AT&T Beats Ests, Subscribers Grow

Healthy mobile broadband growth, strong smartphone sales and sequentially stable wireline earnings led to the better-than-expected results.

Revenue spiked 2.2% year over year to $31.5 billion and surpassed the Zacks Consensus Estimate of $31.3 billion. Operating income inched up 1.3% from the year-ago quarter to $6,165.0 million.

Wireless revenue, including service and equipment, climbed 9.5% year over year to $15.6 billion, primarily on the heels of robust mobile broadband growth, record smartphone sales and an upswing in branded computing subscribers. Wireless data revenue leaped 23.4% year over year to $5.5 billion, driven by multimedia and text messages.

AT&T added 1.1 million wireless clients in the reported quarter to reach 98.6 million total subscribers in service. Strong additions were due to the rapid adoption of smartphones, healthy prepaid subscriber count and growth in tablets and connected devices just as automobile monitoring systems, security systems and a host of other products.

AT&T added 545,000 branded computing subscribers, bringing the total to 4 million. The branded computing subscriber count doubled year over year.

The number of smartphones sold increased 43% year over year to 5.6 million. In spite of the loss of the exclusive hold on Apple Inc.'s iPhone to its largest rival Verizon Communication, AT&T activated 3.6 million iPhones in the quarter compared with 3.2 million in the year-ago quarter. Of the total activations, 24% of the clients were new to AT&T, thanks to the iPhone discounts. Android and other smartphone sales more than doubled from the year-ago quarter.

Total churn increased to 1.43% from 1.29% in the prior-year quarter and 1.36% in the prior quarter. Post-paid churn as well increased to 1.15% from 1.01% in the prior-year quarter and 1.18% in the prior quarter. Post-paid ARPU grew 2% year over year to $63.87, driven by healthy data growth.

Wireline earnings dipped 3.2% year over year to $14.9 billion in the second quarter. Revenue from residential clients nudged up 0.1% year over year to $5.4 billion, driven by the strength in IP data services, during business revenue slid 4.1% 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 shot up 19.4% year over year.

AT&T's total video subscribers, which include U-verse TV and bundled satellite clients, touched 5.26 million at the end of the reported quarter. Total U-verse TV subscribers reached 3.4 million, with a net addition of 202,000 clients on continued high-speed Internet attach rates. The company lost 12,000 net subscribers in the second quarter, bringing the total number of broadband connections to 16.5 million. But, the broadband connections were up 3.3% year over year.

Total consumer connections dropped to 42.5 million from 44.3 million in the year-ago quarter, due to a drop in traditional voice access lines, partially offset by higher U-verse TV, broadband and VoIP (Voice over Internet Protocol) connections.

We believe AT&T's ambitious $39 billion proposed mega-merger with T-Mobile will help in regaining subscribers. Upon completion, the merger will create the leading wireless operator in the U.S. and furthermore improve revenue and profits, adding more wireless subscribers with enhanced networks. We as well expect wireless revenue to continue growing with a low churn rate and network upgrades, and wireline revenue to improve on enhanced services in AT&T U-verse and solid cost management.

However, persistent declines in traditional voice access lines, aggressive pricing plans by rivals and the loss of iPhone exclusivity keep us cautious on the stock. Even more, the proposed merger is facing strong opposition from several companies just as Sprint Nextel Corp., MetroPCS Communications Inc. and Leap Wireless International Inc. that may hurt the company's future profitability.

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