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UPDATE: AT&T 3Q Net Up 41% on Wireless Strength

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NEW YORK (Dow Jones) AT&T reported a double digit gain in third quarter net income as the iPhone provided a halo effect upon its wireless business.

The San Antonio telecommunications giant reported a net wireless subscriber addition of two million - more than half of which signed long-term contracts - to bring its total base to 65.7 million. It also reported activating 1.1 million Apple iPhones since its launch in late June.

"We believe two million net wireless additions and 500,000 net broadband customer gains, ahead of our expectations, should bode well for increased customer loyalty in 2008, even as we see competitive pressure," said Todd Rosenbluth, an analyst at Standard & Poor's, in a note.

Apparently, reports of customers unlocking iPhones haven't hurt AT&T. Unlocked cellphones can run on any GSM carrier, and don't require activation or an account with the carrier. Apple executives said late Monday that it estimates 250,000 phones were bought by people intending to unlock them.

AT&T has an exclusive deal with Apple to provide cellphone service for the iPhone in the U.S. Apple said late Monday it sold more than 1.1 million iPhones in the latest quarter, putting total sales at 1.4 million since the product's launch.

The iPhone has been an important tool for AT&T as it pushes its wireless business amid a change in brand - it was known as Cingular Wireless prior to the merger of its parents, AT&T and BellSouth. The turnover rate for the wireless business fell slightly to 1.7% from 1.8% a year ago, although contract customer turnover was 1.3%.

One cause for concern: Average revenue per user growth of 2% was below expectations, according to UBS analyst John Hodulik.

Chief Financial Officer Rick Lindner, however, told analysts during a Tuesday conference call that AT&T is "attacking the data opportunity," and that the industry was still in the early stage of data services. The company is pushing data-centric phones and offering more entertainment options - such as its recently unveiled over-the-air music download service with Napster.

Data is increasingly important as competition for customers heats up. Lindner said he sees net subscriber additions slowing down next year.

Wireless helped drive overall results. The nation's largest telecom company posted net income of $3.1 billion, or 50 cents a share, compared with $2.2 billion, or 56 cents a share, a year earlier.

The prior-year figures don't include results from BellSouth and its 40% stake in Cingular Wireless, which AT&T took full control of with its takeover of BellSouth late last year.

Excluding acquisition impacts, AT&T said it would have earned 71 cents a share, compared with 63 cents a year earlier.

Revenue rose 93% to $30.13 billion. On a pro forma basis, it increased 3.2% to $30.3 billion as continued wireless strength offset weakness in wireline operations.

The mean estimate of analysts surveyed by Thomson Financial was for earnings of 71 cents a share on revenue of $30.12 billion.

"Our thesis remains intact as AT&T continues to show strong top-line momentum while executing on synergies," Hodulik said in a note, reiterating his buy rating.

AT&T still has a lot of headroom when it comes to merger cost reductions, Lindner said. He added that the estimate of merger cost savings run rate of $5 billion next year and $6 billion in 2009 was a "baseline" figure.

AT&T reported a 18.6% increase in high-speed Internet connection, or 499,000 new lines, from a year ago. Video subscriber growth also rose by 215,000, representing a continued ramp-up in its U-verse TV service. It added 200,000 new subscribers in the second quarter.

Much talk has been made of a slowdown in growth of digital subscriber line, or DSL, service. AT&T, however, said there wasn't a slowdown in the last quarter, but acknowledged that net additions would be tougher to achieve in the future.

"We still think the market has penetration room to grow," said spokesman Rich Dietz.

Helping was AT&T's new strategy to bundle either traditional phone service or wireless service with a high-speed Internet connection.

Wireline, however, was weaker than expected as it lost 1.2 million net switched access lines, compared with a decline of 824,000 lines from a year ago.

The company also boosted its free cash flow after dividend estimate for the year to $6 billion to $7 billion from a prior range of $5 billion to $6 billion. It backed its forecast for double-digit earnings growth.

Over the past few years, AT&T - previously known as SBC Communications - has been on an acquisition spree in purchasing the original AT&T, BellSouth and AT&T Wireless. Earlier this month, AT&T agreed to pay $2.5 billion to acquire wireless licenses in the 700-megahertz frequency, a valuable slice of spectrum suitable for delivering speedy Internet access.

On speculation that AT&T is considering an acquisition of satellite TV provider Echostar Communications, Lindner said he declined to comment.

AT&T shares recently rose 63 cents, or 1.5%, to $41.80.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(Kevin Kingsbury contributed to this report.)

(END) Dow Jones Newswires­

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