AT&T Meets Expectations, Revenues Climb

Net income in the quarter jumped 286.6% year over year to $12.3 billion on strong revenue growth, robust integrated device sales, gains in IP-based and strategic business services as well as cost-cutting measures.

Revenue grew 2.8% year over year to $31.6 billion, which was above the Zacks Consensus Estimate of $31.3 billion. The increase in revenue was driven by strong iPhone sales.

Segment ResultsWireless: AT&T registered a net gain of 2.6 million wireless subscribers in the third quarter to reach 92.8 million total subscribers in service, up 29.9% year over year, attributable to rapid adoption of smartphones, strong prepaid subscribers and higher growth in connected devices. This represents an all-time high quarterly net addition in the company’s history. Retail post-paid additions totaled 745,000 and retail prepaid additions were 321,000 in the reported quarter.

Total Wireless revenue climbed 11.4% year over year to $15.2 billion driven by a record quarter of integrated device sales. Wireless data revenue leaped 30.5% year over year to $4.8 billion, driven by strong text and multimedia messages. AT&T reported third quarter post-paid integrated device activation of more than 8 million. The company activated 5.2 million iPhones during the reported quarter, strongly up from 3.2 million in the previous quarter.

Wireline: Total U-verse TV subscribers reached 2.7 million in the quarter with a net addition of 236,000 customers (up 50.8% from the year-ago quarter), on continued high broadband and voice attach rates. AT&T U-verse revenues were $1.1, up 84.5% from the year-ago quarter. AT&T's total video subscribers, which includes the company's U-verse and bundled satellite customers, reached 4.7 million (representing 18.8% of households served).

Wireline revenue recorded the smallest year-over-year decline of 3% in the last six quarters. Revenues of $15.3 billion in the third quarter were driven by improved consumer revenues, sustained growth in strategic business services, further expansion in AT&T U-verse services, and solid cost management.

However, total consumer connections plunged to 43.7 million from 45.7 million in the year-ago quarter, primarily due to a drop in traditional voice access lines, partially offset by higher broadband, U-verse TV and VoIP (Voice over Internet Protocol) connections. AT&T U-verse Voice connections increased by 166,000 in the quarter. The company added net 148,000 customers in the reported quarter to reach 17.5 million total broadband connections.

Our AnalysisAT&T is pursuing a number of strategies in the wireless data marketincluding aggressive promotion of bundled services (voice, video and Internet) to protect its markets from cable operators and other alternative services. On the wireline front, expansion in AT&T U-verse services and solid cost management will fuel earnings going forward. Moreover, AT&T is also pursuing mobile broadband services, which are currently the industry’s most powerful growth driver.

However, if Verizon Communication (VZ) starts selling Apple Inc.’s (AAPL) iPhone, then AT&T is expected to lose its exclusive hold on the iPhone, which is the company’s strong revenue generator. Further, signs of a slowdown in post-paid wireless business as well as the ongoing aggressive pricing and promotional war with Verizon may limit the potential upside of the stock.