a group level, Q4 consolidated revenue amounted to $34.4 billion, up 3.8 percent versus Q4 2014.

AT&T also posted a net loss of $4 billion (compared with a net income of $6.9 billion in Q4 2013), but this was partly the result of $10 billion in charges related to pension and retiree benefit plans.