Before the opening bell, AT&T Inc. (T), the second largest U.S. mobile service provider, reported second quarter 2012 adjusted earnings per share of 66 cents. The quarter’s earnings surpassed the Zacks Consensus Estimate by 3 cents and the year-ago earnings by 6 cents.
The company once again delivered an outstanding performance with double-digit earnings and operating income growth. The wireless segment performed strongly with record low churn rates and best-ever margins.
Revenue grew 0.3% year over year to $31.57 billion, but missed the Zacks Consensus Estimate of $31.74 billion. Excluding the impact of the sale of the Advertising Solutions unit, revenue increased 2% year over year.
Operating income increased 10.6% year over year to $6.8 billion in the second quarter. Operating margin expanded to a record 21.6% from 19.6% in the year-ago quarter. This represents the highest margins in four years.
Segment Results
Wireless revenue, including service and equipment, rose 4.8% year over year to $16.4 billion primarily on the back of robust smartphone and branded computing device sales as well as lower churn.
Wireless data revenue leaped 18.8% year over year to $6.4 billion, driven by Internet access, multimedia and text messages.
AT&T added 1.3 million wireless customers in the reported quarter, totaling 105.2 million. Strong additions were attributable to the continued adoption of smartphones, including Apple Inc.’s (AAPL) iPhones and Google Inc.’s (GOOG) Android based phones as well as increased sales of tablets and connected devices such as automobile monitoring systems and security systems.
Retail post-paid additions were 320,000, retail-prepaid additions were 92,000, connected device additions were 382,000 and reseller additions were 472,000 in the reported quarter. AT&T added 496,000 branded computing subscribers (including tablets, aircards, MiFi devices, tethering plans and other data-only devices), thus bringing the total to 6.3 million. The branded computing subscriber base grew 50% year over year.
The company sold 5.1 million smartphones in the reported quarter, of which 3.7 million were iPhones and the rest were Android and other smartphones. Notably, 22% of the iPhone customers were new to AT&T.
Total churn improved to a record low of 1.18% from 1.43% in the prior-year quarter and 1.47% in the prior quarter. Post-paid churn improved to 0.97% from 1.15% in the prior-year quarter and 1.10% in the prior quarter. This also represents the lowest level of churn in the company’s history.
Post-paid ARPU (average revenue per user) grew 1.7% year over year to a record $64.93, driven by healthy data growth.
Wireline revenues dipped 0.8% year over year to $14.9 billion. Strong data revenues driven by improving consumer and business strategic services revenue trends partly compensated for lower voice and other revenues.
Revenue from residential customers inched up 1.7% year over year (maximum growth in more than four years) to $5.5 billion, driven by AT&T U-verse services while business revenue slid 1.5% year over year to $9.1 billion, reflecting continued weakness in voice and legacy data products. Strategic business services such as Ethernet, Virtual Private Networks, hosting, IP conferencing and application services, spiked 13.5% year over year.
AT&T's total video subscribers, which include U-verse TV and bundled satellite customers, touched 5.8 million at the end of the second quarter. Total U-verse TV subscribers reached 4.1 million with the net addition of 155,000 customers on continued high-speed Internet attach rates.
Total consumer connections plunged to 40.2 million as of June 2012 from 42.5 million in the same month a year ago, due to a drop in traditional voice access lines, partially offset by higher video and broadband connections.
Cash Flow
AT&T generated $9.7 billion cash from operations in the reported quarter, up from $9.0 billion in the year-ago quarter. The company’s expenditure declined to $4.5 billion from $5.3 billion in the year-ago quarter. Free cash flow was $5.1 billion compared to $3.7 billion in the year-ago quarter.
The company repurchased 75.8 million of shares for $2.5 billion in the reported quarter. With this, AT&T has 156.5 million shares remaining in its buyback authorization, which started last quarter.
Our Take
We believe that strong adoption of smartphones, expansion of LTE networks and U-verse services, as well as the entry into cloud computing and hotel WiFi businesses will boost the company’s future profitability. Further, a healthy balance sheet and strong commitment to return value to shareholders in the form of dividends and share repurchases make the stock more attractive for income-oriented investors.
However, persistent declines in traditional voice access lines, aggressive pricing plans from its largest rivals Verizon Communications Inc. (VZ) and Sprint Nextel Corp. (S), iPhone subsidies and intense competition from cable companies and other alternative service providers are risks to the stock.
We are currently maintaining our long-term Neutral recommendation on AT&T. The stock retains a Zacks #3 (Hold) Rank for the short term (1–3 months).
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