* Earnings top Wall Street's view, but revenue misses
* Net subscriber additions miss analysts' expectations
* Shares fall slightly
By Sinead Carew
Oct 24 AT&T Inc added fewer customers than
expected in the third quarter due to a shortage of the latest
Apple Inc iPhone, highlighting its outsize dependence
on the device.
The company's slowing customer growth shows that it is
rapidly losing ground to bigger rival Verizon Wireless. Since
most people already have cellphones, operators like AT&T and
Verizon have to battle each other to add new customers.
AT&T, the No. 2 U.S. mobile service provider, added 151,000
net new subscribers in the quarter, compared with the average
expectation for 358,000, according to five analysts contacted by
Reuters. Verizon Wireless added 1.5 million net new subscribers
in the same period.
"They're clearly losing significant market share to Verizon
Wireless," Stifel Nicolaus analyst Christopher King said. "It
appears, based on these numbers, that Verizon Wireless is really
pulling away from the rest of the industry."
King said the trend could be a bad omen for smaller rival
Sprint Nextel, which is due to report results on Thursday.
AT&T blamed its weak growth on a shortage of the latest
iPhone, which went on sale in the last week of the quarter,
highlighting AT&T's dependence on Apple to lure new customers.
The vast majority of third-quarter iPhone sales went to
existing subscribers. But the company expects customer growth to
improve this quarter as iPhone supply problems ease, Ralph de la
Vega, AT&T's mobile chief told analysts on a conference call.
The company's iPhone supplies are varying widely from day to
day, according to De la Vega who said that on good days, the
device boosts customer additions to 5,000 to 10,000. Average
daily net additions were 1,600 during the third quarter.
For future revenue growth, De la Vega said he expected AT&T
to be less dependent on gaining new customers as it is able to
increase revenue by convincing existing customers to spend more
by connecting new devices to its network.
The executive did not explain this strategy in greater
detail, but promised to do so at an analyst meeting on Nov. 7.
Analysts also expect AT&T to announce plans for rural phone
lines it was considering selling at the event.
PROFIT HELPED BY BUYBACKS, TAX
AT&T's profit rose to $3.64 billion, or 63 cents per share,
from $3.62 billion, or 61 cents per share, and was 3 cents ahead
of Wall Street expectations, according to Thomson Reuters
Two thirds of the earnings beat was the result of share
buybacks and a lower tax rate, while the remainder was helped by
lower costs due to weak customer growth. U.S. operators pay
hefty subsidies to offer customers discounts on smartphones such
as iPhone in order to tie them into two-year contracts.
But analysts said they would have hoped for even better
profits in the third quarter since the company had to pay
subsidies for fewer new customers than expected.
Guggenheim analyst Shing Yin worried that AT&T's wireless
service margin of 40.8 percent, based on earnings before
interest, taxes, depreciation and amortization, would be under a
lot more pressure this quarter from iPhone costs.
"It's a somewhat troubling sign as we get into the fourth
quarter, where we do expect iPhone sales to be higher," he said.
AT&T's revenue fell to $31.46 billion from $31.48 billion
and missed the analysts' average estimate of $31.59 billion,
according to Thomson Reuters I/B/E/S.
Revenue would have been up 2.6 percent from the year-ago
results, excluding AT&T's directory business, which it sold
earlier this year, the company said.
Revenue for business services fell 2.6 percent in the
quarter, hurt by a slowdown in government spending and an
unwillingness by companies to open their purse strings due to
uncertainty about tax policies, Chief Financial Officer John
On the wireless side, AT&T said it could see a revenue boost
from new service plans that increased its data prices in the
third quarter. The new plans allow customers to buy a single
monthly subscription to share their allowance for data services
such as web surfing between multiple devices. Each device had
previously required a separate data subscription.
Nearly 2 million subscribers signed up for the new plans in
the first five weeks and these customers signed up for bigger
data allowances than the company expected with more than a third
taking plans of 10 gigabytes or higher, the company said.
As a result the company is not seeing any near-term
reduction in revenue from the new plans, counter to its
expectations, De la Vega told analysts on the call.
AT&T raised its 2012 free cash flow target by $2 billion to
$18 billion and said capital spending for the year would come in
at the low end of its $19 billion to $20 billion target range.
Verizon Wireless is a venture of Verizon Communications
and Vodafone Group Plc. Verizon said wireless
helped boost its profit in its quarterly report Oct 18.
AT&T shares were down 13 cents at $34.87 in early afternoon
trade on the New York Stock Exchange.