Broadband Cable Association of Pennsylvania


January 25, 2013

AT&T Inc. added subscribers in the fourth-quarter, but it couldn't keep pace with rival Verizon Wireless, as the telecom companies continue to compete for the shrinking number of customers that are adopting smartphones. The Dallas-based wireless carrier added 780,000 contract customers-the most valuable and profitable-bringing its total to around 1.4 million for 2012. In comparison, Verizon Wireless added 2.1 million contract customers in the quarter and 5 million for the year. "Our objective is to not lose share throughout the course of this year and actually get to a point where we are gaining share vis-a-vis our competitors," Chief Executive Randall Stephenson said. He added that the company aims to "get our margins comparable to our competitors and also equalize share."

AT&T trails Verizon Wireless in total contact subscribers by more than 20 million. The gap is amplified by a U.S. wireless industry that isn't growing very much overall, as most people already have phones. AT&T released its subscriber numbers as part of the company's fourth-quarter report, in which it lost $3.86 billion, weighed down by a previously announced charge of $10 billion for an accounting shift related to pension and postretirement benefit plans. AT&T also projected revenue and earnings growth in 2013 that was slightly above analyst estimates. Shares of AT&T dropped a couple pennies after hours to $33.73.

AT&T's smartphone sales continued to be dominated by iPhone activations, which hit its highest level ever for the carrier, but most of those devices went to existing customers. The growing trend of users replacing older smartphones brings in less new revenue to the carrier, which still has to pay the same subsidy. "This is a continuation of what we have been concerned about," said Nomura Securities analyst Michael McCormack. In the quarter, AT&T activated 8.6 million iPhones and sold about 10.2 million total smartphones. AT&T was long the exclusive U.S. carrier for the iPhone, and it has continued to activate more of the devices than any other carrier. Verizon Wireless activated 6.2 million iPhones and 9.8 million total smartphones in the same period. Mr. McCormack also expressed concerns about the subsidies being paid for customers to get new smartphones, which put pressure on margins. "Wireless margins were well below consensus," he said.

AT&T's wireless service margin, a measure of the profitability of the wireless service, was 29.1%, although the company said that without costs from superstorm Sandy, margins would have been "nearly" 30%. Analysts had generally expected 30% to 31% in the quarter. The margins took an expected hit sequentially as shoppers gobbled up smartphones that entail large subsidies from AT&T. Those costs are made up through monthly bills-and a two-year contract-but they cause a direct hit to earnings in the quarter when the phones were purchased. AT&T reported a surge in wireless data revenue for the quarter, as more smartphones come onto its network and customers increasingly move away from unlimited data plans. Wireless service revenue rose 4.2% to $14.9 billion, while wireless data revenue rose by 14.7% to $6.8 billion.

Verizon Wireless-a joint venture of Verizon Communications Inc. and Vodafone Group PLC-has outpaced AT&T and other carriers in adding new customers for a while. Indeed, Verizon's 2.1 million in customers additions in the fourth quarter is about equal with the amount AT&T added from the beginning of 2011 until the end of September. While the two giants battle in the wireless space, smaller players Sprint Nextel Corp. and Deutsche Telekom are expected to cap a year of massive customer defections when they report results in coming weeks. AT&T said the rate at which wireless contract customers left its network, called churn, rose to 1.19% from 1.08% last quarter, but it fell from 1.21% a year earlier. Average revenue per user grew 1.9% to $64.98, being driven by the increase adoption of smartphones. AT&T has said that customer revenue doubles when they switch to using a smartphone because of higher service fees.

As a whole, AT&T reported a fourth-quarter loss of $3.86 billion, or 68 cents a share, compared with a year-earlier loss of $6.68 billion, or $1.12. Adjusted for pension charges, impacts from superstorm Sandy, and the sale of its Yellow Pages division in May, per-share earnings rose were 44 cents, compared with Wall Street expectations of 45 cents, according to Thomson Reuters. Revenue rose 0.2% to $32.58 billion, beating the average analyst projection of $32.22 billion. The company repurchased 126.6 million of its shares for $4.4 billion in the quarter. Its average shares outstanding fell 4.6% to 5.68 billion from 5.96 billion a year ago. Looking ahead to 2013, AT&T expects revenue growth to exceed 2%, while per-share earnings are expected to grow in the upper-single digits percentage or higher. Analysts polled by Thomson Reuters recently expected revenue growth of 1% and per-share earnings growth of roughly 7%. Wall Street Journal