AT&T's Q4: 7.6 million iPhones activated, 9.4 million smartphones sold

AT&T reported strong sales of the iPhone 4S and Android devices, but the company's fourth quarter earnings fell short of expectations. CEO Randall Stephenson, however, said AT&T started 2012 "with the best visibility we've had in some time."

The telecom giant reported a fourth quarter net loss of $6.7 billion, or $1.12 a share, on revenue of $32.5 billion, up 3.6 percent from a year ago. That sum includes a $4 billion break-up fee due to the failed T-Mobile acquisition as well as losses on AT&T's directory business. Pension valuations also hurt AT&T much like they did Verizon.

Excluding those items, AT&T's earnings would have been 42 cents a share. Wall Street was expecting earnings of 43 cents a share on revenue of $31.97 billion.

The quarter was bittersweet for AT&T. The company had to take a big hit from the T-Mobile merger and iPhone sales crimped margins due to higher subsidy costs. AT&T's operating margins for its wireless business were 15.2 percent in the fourth quarter, down from 22.9 percent a year ago. Verizon had the same issue.

For 2011, AT&T reported earnings of $3.9 billion on revenue of $126.7 billion. Sales were up 2 percent for 2011, but earnings fell dramatically from the $19.9 billion profit reported in 2010.

As for the outlook AT&T said it will deliver "solid revenue and earnings growth" with better margins. AT&T expects "mid-single-digit or better" earnings growth assuming the economy keeps its current course. Capital spending will be $20 billion on par with 2011.

On a conference call with analysts, Stephenson hit on many key themes. First, he ripped the Federal Communications Commission. There's no surprise there given that the FCC scuttled the T-Mobile acquisition, but Stephenson had a nice rant. He said:

The number one issue for us as we move forward into the industry continues to be spectrum. This industry continues to see just explosive mobile broadband growth and is one of the few bright spots in the U.S. economy, but I think we all understand this growth cannot continue without more spectrum being cleared and brought to market. Despite all the speeches from the FCC, we are all still waiting. The last significant spectrum auction was nearly five years ago now and this FCC has made it abundantly clear that they will not free up new spectrum, so in the absence of auctions are company in the industry have taken a logical step of entering into smaller transactions to acquire the spectrum we need. But even here we need the FCC's action and leadership and unfortunately even the smallest and most routine spectrum deals are receiving intense scrutiny. Now I hope I am wrong, but it appears the FCC is intent on picking winners and losers rather than letting these markets work.

Stephenson also acknowledged that the iPhone delivers a hit to profit margins, but the situation isn't all that bad when you consider the long-term effects. These customers stick with their carriers and consume data. Stephenson said:

To think that we are getting to 57% penetration of our base with smartphones and keeping margins in that 40% range I actually think it's better than I might've hoped for.

On the wireless front, AT&T's quarter broke down like this:

• 717,000 wireless postpaid net ads;
• Wireless revenue was up 10 percent from a year ago;
• 2.5 million total wireless subscribers;
• 56.8 percent of AT&T's 69.3 million postpaid subscribers had smartphones;
• Postpaid churn was 1.21 percent in the fourth quarter, up from 1.15 percent a year ago;
• 87 percent of smartphone subscribers are on family plans;
• 571,000 computing devices such as tablets and aircards sold;
• And 82 percent of postpaid additions bought smartphones.

In the wireline business, AT&T's fourth quarter went like this:

• Business revenue was $9.3 billion, down 1.4 percent from a year ago. IP data and business service revenue showed growth;
• U-Verse TV net adds were 208,000;
• There are 3.8 million U-Verse TV accounts in service;
• AT&T added 587,000 net U-verse broadband subscribers in the quarter;
• And overall wireline revenue was $14.9 billion, down 1.4 percent from a year ago. Operating income was $1.8 billion.