(T) AT&T Beats Quarterly Estimates – Subscribers Grow

AT&T Inc. (T) announced second quarter 2011 adjusted earnings per share of 60 cents, a penny ahead of the Zacks Consensus Estimate and flat with year-ago earnings.

Healthy mobile broadband growth, strong smartphone sales and sequentially stable wireline revenues led to the better-than-expected results.

Revenue spiked 2.2% year over year to $31.5 billion and surpassed the Zacks Consensus Estimate of $31.3 billion. Operating income inched up 1.3% from the year-ago quarter to $6,165.0 million.

Segment Results

Wireless revenue, including service and equipment, climbed 9.5% year over year to $15.6 billion, primarily on the heels of robust mobile broadband growth, record smartphone sales and an upswing in branded computing subscribers. Wireless data revenue leaped 23.4% year over year to $5.5 billion, driven by multimedia and text messages.

AT&T added 1.1 million wireless customers in the reported quarter to reach 98.6 million total subscribers in service. Strong additions were due to the rapid adoption of smartphones, healthy prepaid subscriber count and growth in tablets and connected devices such as automobile monitoring systems, security systems and a host of other products.

Retail post-paid additions totaled 331,000, while retail prepaid additions were 137,000, connected device additions were 379,000 and reseller additions were 248,000 in the reported quarter.

AT&T added 545,000 branded computing subscribers (including tablets, aircards, MiFi devices, tethering plans and other data-only devices), bringing the total to 4 million. The branded computing subscriber count doubled year over year.

The number of smartphones sold increased 43% year over year to 5.6 million. Despite the loss of the exclusive hold on Apple Inc.’s (AAPL) iPhone to its largest rival Verizon Communication (VZ), AT&T activated 3.6 million iPhones in the quarter compared with 3.2 million in the year-ago quarter. Of the total activations, 24% of the customers were new to AT&T, thanks to the iPhone discounts. Android and other smartphone sales more than doubled from the year-ago quarter.

Total churn (customer switch) increased to 1.43% from 1.29% in the prior-year quarter and 1.36% in the prior quarter. Post-paid churn also increased to 1.15% from 1.01% in the prior-year quarter and 1.18% in the prior quarter. Post-paid ARPU (average revenue per user) grew 2% year over year to $63.87, driven by healthy data growth.

Wireline revenues dipped 3.2% year over year to $14.9 billion in the second quarter. Revenue from residential customers nudged up 0.1% year over year to $5.4 billion, driven by the strength in IP data services, while business revenue slid 4.1% year over year to $9.3 billion reflecting economic weakness in voice and legacy data products. Strategic business services such as Ethernet, Virtual Private Networks, hosting and application services shot up 19.4% year over year.

AT&T’s total video subscribers, which include U-verse TV and bundled satellite customers, touched 5.26 million at the end of the reported quarter (representing 21.5% of households served). Total U-verse TV subscribers reached 3.4 million (up 36% from the year-ago quarter), with a net addition of 202,000 customers on continued high-speed Internet attach rates. The company lost 12,000 net subscribers in the second quarter, bringing the total number of broadband connections to 16.5 million. However, the broadband connections were up 3.3% year over year.

Total consumer connections dropped to 42.5 million from 44.3 million in the year-ago quarter, due to a drop in traditional voice access lines, partially offset by higher U-verse TV, broadband and VoIP (Voice over Internet Protocol) connections.

Cash Flow

AT&T generated $9 billion cash from operations in the reported quarter compared with $8.57 billion in the year-ago quarter. The company’s expenditure increased to $5.3 billion from $4.9 billion. Free cash flow (cash from operations minus capital expenditures) increased to $3.71 billion from $3.67 billion in second quarter 2010.

Our Analysis

We believe AT&T’s ambitious $39 billion proposed mega-merger with T-Mobile will help in regaining subscribers. Upon completion, the merger will create the leading wireless operator in the U.S. and further improve revenue and profits, adding more wireless subscribers with enhanced networks. We also expect wireless revenue to continue growing with a low churn rate and network upgrades, and wireline revenue to improve on enhanced services in AT&T U-verse and solid cost management.

However, persistent declines in traditional voice access lines, aggressive pricing plans by rivals and the loss of iPhone exclusivity keep us cautious on the stock. Furthermore, the proposed merger is facing strong opposition from several companies such as Sprint Nextel Corp. (S), MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) that may hurt the company’s future profitability.

We are currently maintaining our long-term Neutral rating. The stock retains a Zacks #3 (Hold) Rank for the short term.

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AT&T INC (T): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

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