Bloomberg News

AT&T Misses Earnings Estimates as Customers Shift to Phone Financing

July 24, 2014

AT&T Inc. (T:US), the second-largest U.S. wireless carrier, fell short of earnings estimates as more customers started paying for devices with installment plans, an option that’s reducing profits as it cuts monthly service bills.

Second-quarter profit of 62 cents a share, excluding some items, missed the 63-cent average estimate (T:US) of analysts, according to data compiled by Bloomberg. Sales rose 1.6 percent to $32.6 billion, below the $33.2 billion average estimate. The company, which is buying satellite carrier DirecTV, already had raised its 2014 sales forecast and cut its range of earnings estimates on June 3 due to the effect of the installment plans, called Next. It reiterated the outlook yesterday.

The company added more than 1 million monthly wireless subscribers. The shift to Next helps keep customers from switching to T-Mobile US Inc., whose offer of smartphone financing early last year forced Dallas-based AT&T and the other carriers to catch up. The downside for AT&T and its rivals is that the trend cuts into their revenue from wireless services, since the companies have to account for smartphone installment payments separately.

“They’re seeing pressure on the margin side of things, but they’re hanging in there. That’s the best thing you can do in this type of environment,” Angelo Zino, an analyst with S&P Capital IQ, said in an interview before the earnings release.

Shares of AT&T dropped 1.1 percent to $35.50 at the close in New York. They have risen 1 percent this year, trailing the 7.6 percent gain of the Standard & Poor’s 500 Index.

Smaller Bills

The average monthly wireless-phone bill fell to $62.28 from $67.49 a year earlier. Including Next installment payments for smartphones, the average bill was $64.35. Bills will increase “substantially” in the second half of the year as customers spend more on data for their new devices, AT&T said in a presentation posted online.

AT&T started promoting Next, along with its shared-data Family Value plan, to keep subscribers from fleeing to a smaller rival like T-Mobile for quicker device upgrades and lower service charges.

“The best thing to do in this environment is keep the most valuable customers we have,” said Ralph de la Vega, chief executive officer of AT&T’s mobile-services unit, in an interview. “Our smartphone customers are crucial -- if you lose them, you lose growth opportunities in areas like connected cars and smart-home services.”

More Smartphones

The company’s 1 million new monthly subscribers surpassed the 816,000 average of analysts’ estimates, though it fell short of Verizon Communications Inc.’s gain of 1.4 million. AT&T’s additions included about 700,000 smartphone subscribers, compared with Verizon’s 304,000 new phone subscriptions. About half of the smartphones AT&T sold were through Next plans.

AT&T’s wireless-service profit margin expanded 0.2 percentage point from a year earlier to 42.6 percent. Analysts had projected a service margin of 42.4 percent, based on a Bloomberg survey of nine estimates.

In AT&T’s landline video-and-broadband business, called U-verse, the company added 488,000 Internet users and 190,000 video subscribers. That compared with 641,000 U-verse Internet customers and 233,000 TV customers added a year ago.

Net income slid to $3.5 billion, or 68 cents a share, from $3.8 billion, or 71 cents, a year earlier.

To bolster its video offerings, AT&T agreed in May to buy El Segundo, California-based DirecTV for $48.5 billion. As part of the deal, AT&T is selling its stake in America Movil SAB to longtime partner Carlos Slim for $5.57 billion. The sale added 8 cents a share to AT&T’s net income in the quarter.

In another move to raise cash for the DirecTV purchase, AT&T agreed to sell as much as $2 billion in phone financing receivables to a group of banks led by Citigroup Inc.

To contact the reporters on this story: Scott Moritz in New York at smoritz6@bloomberg.net; Caitlin McCabe in New York at cmccabe11@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Crayton Harrison, Stephen West


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