* 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 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
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
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.