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AT&T Q3 Earnings, No Surprises

Posted on: October 24, 2008 - Email Article - Printable Version

Nestor Solari

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AT&T Inc. [T: 28.43, 0.00 (0.00%)] reported third quarter earnings before the bell on Wednesday, October 22. Earnings came in at $0.55 per share, up from $0.50 per share a year ago. Excluding one-time expenses and amortization costs, earnings were $0.67 per share. This missed analyst estimate of $0.71 according to Bloomberg. These estimates include losses related to the iPhone. The better than expected sales of Apple’s new smart phone contributed to a healthy 4% increase in revenue, or $31.3 billion, which is in line with most analyst expectations. The increase in wireless subscribers amounted to 2 million adds, just above consensus that was pointing to an increase of just under 2 million.

This hit to their bottom line should not come as a surprise to anyone. The new 3G iPhone has had great success. When the company announced that it would subsidize the new iPhone, it clearly stated that it would take some short-term losses to gain market share and make long-term profits. AT&T, being the exclusive service provider of Apple’s phone in the U.S., activated over 2.4 million of the new iPhones last quarter. Of these 2.4 million, over 40% went to new clients. Apple sold 1.89 million more iPhones than analysts expectation of 5 million during the quarter. The loss that can be attributed to the greater than expected sales of the iPhone were estimated at about $0.10 off of their adjusted earnings.

The smart phone that has been making news is the only real story in this earnings announcement. Business Sales, which represent over 33% of the company’s revenue, remained unchanged for the most part at $11.5 billion. Wireless revenue surged about 15%, driven by sales and increased market share. The iPhone is estimated to cost subscriber 1.6 times the average subscriber cost per month. Revenue attributed to internet access and other data transmission, which is supposed to make up for wireline losses, jumped 51%. The wireline losses this quarter amounted to about 2.2%, a loss of just under 1 million primary lines.

I still cannot help but like AT&T going into the future. The numbers might not look as good initially, but the progress the company has been making is all in the right direction. AT&T plans to spend about $7 billion rolling out its U-verse network, their “triple play” type package, which has been showing healthy growth quarter after quarter. The new deal with DIRECTV Group [DTV: 23.17, 0.00 (0.00%)] represents a better positioning than that of its previous deal with Dish. Some investors might not like that the company cut its forecast for profit margins by approximately 2% to “better than 37%,” and that the company cut its full-year outlook on its adjusted EBIT margins to 23% from 24%, but there is more to that story. The pressure on margins from the iPhone are more than worth the long term gains and increased market share AT&T should realize. There has been a lot of pressure on the Telecommunications sub-sector due to losses in wireline, but the wireless segments of these businesses are not going to disappear any time soon and only becoming more efficient. AT&T is the leader in this market, with strong cash flows and steady growth, and is historically cheap. I cannot help but be long on this Telecom giant making strides in the right direction.

- Nestor Solari

Disclaimer: The mutual fund the author manages is long T.

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