NEW YORK (Reuters) - U.S. consumers’ obsession with using smartphones to find restaurants, surf the web and navigate city streets helped propel a 26 percent rise in AT&T’s (T.N) quarterly profit — but at a cost for the operator.
The strain that wireless devices like smartphones and e-readers have placed on AT&T’s network is such that the company announced on Thursday it will increase capital spending by about $2 billion this year, targeting improvements in its wireless service.
The increase was unveiled as AT&T posted revenue and earnings that largely matched analysts’ estimates, although its addition of 2.7 million net subscribers in the fourth quarter was nearly 1 million more than expected.
Analysts did, however, point out that just 910,000 of those were the highly prized monthly bill-paying customers, compared with bigger rival Verizon Wireless’ addition of 1.15 million postpaid users.
Every new AT&T customer puts more demands on its network. Consumers have complained about service problems in cities such New York and San Francisco, where there are a high proportion of data-hungry iPhone users surfing the web on the go. AT&T is the exclusive U.S. carrier for Apple Inc’s (AAPL.O) wildly popular iPhone.
Given the strain on its network, AT&T’s announcement yesterday that it will support Apple’s iPad tablet is being viewed as a mixed blessing.
To that end, AT&T will increase capital spending by up to 10 percent from 2009 to a range of $18 billion to $19 billion. The roughly $2 billion increase includes spending on wireless network capacity and wires connecting mobile towers.
The spending boost comes as AT&T, along with rivals like Verizon, complained of a sluggish economy.
“Looking to 2010 we’re modeling a slow recovery in the economy and employment,” said Rick Lindner, chief financial officer of AT&T.
But even in a weak economy consumers appear willing to buy devices like iPhone, which was activated on AT&T’s network by 3.1 million customers in the quarter.
Lindner said the high-profile iPad would come with “very positive” economics for AT&T because it neither has to share service revenue with Apple nor subsidize the price of the device.
In contrast, AT&T’s payment of hefty subsidies for the iPhone has made its profit margins slimmer than some analysts had hoped even as it brings millions of customers to its network.
AT&T said it would expand wireless margins this year to the low 40 percent range from below 39 percent in the fourth quarter, and it set a long-term goal of margins around 45 percent. Verizon already produces margins in this range.
While iPad will not hit the market for months, other similar devices are already helping AT&T.
Analysts said, in fact, that the quarter’s subscriber surprise came from the number of customers that AT&T added with wireless links to devices such as Amazon.com Inc’s (AMZN.O) Kindle, Sony Corp’s (6758.T) Reader Daily Edition, and the Barnes & Noble BKS.N Nook. In this “emerging devices” category, AT&T brought about 1 million users aboard.
Devices such as e-readers are seen bringing in much less monthly revenue per customer than traditional cellphones, but since they are unsubsidized they offer healthy profit margins.
“I don’t want to overstate the value of it, but it’s a very high profit margin business,” said Piper Jaffray analyst Chris Larsen. “There is very little cost associated with the business — it might be a low revenue per individual user business, but it’s a high margin business.”
AT&T’s quarterly earnings rose in line with Wall Street expectations to $3.01 billion, or 51 cents a share, from $2.40 billion, or 41 cents a share, a year ago, when it took charges for staff cuts and investment losses.
Revenue fell nearly 1 percent to $30.9 billion, which met analyst estimates, according Thomson Reuters I/B/E/S.
For 2010, AT&T said it would deliver “stable consolidated revenues and stable-to-improved consolidated operating income margins, leading to stable-to-improved earnings per share.”
Its shares were up 3 cents at $25.59 cents on NYSE.
Reporting by Paul Thomasch and Sinead Carew; Editing by Derek Caney and Steve Orlofsky