Lofty Subsidies Hurt AT&T's 4Q

Despite solid smartphone sales, revenues slipped due to high churn rate and lofty subsidies associated with Apple Inc.’s iPhone.

Revenue grew 3.6% year over year to $32.5 billion in the fourth quarter, outpacing the Zacks Consensus Estimate of $31.99 billion. Improved performance in the quarter was driven by continued mobile broadband sales, strong wireless network performance and improved wireline revenue trends. Revenue for fiscal 2011 increased 2% year over year to $124.3 billion.

Wireless revenue, including service and equipment, climbed 10% year over year to $16.7 billion in the reported quarter, primarily on the back of robust smartphone sales and strong postpaid additions. Wireless data revenue leaped 19.4% year over year to $5.9 billion, driven by multimedia and text messages.

AT&T added 2.5 million wireless clients in the reported quarter totaling 103.2 million. Strong additions were attributable to the rapid adoption of smartphones including iPhone 4S launched in mid-October, healthy prepaid and reseller subscriber count coupled with growth in tablets and connected devices just as automobile monitoring systems and security systems.

The company recorded the largest increase in retail post-paid additions of 717,000 in the last five quarters. Retail-prepaid additions were 159,000, connected device additions were 1,029,000 and reseller additions were 592,000 in the reported quarter. AT&T added 571,000 branded computing subscribers, in doing so bringing the total to 5.1 million. The branded computing subscriber shot up 70% year over year and represented the best ever quarter in the company’s history.

The company sold a record 9

The company sold a record 9.8 million smartphones in the fourth quarter, which doubled from the prior quarter and up 50% from the previous quarterly record. Out of these, 7.6 million were iPhone sales and the rest were Android and other smartphones.

Total churn increased slightly to 1.32% in the fourth quarter from 1.15% in the prior-year quarter and 1.28% in the prior quarter. Post-paid churn increased to 1.21% from 1.15% both annually and sequentially. Post-paid ARPU grew 1.4% year over year to $63.76, driven by healthy data growth.

Wireline earnings dipped 1.4% year over year to $14.9 billion in the fourth quarter. Lower voice and other earnings offset strong data earnings.

Revenue from residential clients inched up 0.5% year over year to $5.3 billion, driven by AT&T U-verse services, during business revenue slid 1.4% year over year to $9.3 billion reflecting economic weakness in voice and legacy data products. Strategic business services just as Ethernet, Virtual Private Networks, hosting and application services, spiked 16.4% year over year.

AT&T's total video subscribers, which include U-verse TV and bundled satellite clients, touched 5.6 million at the end of the fiscal 2011. Total U-verse TV subscribers reached 3.8 million with net addition of 208,000 clients on continued high-speed Internet attach rates.

Total consumer connections plunged to 41.3 million as of December 2011 from 43.4 million in the year-ago period, due to a drop in traditional voice access lines, partially offset by higher U-verse TV and VoIP (Voice over Internet Protocol) connections.

For fiscal 2012, AT&T expects consolidated revenue, including postpaid ARPU, to grow 2% year over year. Consolidated and wireless margins are expected to expand furthermore keeping wireline margin stable. As a result, the company expects revenues per share to increase in the mid-dingle digit range, leading to furthermore earnings acceleration in the years ahead.

We believe AT&T will generate strong revenue and revenues growth on the back of healthy iPhone and smartphone sales coupled with growth in tablets and connected devices that will accelerate subscriber gains during reducing churn rate. The launch of 4G LTE (Long Term Evolution, latest standard in the mobile network technology) networks in September last year, expanding U-verse services, and entry into cloud computing and hotel WiFi businesses are expected to boost the company’s profitability furthermore.

In addition, AT&T was the first wireless carrier to provide mobile social gaming options on its smartphones and tablets, along these lines differentiating and making it superior from other operators. But, persistent declines in traditional voice access lines, hefty iPhone subsidy, competitive threats from rivals Verizon Communication and Sprint Nextel Corp. and the loss of iPhone exclusivity in February last year keep us cautious on the stock.