Bloomberg News

AT&T Sales Miss Estimates on Slowing IPhone, Pay-TV Demand

October 20, 2011

(Updates with closing share price in sixth paragraph.)

Oct. 20 (Bloomberg) -- AT&T Inc., the second-largest U.S. wireless carrier, reported third-quarter sales that missed analysts’ estimates as customers waited for this month’s newest iPhone and pay-TV subscriber gains slowed.

Sales fell 0.3 percent to $31.5 billion, AT&T said today in a statement. Analysts predicted $31.6 billion, the average of estimates compiled by Bloomberg. Earnings, excluding some items, rose to 61 cents a share, matching the average estimate.

AT&T added 319,000 wireless subscribers on monthly contracts, down from the second quarter’s 331,000 and more than the 294,000 average estimate of six analysts surveyed by Bloomberg. IPhone activations slowed as consumers waited for the latest version of the Apple Inc. device, which became available at all three biggest carriers for the first time this month.

“The focus now is on the fourth quarter and how well AT&T does with iPhone sales,” said Todd Rethemeier, an analyst at Hudson Square Research in New York, who recommends buying AT&T shares. Investors need to hear “how well they are doing in terms of market share.”

Net income declined to $3.62 billion, or 61 cents a share, from $12.3 billion, or $2.07, a year earlier, when the Dallas- based company booked a one-time $8.3 billion gain related to the acquisition of Cingular Wireless.

AT&T fell 0.3 percent to $28.99 at the close in New York. The stock is little changed this year.

Sluggish Economy

AT&T’s wireline business missed analysts’ subscriber-gain estimates for Internet and pay-TV users. The unit is banking on broadband and video services for sales growth as consumers continue to abandon their home phones.

“We saw continued weakness on the consumer side,” said Michael Nelson, an analyst at Mizuho Securities USA Inc., who recommends buying AT&T stock.

AT&T added 3,000 broadband subscribers, fewer than the 91,000 analysts predicted on average. Still, the gain was a turnaround from the 12,000 lost in the second quarter.

The company signed on 176,000 subscribers to its U-verse video service, compared with an average estimate of 219,000. The gain was the smallest since the second quarter of 2008, according to Bloomberg data.

IPhone Lag

AT&T activated 2.7 million iPhones in the quarter ended Sept. 30, down from the second quarter’s 3.6 million. As of Oct. 18, the company had activated more than 1 million of the new iPhone 4S devices since it went on sale Oct. 14. The initial iPhone 4S sales will be accounted for in the fourth quarter.

The carrier will sell 4.5 million iPhones this quarter, according to an estimate by John Hodulik, an analyst at UBS AG. The record number of early iPhone sales may boost AT&T’s expenses for the fourth quarter. Phone companies pay Apple an estimated $600 per iPhone and then sell the device at a discount to lure subscribers into two-year contracts. The upfront costs reduce profit initially.

In the third quarter, AT&T’s wireless operating margin expanded to 29.6 percent from 23.1 percent a year earlier. Almost half of the smartphones AT&T sold weren’t iPhones and included devices running on Google Inc.’s Android software.

“The margins in wireless looked pretty good, that’s probably due to fewer iPhones, which are expensive to subsidize,” Rethemeier said.

Shrinking Bills

The average monthly revenue per contract wireless customer fell to $63.69 from $63.87 in the second quarter, the first sequential decline in several years, Christopher King, an analyst at Stifel Nicolaus, said in a research note. King recommends buying AT&T. From a year earlier, the average monthly postpaid bill rose 1.4 percent, the 11th straight gain.

The sequential decline suggests AT&T’s most lucrative wireless customers, who spend the most each month, are seeking to curb expenditures. At least three analysts on the company’s conference call asked about the drop.

Brooks McCorcle, an AT&T spokeswoman, said that demand for the new iPhone will help boost average revenue per user in the fourth quarter.

AT&T is starting limited service this year on its newer wireless technology called long-term evolution, or LTE, which allows faster data speeds. The company trails Verizon, which started offering LTE in some markets last year.

AT&T is also fighting the U.S. Justice Department’s Aug. 31 lawsuit to block its $39 billion acquisition of T-Mobile USA, the No. 4 carrier.

AT&T has approached smaller rivals, including MetroPCS Communications Inc., about them buying spectrum and subscribers as part of an effort to save the merger, two people with direct knowledge of the situation said last month. Shedding assets may help AT&T counter regulators’ concerns that the T-Mobile transaction would increase market concentration.

AT&T said today it continues to work toward a “successful completion” of the acquisition.

“It looks like the merger will go to trial and that could lead to a long, drawn-out process,” Nelson said. “Every day that goes by means the odds of a deal going through is diminished.”

--Editors: Ville Heiskanen, Cecile Daurat

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net


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