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Some conundrums have no easy answers.
Just ask regional telecom Alaska Communications Systems (Nasdaq: ALSK ) . The company has been building a next-generation 4G LTE network for quite a while, hoping to launch it this month. But then AlaskaComm had a chance to sell the Apple (Nasdaq: AAPL ) iPhone. Problem is, that device only connects to older 3G networks, so AlaskaComm had to pause the 4G build to beef up the 3G service. Those darn iPhone customers sure like to suck up wireless bandwidth, and you don't want to leave them hanging.
So now, the 4G launch has been pushed to “the later part of the year.” On top of that, the large subsidies AlaskaComm pays to Apple will hurt profit margins while the excitement over the iPhone lasts.
And just to complicate the matter even further, AT&T (NYSE: T ) already has a large footprint in Alaska and Verizon (NYSE: VZ ) moves into the frozen state later this year. To capture some iPhone customers who might otherwise go with the national giants, AlaskaComm sells its Apple products at a $50 discount. So the margin crunch up front cuts even deeper.
The iPhone looms extremely large in AlaskaComm's first-quarter report. The launch didn't directly affect results in the quarter; Adjusted revenues rose 5.5% year over year to $86 million, yielding $0.02 of GAAP earnings per share. That's a solid sales surprise and perfectly adequate earnings, according to Wall Street analysts.
This morning's 7% share price drop follows from the near-term iPhone damage to the bottom line and the delayed 4G network launch. AlaskaComm hopes to make up for the subsidies by selling high-value data plans to fiercely loyal iPhone customers. That strategy might backfire, though. Apple fans are indeed very loyal, but they also like to upgrade to the latest and greatest as often as possible. Subsidizing another iPhone once every two years for a large number of customers will cut into the long-term value of selling this product line.
I'm also left to wonder whether it wouldn't have been better to just wait for a 4G-capable iPhone to launch before jumping on Apple's bandwagon. That way, AlaskaComm could have its 4G cake and eat the iPhone a few months later, rather than shuffling business plans all over the place just to accommodate Cupertino.
But that's not what happened, and investors are hating the iPhone impact today. If you want to look at the bright side, AlaskaComm's shares opened up this morning with an 8.1% dividend yield. After the earnings-related haircut, the yield jumps to 8.7%. Locking in those generous rates today could pay dividends (pun intended) if the iPhone gambit starts to pay off down the road. Or you could take a look at these nine rock-solid dividend dynamos instead -- no skin off my nose either way.