AT&T's iPhone dividend pays off, but subscriber adds disappoint

AT&T's earnings were better-than-expected as the company activated 3.2 million Apple iPhones and saw record low churn levels in the second quarter. However, post-paid subscriber additions were below expectations.

Updated: AT&T's earnings were better-than-expected as the company activated 3.2 million Apple iPhones and saw record low churn levels in the second quarter. However, post-paid subscriber additions were below expectations.

The company on Thursday reported earnings of $4 billion, or 68 cents a share. That sum includes a one-time gain as AT&T swapped Telmex Internacional stock for shares of América Móvil. Excluding that gain, AT&T reported earnings of 61 cents a share. Wall Street was expecting earnings of 56 cents a share. AT&T's revenue for the second quarter was $30.8 billion, a bit light relative to Wall Street expectations of $30.89 billion. Note: AT&T said that its revenue figure doesn't include Sterling Commerce, which was recently sold to IBM. Wall Street expectations including Sterling. Bottom line: If you add back about $120 million in Sterling Commerce revenue, AT&T topped sales estimates.

AT&T also updated its outlook. The company said it expected stable earnings to improved earnings and free cash flow. Now AT&T expects "strong earnings per share growth" with improved margins and free cash flow above 2008 levels. The company also recently sold Sterling Commerce to IBM and will net a gain in the second half.

According to the telecom giant, there are a few things bolstering results. First, the company has a tailwind from the iPhone 4 upgrade cycle. And then AT&T has been good with expense management. The company noted that it has 10,000 fewer employees compared to the end of 2009. Indeed, AT&T's operating expenses in the second quarter were $24.7 billion, down from $25.1 billion a year ago.

Randall Stephenson, AT&T CEO, said "we continue to see positive signs of growth in almost every customer segment of our business, especially wireless." Consumer trends were also improving, the company said.

However, there were a few worry spots. The good news: AT&T activated 3.2 million iPhones and 27 percent of those activations were new to AT&T.

The bad news: Subscriber adds, the human variety, fell short of the 550,000 or so Wall Street was expecting. AT&T in the second quarter had an organic net gain of 1.6 million wireless subscribers. Those figures were significantly boosted by connected devices. AT&T said: "Second-quarter net add growth reflects rapid adoption of smartphones, increases in prepaid subscribers and growth in a host of connected devices such as eReaders, global positioning systems and alarm monitoring systems. Connected devices net adds were 896,000 in the quarter to reach 6.7 million, and retail postpaid net adds totaled 496,000 to reach 67 million." Simply put, the gains are about the devices not the consumer. Barclays Capital expected AT&T to deliver 575,000 post-paid additions.

AT&T's subscriber additions will add fuel to the argument that the U.S. wireless industry is saturated.

Among the highlights from the earnings call:

  • AT&T CFO Rick Lindner said AT&T expects LTE trials to start in a few months and reach customers in 2011.
  • Lindner said network improvements in San Francisco are about 90 days behind New York.
  • About 400,000 to 500,000 iPad 3Gs were activated on AT&T.
  • Lindner echoed that business customers are interested in the iPad, reiterating what Apple said.

By the numbers:

  • Second quarter postpaid churn was 1.01 percent, down from 1.07 percent a year ago. Total churn was a record low 1.29 percent.
  • Wireless data revenue in the second quarter was up 27.2 percent to $4.4 billion.
  • 53.2 percent of AT&T's 67 million post-paid subscribers have smartphones.
  • Second quarter revenue from residential wired customers was $5.4 billion, flat with a year ago. The company added 209,000 U-verse TV subscribers in the second quarter.
  • U-verse revenue in the second quarter topped $1 billion.
  • Enterprise revenue is stabilizing, but total business sales were $9.6 billion, down 4.7 percent from a year ago. Business IP data revenue was up 9.1 percent in the second quarter.

Among the other key themes:

AT&T said that its new tiered data plans are off to a promising start:

AT&T added that its reception in New York is improving.

And business trends over the last few quarters.

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