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 November 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 I/B/E/S.
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 Stephens said.
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.
(Reporting by Sinead Carew; Editing by Lisa Von Ahn, Jeffrey Benkoe)