Before the opening bell, the second-largest U.S. mobile service provider AT&T Inc. (T) reported its third quarter adjusted earnings per share (EPS) of 61 cents. The quarter’s EPS matched the Zacks Consensus Estimate and improved 13% from the year-ago quarter.
The year-over-year improvement was attributable to continued mobile broadband growth, strong smartphone and connected device sales, and sequentially stable wireline revenues.
Revenue inched down 0.3% year over year to $31.5 billion, missing the Zacks Consensus Estimate of $31.6 billion. Operating income grew 14.8% from the year-ago quarter to $6,235 million.
Segment Results
Wireless revenue, including service and equipment, increased 2.8% year over year to $15.6 billion primarily on the heels of robust mobile broadband growth, smartphone sales and an upswing in branded computing subscribers. Wireless data revenue leaped 184% year over year to $5.6 billion, driven by multimedia and text messages.
AT&T added 2.1 million wireless customers in the reported quarter to reach 100.7 million total subscribers in service. Strong additions were attributable to the rapid adoption of smartphones, healthy prepaid and reseller subscriber count plus growth in tablets and connected devices such as automobile monitoring systems and security systems.
Retail post-paid additions totaled 319,000, retail prepaid additions were 293,000, connected device additions were 1,038,000 and reseller additions were 473,000 in the reported quarter. AT&T added 505,000 branded computing subscribers (including tablets, aircards, MiFi devices, tethering plans and other data-only devices), bringing the total to 4.5 million. The branded computing subscriber shot up 80% year over year.
The company sold 4.8 million smartphones during the third quarter. Out of these, 2.7 million were Apple Inc.’s (AAPL) iPhone sales. The rest were Android and other smartphones, which more than doubled from the year-ago quarter.
Total churn (customer switch) declined to 1.28% from 1.32% in the prior-year quarter and 1.43% in the prior quarter. Post-paid churn increased slightly to 1.15% from 1.14% in the prior-year quarter but was flat with the prior quarter. Post-paid ARPU (average revenue per user) grew 1.4% year over year to $63.69, driven by healthy data growth.
Wireline revenues dipped 2.2% year over year to $15 billion in the third quarter but grew for the first time sequentially in three years. Revenue from residential customers nudged up 0.2% year over year to $5.3 billion driven by AT&T U-verse services, while business revenue slid 2.7% 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, climbed 19.3% year over year.
AT&T's total video subscribers, which include U-verse TV and bundled satellite customers, touched 5.4 million at the end of the third quarter (representing 22.6% of households served). Total U-verse TV subscribers reached 3.6 million with a net addition of 176,000 customers on continued high-speed Internet attach rates.
Total consumer connections plunged to 41.9 million from 43.7 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 $10.4 billion cash from operations in the reported quarter compared with $9.5 billion in the year-ago quarter. The company’s expenditure decreased to $5.3 billion from $5.5 billion a year ago. Free cash flow (cash from operations minus capital expenditures) increased to $5.1 billion from $4 billion in third quarter 2010.
Our Analysis
We are optimistic on AT&T’s strong smartphone portfolio. Strong Wireless revenue is expected to be driven by healthy iPhone and smartphone sales coupled with growth in tablets and connected devices that are accelerating subscriber gains while reducing churn.
Additionally, the launch of 4G Long-Term Evolution wireless networks in the U.S. last month strengthens its position against its largest rivals Verizon Communication (VZ) and Sprint Nextel Corp. (S). Further, Wireline revenue is also likely to improve on enhanced AT&T U-verse services and solid cost management.
However, persistent declines in traditional voice access lines, hefty iPhone subsidy, aggressive pricing plans by rivals and the loss of iPhone exclusivity keep us cautious on the stock. In addition, AT&T’s effort to buy T-Mobile is facing a major roadblock, which might force the stock to move downside.
We are currently maintaining our long-term Neutral rating. The stock retains a Zacks #3 Rank (Hold) for the short term.
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