Overview:
AT&T, the largest US telecommunications carrier, reported net profit of $3.64bn in the third quarter or $0.63 per diluted share of common stock. That compares with $3.62bn, or $0.61 per diluted share, in the year-earlier quarter. Strong wireless revenue gains coupled with continued growth in its U-verse video and strategic business services units helped AT&T report solid third-quarter 2012 earnings. Consolidated revenues of $31.5bn were flat year year-over-year, but up 2.6 per cent when adjusted for the advertising solutions sale.
“We had another impressive quarter with strong earnings growth, record cash flows and solid returns to shareholders through dividends and share buybacks,” said Randall Stephenson, AT&T chief executive. “Our strong performance allows us to increase our free cash flow guidance to $18bn or higher this year, exceeding our previous outlook by $2bn.”
AT&T now expects capital expenditures for the year to come in at the low end of $19bn-$20bn while its rollout of a new “4G” wireless network based on LTE technology is ahead of schedule (but still way behind LTE leader Verizon Wireless).
Wireless Operations:
AT&T Mobility added a net 678,000 subscribers during the quarter, sold 6.1 million smartphones, including 4.7 million Apple iPhones, and reported record sales of Android and Windows smartphones. However AT&T ‘s wireless unit only added 151,000 monthly contract customers, less than half of what most analysts had expected. Total wireless revenues, which include equipment sales, were up 6.6 per cent year on year to $16.6bn. Wireless service revenues increased 4.5 per cent to $14.9bn while wireless data revenues – driven by mobile internet use, access to applications, messaging and related services – increased 18.3 per cent to $6.6bn.
AT&T Mobility Highlights:
- Wireless revenues up 6.6 percent; wireless service revenues up 4.5 percent
- Strongest postpaid wireless subscriber ARPU (average monthly revenues per subscriber) growth in six quarters, up 2.4 percent to $65.20; phone-only ARPU up almost 3 percent
- Strong smartphone sales of 6.1 million; postpaid smartphone customer base now 44.5 million, up 1.4 million from second quarter 2012
- 4.7 million iPhones activated; record sales quarter for Android and Windows smartphones
- Best-ever third-quarter postpaid churn
- 678,000 net increase in total wireless subscribers, including gains in every customer category
- Wireless operating income margin of 26.2 percent; EBITDA service margin of 40.8 percent with strong smartphone sales
The number of subscribers on usage-based cellular data plans continues to increase. Usage-based plans include tiered data plans and the recently introduced Mobile Share plans. About 64 percent, or 28.5 million of all smartphone subscribers are on usage-based data plans. This compares to 50 percent, or 18.0 million a year ago. About three-quarters of customers on tiered data plans have chosen the higher-priced plans. Early results from sales of Mobile Share plans have been positive. Nearly 2 million subscribers signed up for Mobile Share plans in the first five weeks they were available, with take rates on the higher-data plans stronger than expected. More than a third of Mobile Share subscribers are taking plans of 10 gigabits or higher. Overall, AT&T’s postpaid wireless subscribers on data plans increased by 11 percent over the past year.
Churn (customers switching to another cellular network provider) fell to 1.08 percent, compared to 1.15 percent in the year-ago third quarter and 0.97 percent in the second quarter of 2012. Total churn was 1.34 percent versus 1.28 percent in the third quarter of 2011 and 1.18 percent in the second quarter of 2012.
Wireline Operations:
AT&T’s third-quarter wireline results were led by strong U-verse TV and high speed Internet gains and accelerating wireline consumer revenue growth. Subscribers to the U-verse TV and high-speed internet service reached 7.4m in the third quarter. Broadband internet added a net 613,000 subscribers to reach 7.1m in total, helping offset losses from the digital subscriber line (DSL) service.
Total business revenues declined 2.6 per cent to $9.1bn. But declines in legacy products were largely offset by continued growth in strategic business services. Revenues from these services – the new-generation capabilities that lead AT&T’s most advanced business including Ethernet, virtual private networks (VPNs), hosting, IP conferencing and application services – grew 11.4 per cent year on year.
U-verse Subscribers Continue Strong Growth. Total AT&T U-verse subscribers (TV and high speed Internet) reached 7.4 million in the third quarter. AT&T U-verse TV added 198,000 subscribers to reach 4.3 million in service. AT&T U-verse High Speed Internet delivered a third-quarter net gain of 613,000 subscribers to reach a total of 7.1 million, helping offset losses from DSL. Overall, AT&T wireline broadband connections decreased 42,000. However, total broadband ARPU was up almost 10 percent year over year.
A majority of U-verse broadband subscribers have a plan delivering speeds up to 12 Mbps or higher — 54 percent, up from 43 percent in the year-ago quarter. About 90 percent of new U-verse TV customers took AT&T U-verse High Speed Internet in the third quarter. About three-fourths of AT&T U-verse TV subscribers have a triple- or quad-play option from AT&T. ARPU for U-verse triple-play customers was more than $170, up slightly year over year. U-verse TV penetration of eligible living units continues to grow and was at 18.0 percent at the end of the third quarter.
Closing Comment & Analysis:
In light of its failed takeover of T-Mobile, we wonder how AT&T will respond to all the mergers and acquisitions in the wireless telco space. In particular, T-Mobile and MetroPCS along with Softbank and Sprint (especially now that Sprint owns over 50% of votes on Clearwire’s Board of Directors).
In 2011, federal regulators blocked AT&T’s bid for T-Mobile, resulting in a loss of $6 billion for AT&T — the $4 billion it was required to pay T-Mobile over the failed acquisition, plus the estimated value of the broadband licenses it was required to grant T-Mobile.
T-Mobile (with MetroPCS) and Sprint (with the huge Softbank investment and control of Clearwire’s Board) are financially stronger and attempting to get much bigger. Softbank’s proposed 70% ownership of Sprint (over $21B) would be the largest acquisition of a US company by a Japanese buyer. Sprint CEO Dan Hesse recently commented on his company’s deal with Softbank:
“This is pro-competition and pro-consumer because it creates a stronger number three to compete with AT&T Wireless and Verizon. Over the longer term I think we will see consolidation in the US industry and what this does is give Sprint the balance sheet and financial flexibility to play a larger role in consolidation in the future.”
AT&T issued a statement that noted Sprint’s control over Clearwire would convey to SoftBank “control of significantly more U.S. wireless spectrum than any other company.” AT&T said it expected “that fact and others” to be considered in the federal review of the SoftBank bid for Sprint. However, it looks likely to this author that the regulators and U.S. Justice Dept will approve the transaction.
The cellular deal frenzy would reach a fever pitch if (the soon to be financially stronger) Sprint makes a bid for T-Mobile, as was reported several weeks ago. Such a merger would give the combined telco approximately as many wireless customers (monthly and pre-paid subscribers) as either Verizon or AT&T. It would also mean that just three carriers (AT&T, VZW and Sprint/ T-Mobile/ MetroPCS) would control almost the entire market. That would be very bad for consumers who would then have less choice of provider and would likely pay more with diminished competition.
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References:
http://www.att.com/gen/press-room?pid=23448&cdvn=news&newsarticleid=35518
http://www.ft.com/cms/s/0/76dc3cce-1dd7-11e2-8e1d-00144feabdc0.html#ixzz2AK8CtopZ
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