The No. 2 U.S. mobile service, which reported third-quarter earnings that matched analysts’ estimates, also posted a record 5.2 million iPhone customer activations for the third quarter, helping it beat revenue expectations — and locking in customers for the next two years.
But AT&T would need to find other ways to attract new customers should rival Verizon Wireless start selling iPhone also next year, as is widely expected.
“It makes it incrementally more difficult to move the needle from a top-line growth standpoint, if they lose iPhone subscribers,” said Stifel Nicolaus analyst Chris King.
AT&T, the first of the top U.S. operators to post earnings this quarter, said it had 745,000 net new monthly bill-paying subscribers, a bit ahead of the average expectation for more than 716,000 from six analysts contacted by Reuters.
Revenue rose to $31.58 billion from $30.73 billion in the year-ago quarter, beating analyst estimates of $31.25 billion, according to Thomson Reuters I/B/E/S.
AT&T said wireless data revenue rose 30.5 percent to $4.8 billion, a “terrific mobile broadband quarter,” Chief Executive Randall Stephenson boasted in the company statement.
The company said more than 80 percent of phone sales in the quarter were advanced devices used for wireless data services, which cost extra, and about 43 percent of consumers have yet to buy such devices.
“There’s a lot of room to continue to grow,” Chief Financial Officer Rick Lindner said in an interview. While AT&T has been criticized for network performance issues, Lindner said an upcoming upgrade would help AT&T compare more favorably with rivals like Verizon Wireless.
Many analysts expect that as soon as the first quarter, Apple will expand iPhone distribution to market leader Verizon Wireless, a venture of Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L). Verizon is due to report earnings October 22.
Lindner declined to say when iPhone exclusivity would end.
“If that’s all that people are looking at in this business, they’re missing the story,” he said.
In the third quarter AT&T said its iPhone activations were 62 percent higher than its previous record quarter of 3.2 million, but most of these came from existing customers. It said that 24 percent of iPhone sales were to customers that were new to AT&T, compared with about 40 percent for the first iPhone.
Analysts had expected strong wireless growth for AT&T in its first full quarter selling the latest iPhone model, but had warned this would put pressure on its mobile profit margin, as strong phone sales mean hefty subsidy costs.
At 37.6 percent, AT&T’s wireless profit margins were below expectations for 40.5 percent from Barclays’ Ratcliffe or 39.2 percent from King.
The idea of paying subsidies is to attract more customers and recoup the cost over time with higher average monthly revenue per user (ARPU). AT&T pays higher subsidies for iPhone as these users tend to spend more on data services.
“We expect that will translate into better ARPU growth in the future. We don’t yet have that proof,” Barclays analyst Ratcliffe said.
Lindner said the margin weakness would be temporary and noted that ARPU was hurt by nonoperating issues such as a reduction in fees related to regulations.
On the plus side, Ratcliffe said a weaker than expected margin likely meant AT&T sold a lot more smartphones, other than iPhone, than he had expected.
AT&T’s third-quarter net profit rose to $12.3 billion, or $2.08 per diluted share, from $3.2 billion, or 54 cents per share in the year-earlier quarter.
Before unusual items such as a gain from the sale of its Sterling Commerce unit, AT&T said its earnings would have been 55 cents per share, in line with Wall Street estimates.
Mizuho analyst Michael Nelson said AT&T’s free cash flow of $4 billion beat his estimate for $3.2 billion, suggesting that it could announce a share buyback program later this year.
Lindner did not reveal specific plans on the conference call but said AT&T’s strong cash position gives it the flexibility to consider options like buybacks.
In the connected devices category, which includes gadgets like Amazon.com Inc’s (AMZN.O) Kindle e-reader, AT&T said it added 1.2 million customers. It ended the period with a total of 92.8 million mobile connections, including 2.6 million new customers in the quarter.
AT&T shares were down 21 cents or almost 1 percent at $28.40 in early afternoon trade on New York Stock Exchange. The stock has risen about 18 percent since late May.
Reporting by Sinead Carew; editing by Maureen Bavdek and Gerald E. McCormick