UPDATE 4-AT&T weaker business outlook dampens wireless strength

Tue Jul 24, 2012 12:06pm EDT

* Q2 earnings per share 66 cents vs Street view 63 cents

* Wireless service margin 45 pct vs analyst view 42.56 pct

* Adds 320,000 subscribers vs analyst view 233,000

* Says business revenue will not return to growth this year

* Shares fall 3 percent

By Sinead Carew

July 24 (Reuters) - AT&T Inc pulled back its outlook for business services this year, sending its shares down 3 percent despite its better than expected quarterly profit as it reduced costs from customer upgrades to smartphones such as the Apple Inc iPhone.

After pushing up AT&T's share price up 17 percent so far this year, investors pulled back on Tuesday due to economic uncertainties and expectations that the company will not be able to sustain its strong wireless profit margins once Apple launches its next iPhone, expected in the fourth quarter.

The company said that it no longer expects its revenue from business services to return to growth this year because of the weak economy. Chief Financial Officer John Stephens did not say when he expects growth to recur in an conference call because businesses are being "very careful" about their spending.

"We are still optimistic about our wireline business and believe particularly our business revenues are going to be positive going forward. It just may take us a little bit longer," the executive told analysts in a conference call.

AT&T revenue from business customers fell 1.5 percent in the second quarter to $9.1 billion.

While analysts said that the comment should not be a big surprise they said it dampened investor enthusiasm about the stronger than expected wireless quarter.

"Now the quarter is behind us the focus turns to the iPhone 5 and trying to model that impact as well the economy." said Roe Equity Research analyst Kevin Roe.

SLOWER UPGRADES HELP WIRELESS PROFIT

AT&T, the No. 2 U.S. wireless provider, reported better-than-expected wireless profit margins because it reduced the amount of subsidies it paid for devices including the iPhone by forcing customers to wait longer before upgrading.

It posted a wireless service margin of 45 percent, based on earnings before interest, taxes, depreciation and amortization. This was well ahead of the average expectation of 42.56 percent from five analysts.

"It was a very strong quarter driven by policies the company put in place on the wireless side," Piper Jaffray analyst Christopher Larsen said.

AT&T and its rivals Verizon Wireless and Sprint Nextel have been curtailing upgrades in an effort to reduce their costs for subsidies paid to Apple. They shoulder a hefty portion of the phone's cost to give a discount to customers who commit to a two-year contract.

AT&T said roughly 6 percent of its subscribers upgraded their phones in the second quarter, compared with about 7 percent in the first quarter.

AT&T was also likely helped in the second quarter as customers may be putting off buying phones until the next iPhone launch, which is expected in the fourth quarter.

MARGINS SEEN STRONG UNTIL Q4

Piper's Larsen said that while he expects strong wireless margins to continue into the current quarter, they will likely subside in the fourth quarter.

"I do expect a lot of this to reverse in the fourth quarter because of the expected iPhone refresh," Larsen said.

AT&T's profit rose to $3.90 billion, or 66 cents per share, from $3.59 billion, or 60 cents per share, a year earlier. The result beat Wall Street expectations of 63 cents per share, according to Thomson Reuters I/B/E/S.

The company added 320,000 contract customers in the second quarter, ahead of the average expectation of about 233,000 from six analysts contacted by Reuters. However, it was well behind the 888,000 net subscribers bigger rival Verizon Wireless added.

AT&T said it was helped by a record low 0.97 percent customer cancellation rate, known in the industry as churn, compared with 1.15 percent in the year-ago quarter.

Hudson Square analyst Todd Rethemeier noted AT&T's profit margin of 32.3 percent for its traditional wireline business was above his 31.8 percent estimate.

The company also said it saw an increase in the number of customers who moved from its unlimited data service plans to its tiered plans, under which customers are charged based on how much data they download.

According to AT&T, about 27 million people, or two-thirds of its smartphone subscribers, are now on tiered plans, compared with 45 percent a year ago.

The results followed AT&T's announcement last week of a new pricing structure aimed at boosting revenue and encouraging customers to connect more devices, besides phones, to its network.

Revenue rose to $31.6 billion from $31.5 billion but fell a little short of analysts' expectations for $31.7 billion.

During the quarter, AT&T sold 53 percent of its telephone directory business to private equity firm Cerberus Capital Management LP for $750 million in cash.

Despite the strong numbers, AT&T shares were down 3 percent at $34.31 in noon trade on the New York Stock Exchange.

Some analysts had predicted that strong second-quarter results might fail to move AT&T's stock, which has risen about 14 percent so far this year due to its high dividend yield and earnings and revenue stability in the face of an uncertain global economy and low U.S. Treasury interest rates.

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