AT&T beats profit view, raises outlook

NEW YORK Thu Jul 22, 2010 1:15pm EDT

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NEW YORK (Reuters) - AT&T Inc (T.N) posted a better-than-expected profit due to cost cuts in its landline business and said it was more optimistic about growth prospects for 2010, which sent its shares up 3 percent.

The No. 2 U.S. mobile provider posted slower-than-expected customer growth for the second quarter as fewer consumers switched from AT&T rivals to buy Apple Inc's (AAPL.O) iPhone, which AT&T has exclusive rights to sell.

The company, however, buoyed investor sentiment by forecasting strong earnings per share growth for the full-year 2010 after previously promising "stable-to-improved" results.

Chief Financial Officer Rick Lindner told Reuters in an interview to assume earnings growth would be "above 5 percent" but he did not give a more specific outlook. He said analysts were expecting earnings growth approaching 10 percent.

Lindner told analysts on a conference call that he expects improved results from consumer landline services, driven by its U-Verse TV and broadband service, but he expects a slower recovery of business services.

"We expect going forward in the remainder of this year and into 2011, steady improvement (in business). But, it will be slower improvement. We're not anticipating any kind of V-shaped recovery." Lindner said, noting that unemployment remained "stubbornly high" but industrial production was improving.

BTIG analyst Walt Piecyk said investors saw the positive outlook as a sign of improvements in the overall economy.

"People look at the large companies like AT&T for tone on the economy and that tone appears to be positive," he said.

Lindner said the company had looked for potential investments in wireless companies overseas but had a hard time finding an appropriate investment. Asked about speculation that it could buy satellite video provider DirecTV (DTV.O), he said the company was happy with its U-Verse business.

Several analysts said they were pleased with improvements in the company's 32.5 percent landline profit margin. This compared with expectations for 30.4 percent and 31 percent from two analysts contacted by Reuters.

"The margins in the landline business were much better than we were expecting," said Hudson Square analyst Todd Rethemeier who said much of the improvement came from job cuts.

The company cut its work force 1.3 percent, or 3,860 people, in the quarter and said the cuts were all in the landline side of the business.

AT&T, the second-biggest U.S. mobile service provider, said its profit rose to $4 billion, or 68 cents per share, from $3.2 billion, or 54 per share in the same quarter a year earlier.

Excluding certain items, earnings per share would have been 61 cents compared with analysts' average expectation for 57 cents, according to Thomson Reuters I/B/E/S.

Revenue rose to $30.8 billion from $30.6 billion in the same quarter a year ago. AT&T said second-quarter comparisons were based on results from continuing operations, which excludes revenue from Sterling Commerce, a unit it is selling to International Business Machines Corp (IBM.N).

However, AT&T's growth of valuable monthly-bill paying mobile customers was lower than analysts expected despite iPhone 4, Apple's latest device. While Apple has been criticized for antenna problems on the iPhone 4, it has still sold the phone in record numbers overseas as well as in the United States.

The operator's addition of 496,000 monthly bill paying customers, known as postpaid customers, was below the average expectation for 552,000 from eight analysts contacted by Reuters.

CFO Lindner said some consumers had put off buying phones in anticipation of upcoming devices, including iPhone 4, which launched late in the quarter. He noted that supply constraints had also curbed sales.

AT&T activated 3.2 million iPhone customers in the quarter, implying that the vast majority of people buying the device were already AT&T customers rather than customers leaving rivals such as Verizon Wireless or Sprint Nextel (S.N).

BTIG's Piecyk said only 27 percent of iPhone activations were from new customers in the second quarter compared with 33 percent in the first quarter this year.

"What that means is the ability of AT&T to bring in new customers because of iPhone is starting to diminish," he said.

Lindner said initial iPhone buyers tend to skew heavily toward its existing customer base but said the percentage of new iPhone subscribers should increase in the third quarter.

He said new subscribers would be below the low-to-mid 30 percent range seen with previous iPhones, as many consumers have already moved to AT&T for iPhone.

Additions of about 300,000 prepaid customers who pay for services in advance, were primarily driven by Apple's iPad tablet computer, according to analysts.

Including prepaid services and connections to devices such as the Amazon.com Inc (AMZN.O) electronic reader Kindle, AT&T added a total 1.6 million customers in the quarter.

AT&T was the first of the big U.S. mobile operators to report second-quarter results. Its bigger rival Verizon Wireless, a venture of Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L), is due to report on July 23.

Sprint Nextel, the No. 3 U.S. provider, plans to post its results on July 28.

AT&T shares were up 75 cents or 3 percent at $25.67 on the New York Stock Exchange in early afternoon trading. Verizon shares were up 1.9 percent, or 51 cents, at $27.03 and Sprint Nextel shares were up 1.9 percent, or 9 cents, at $4.68.

(Reporting by Sinead Carew; editing by Derek Caney)

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