AT&T Tops Profit Estimates After Paying Fewer Subsidies

AT&T Inc. (T), the largest U.S. phone company, reported sluggish second-quarter sales after signing up fewer wireless customers, even as the slowdown boosted profit by lowering smartphone subsidy costs.

Net income attributable to AT&T climbed 8.7 percent to $3.9 billion, or 66 cents a share, from $3.59 billion, or 60 cents, a year earlier, Dallas-based AT&T said today in a statement. Analysts projected 63 cents a share on average, according to data compiled by Bloomberg. Sales rose less than 1 percent to $31.6 billion, compared with an estimate of $31.7 billion.

AT&T added 320,000 monthly contract customers, a smaller number than a year earlier. While the decline hurt sales growth, it meant the company doled out fewer dollars in subsidies -- the payments that make it easier for customers to afford the latest phones. The lack of a new iPhone from Apple Inc. (AAPL) contributed to the lull in subsidy payments, said Joe Bonner, an analyst with Argus Research in New York.

“It’s all related to the iPhone cycle,” said Bonner, who has a hold rating on AT&T shares. “Margins go up without the iPhone, and they go down when they have to pay Apple all those subsidies.”

AT&T shares fell 2.1 percent to $34.63 at the close in New York. The stock has climbed 15 percent this year.

Photographer: Mark Lennihan/AP Photo

An AT&T retail store in New York. AT&T saw a 1.7 percent rise in the size of wireless bills, lifted by more people buying data plans. Close

An AT&T retail store in New York. AT&T saw a 1.7 percent rise in the size of wireless... Read More

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Photographer: Mark Lennihan/AP Photo

An AT&T retail store in New York. AT&T saw a 1.7 percent rise in the size of wireless bills, lifted by more people buying data plans.

New Subscribers

Analysts had estimated 236,182 new subscribers, according to a Bloomberg survey of 11 analysts. The contract-customer gains lagged behind the 888,000 at Verizon Wireless, AT&T’s biggest rival. While AT&T leads in total phone revenue, Verizon has more wireless customers.

AT&T activated 3.7 million iPhones, compared with the 4.3 million sold in the first quarter. The company also sold 219,000 tablets, a drop from the 240,000 tablets sold in the first quarter.

Offering smartphones, including the iPhone, takes a toll on carriers’ profit margins because they typically sell the phones at a loss to lure subscribers into two-year contracts. Users of the iPhone and other smartphones are lucrative in the long run because they spend money more each month to browse the Web, send e-mail and watch videos.

The carrier will go through a fresh surge of iPhone sales when the next model comes out, expected later this year.

“This isn’t our first iPhone -- we’ve been through this before,” AT&T Chief Financial Officer John Stephens said in an interview today.

Upgrade Fees

The company has made some changes to mitigate the crush of users buying the new model at subsidized prices. It has raised the upgrade fee for existing customers who want the phone to $36 from $18. AT&T also lengthened the upgrade eligibility period to 20 months, meaning customers have to wait that long to get the subsidized rate.

“These changes make for a real difference,” Stephens said. He also reaffirmed his projection for sales of 25 million smartphones this year, the same as last year.

AT&T’s wireless margins widened to 45 percent last quarter. That was up from first-quarter margin of 41.6 percent and topped the 42.2 percent estimate average based on a Bloomberg survey.

AT&T also saw a 1.7 percent rise in the size of wireless bills, lifted by more people buying data plans. The average revenue per monthly subscriber increased to $64.93. The average estimate was $65.04, according to the Bloomberg survey.

Sales from AT&T’s land-line business fell 0.8 percent to $14.9 billion. The carrier lost 96,000 Internet customers, which AT&T blamed on seasonal trends. AT&T added 155,000 U-verse television subscribers, compared with the 200,000 in the first quarter.

AT&T’s second-quarter capital spending totaled $4.48 billion, down 15 percent from $5.27 billion a year earlier. The company is cutting costs by jettisoning slower-growth businesses. That includes selling its Yellow Pages directory unit to Cerberus Capital Management LP in May for $950 million.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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