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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