AT&T Should Renew Its iPhone Vows

Remind me again why AT&T (NYSE: T  ) was shifting so much marketing attention away from Apple's (Nasdaq: AAPL  ) iPhone in favor of Nokia's (NYSE: NOK  ) Lumia 900? Oh yes, that's right. It's because wireless carriers generally loathe innovation and push whatever exclusive devices they can get their hands on for the sake of differentiation.

The market has voted
Ma Bell's earnings speak for themselves, though: Consumers still just want the iPhone. The company sold 3.7 million iPhones during the second quarter, nearly three-quarters of the total 5.1 million smartphones sold. AT&T continues to outpace red rival Verizon (NYSE: VZ  ) in iPhone sales, as Big Red put up 2.7 million iPhone activations recently.

That means the remaining 1.4 million smartphones sold on AT&T last quarter are split between Google Android handsets and Microsoft (Nasdaq: MSFT  ) Windows Phone devices. The Lumia 900 is AT&T's current exclusivity play, which also just got its price dropped to $50 on contract amid the lack of upgradeability for the devices to Windows Phone 8.

To an extent, AT&T is interested in shifting consumer focus away from the iPhone, which is now available on all three largest carriers. It would prefer to get subscribers onto an exclusive device for customer lock-in, but clearly the iPhone continues to sell itself.

Back to basics
Total revenue came in at $31.6 billion for the second quarter, resulting in net income of $3.9 billion, or $0.66 per share. Operating cash flow was $9.7 billion, of which $4.5 billion was spent on capital expenditures. That leaves roughly $5.1 billion in free cash flow.

AT&T also repurchased 75.8 million shares for $2.5 billion during the quarter, and still has more than 150 million shares authorized under the repurchase program.

The company also achieved its highest-ever wireless margins and best churn figures. Postpaid churn fell to 0.97%, a healthy improvement from the 1.15% a year ago. Overall churn also decreased to 1.18%. AT&T saw 1.3 million net wireless additions, of which 320,000 were in the lucrative postpaid segment. The carrier now has 43 million smartphone subscribers.

Wireless service sales rose to $14.8 billion, while data revenue increased by nearly 19% to $6.4 billion. Wireless operating expenses were flat from a year ago, allowing margins operating margins to expand to 30.3%, a meaningful gain relative to the 26.9% a year ago.

Postpaid subscriber average revenue per user, or ARPU, jumped to $64.93, which Ma Bell calls "the highest in the industry." This is the 14th consecutive quarter that the carrier has posted year-over-year increases in its postpaid ARPU segment. Postpaid data ARPU jumped 14.1% to $28.04.

Smartphones continue to steal the show, representing 77% of postpaid device sales. Within AT&T's overall postpaid subscriber base, smartphone penetration has now reached 62%, or 43.1 million users. That's up from roughly 50%, or 34.1 million, a year ago. Smartphone users have doubled the ARPU of nonsmartphone users as well as significantly lowered churn levels.

Keepin' on
The wireline business remained healthy, if not exciting. Total revenue was $14.9 billion, down slightly. Voice revenue continues to fall, but that was somewhat offset by growth in other business service segments. AT&T said it has returned to enterprise revenue growth after more than four years of declines. Business data sales also grew as companies migrated from older data products to more modern offerings.

AT&T U-verse subscribers now stand at 6.8 million, with residential customer revenue of $5.5 billion. Again, we see a trend of ditching older technologies like voice in favor of data service. ARPU for U-verse triple-play subscribers came in at $170.

Check or bet
Smartphones are the strongest aspect of the business right now, helping boost wireless subscriber ARPU and keeping subscribers on board. With the Lumia 900 exclusive card, AT&T is simply playing the hand it's been dealt. Still, users clearly still just want the iPhone.

Apple is one of few phone makers that can override carrier demands and call the shots, which is why its growth story isn't over. Sign up for The Motley Fool's brand new premium Apple research service to read more

Fool contributor Evan Niu owns shares of AT&T, Apple, and Verizon Communications, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Google, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 25, 2012, at 9:52 AM, 1brownie wrote:

    Niu:

    Just write the facts and don't include your opinion.

    Could it be that AT&T knows something you do not? Sometimes writers, like yourself, inject their egoes into their articles. You would be better served not to continue that practice.

    dan

  • Report this Comment On July 25, 2012, at 10:55 AM, idealab wrote:

    Have you actually used a recent Nokia phone like the Lumia series or Pure view 808? AT&T choose Nokia because Nokia's phones are technically superior than iPhone. Nokia has its own mapping company and some of its phones come with built-in real GPS that you can use without internet connection. Nokia's recent innovation in compact digital photography sensor exceeds even camera companies. It was able to put a 1-inch sensor into a smartphone, that is much bigger than the sensor you will find in the latest iPhone. The quality of image is superb to the point that it exceeds most compact digital camera (not those with interchangeable lens though), which is the first time a cell phone camera is able to do so, thanks to the large sensor and good optics. Take a look at the photos taken with Nokia's Pure View technology and compare them side by side to Apple's iPhone camera.

    In addition, Apple actually licenses from Nokia many of the technologies it uses in the iPhone.

    Nokia's phone can be used as a USB drive, can the iPhone do something so basic?

    Consumers are buying iPhone because Apple has better marketing and they just don't know better. If they know for the same money they can get a much better product, they will. It takes time to raise awareness. Unfortunately, most consumers are not very technology savvy, so ATT has to do the promotion.

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