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AT&T Sales Trail Projections as Mobile Gains Slow

iPhone 3G handsets
Two iPhone 3G handsets are displayed for a photograph in New York, on Jan. 28, 2009. Photographer: Daniel Acker/Bloomberg

AT&T Inc., the largest U.S. phone company, added the fewest mobile subscribers in at least 12 quarters, crimping sales growth and stoking concerns about its reliance on the iPhone.

First-quarter sales of $30.6 billion missed the $30.7 billion average of estimates compiled by Bloomberg . A net new 512,000 contract subscribers signed up, compared with almost 900,000 a year earlier, Dallas-based AT&T said today in a statement.

Competition has escalated as the pool of new U.S. subscribers shrinks, forcing carriers to poach customers to sustain growth. Apple Inc.’s iPhone, which AT&T offers exclusively in the U.S., accounted for much of its growth, said Chris King, an analyst at Stifel Nicolaus & Co. in Baltimore.

“It does raise continued investor concerns about the idea of them losing the exclusivity on the iPhone,” said King, who predicts Apple will allow another carrier to offer the iPhone early next year. “It’s a good thing today because without it, they’d be sunk.”

King recommends buying AT&T shares and doesn’t own any.

AT&T fell 32 cents to $26.34 at 4 p.m. in New York Stock Exchange composite trading. The stock has lost 6 percent this year.

Net income fell 21 percent to $2.48 billion, or 42 cents a share, from $3.13 billion, or 53 cents, a year earlier, Dallas- based AT&T said. The company recorded $1 billion in expenses last quarter because of new health-care legislation that eliminated tax breaks on some health benefits for retirees.

Excluding that, earnings were 59 cents a share, compared with analysts’ average 55-cent estimate.

IPhone Activations

About a third of iPhone activations came from customers who were new to AT&T. Without those 900,000 new subscribers, the company may have posted a loss in contract customers this quarter, analysts said.

“Mathematically, they’re not incorrect,” Chief Financial Officer Rick Lindner said in an interview. “They’re incorrect in their assumption that those customers would not be coming to us irrespective of the iPhone.”

AT&T has battled customer complaints about its wireless service, especially in New York and San Francisco, and dedicated an extra $2 billion to the network in its budget this year. Dropped calls on its third-generation network fell 6 percent in Manhattan and 9 percent in the wider New York City area.

‘A New World’

While San Francisco is improving, progress has been held up by regulations that delay changing or adding wireless antennas and other network infrastructure, Lindner said. The company has also had a hard time getting the parts it needs after its Asian suppliers cut staff and production.

“We’d like the improvement to be faster there than it has been,” Lindner said. “We have maybe a bit more sense of urgency because of the growth in data traffic that we’re seeing.”

AT&T and its mobile-phone rivals are looking for new sources of revenue as the U.S. wireless market grows saturated. There are enough wireless devices for more than nine out of 10 people, according to the CTIA wireless industry association.

“The entire postpaid business, certainly for the big four national wireless carriers, is going to show very little growth,” King said, referring to AT&T, Verizon Wireless, Sprint Nextel Corp. and T-Mobile USA Inc. “We’re in a new world.”

To help compensate, Chief Executive Officer Randall Stephenson is promoting devices other than phones, like dog-tracking collars and e-readers that communicate information over its networks. The company added 1.1 million subscribers for those types of devices in the quarter.

2010 Forecast

The business may be the next area of growth for AT&T after the company loses its exclusive U.S. rights to the iPhone, executives have said.

AT&T still expects to meet its full-year forecast for capital spending and margins. It will spend $18 to $19 billion this year on its network and other capital costs, according to an investor presentation.

AT&T also added 231,000 television subscribers to its U-Verse product, giving it 2.3 million. The company unveiled the service about five years ago to help it retain home-phone users. Total sales in its wireline business dropped 4.6 percent to $15.4 billion.

Verizon Communications Inc., the second-largest phone company, will report first-quarter results tomorrow.

Download: Earnings

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