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AT&T Tops Street as iPhone Rings Up Revenue

AT&T's (NYSE: T) second-quarter earnings modestly beat Wall Street estimates, thanks yet again to strong sales of the Apple iPhone, which also helped keep a record number of subscribers on board.

The nation's second-largest mobile carrier activated 2.4 million Apple (NASDAQ: AAPL) iPhones in the second quarter, up 29 percent from a year ago -- and a 31-percent spike from Q1. AT&T also said its churn rate, or the amount of subscribers who discontinue service, fell to a record-low 1 percent.

Across the board, AT&T's second quarter was better than estimates, but still slipped from a year ago. The company reported net income of $3.2 billion, or $0.54 a share, on revenue of $30.7 billion, while analysts were expecting earnings of $0.51 a share on revenue of $30.6 billion, according to Reuters Estimates.

However, compared to the same period a year ago, AT&T saw a decline from $30.9 billion in revenue and $3.77 billion or $0.63 per share in income.

"Our wireless momentum is excellent, operational execution and cost management continue to be strong, and in a challenging economy we delivered solid results," AT&T CEO Randall Stephenson said in a statement. "AT&T continues to invest and innovate in key areas that are transforming communications for customers. We announced a major initiative to deliver greater mobile broadband speeds, and that work is under way."

AT&T enjoyed a 1.4 million net gain in total wireless subscribers to reach 79.6 million, up 6.7 million over the past year. It reported 1.2 million retail, postpaid wireless net adds, up 29 percent from the same quarter last year, and enough to make the period the company's best second quarter to date.

The company's customers are also spending more once they sign up. AT&T reported its sixth consecutive quarter with a year-over-year increase in wireless postpaid subscriber's average monthly revenues, up 2.3 percent to $60.21.

In the first quarter, despite a 9 percent drop in revenue, AT&T also reported solid financial numbers driven primarily by the Apple iPhone, wireless services and growth in its enterprise business.

Net income for the first quarter totaled $3.1 billion, or $0.53 per share, down year-over-year from $3.5 billion, or $0.57 per share -- but topped analysts' forecasts of a per-share profit of $0.48. Revenue, however, was less impressive, totaling $30.6 billion, down from $30.7 billion from a year earlier, and under analysts' expectations at $31.1 billion.

iPhone going strong

The iPhone continues to be a major driver of new subscribers and data revenue for the carrier.

AT&T currently holds the exclusive deal for carrying the iPhone in the U.S., and realized record activations in Q1 from previous iPhone models. Of the 2.4 million iPhone activations in Q2, a third were new customers.

AT&T CFO Rick Lindner, however, declined to provide any details on the status of the exclusive contract with Apple, but said the iPhone and other AT&T smartphones -- or "integrated devices" -- were paying off handsomely in part because of their retention rates .

“In terms of iPhone exclusivity, as you know, that’s something we and Apple have agreed not to disclose the terms of, but if we talk about the iPhone base, I can give some comfort on what happens as move forward,” he said during today's earnings call. “Sixty percent of integrated devices are part of family plans, which tend to be 'stickier' -- there’s low churn -- about one-third are associated with business relationships, company phones, so you put all that together, and it gives some comfort in the stickiness of the base going forward.”

Despite the payoff from the iPhone, AT&T also noted that there have been downsides. For instance, the company's margins eroded somewhat as it dedicated funds to prepare its network for the iPhone 3GS launch, which was June 19. The company's second-quarter wireless operating income service margin -- calculated before depreciation and amortization -- clocked in at 38.3 percent, compared with 41.2 percent in the year-earlier quarter.

AT&T estimated that without increased the acquisition costs associated with the iPhone 3GS launch, its second-quarter service margin would have been more than 40 percent, in line with results for the second quarter of 2008 and the first quarter of 2009.

Additionally, AT&T initially faced a public outcry over the cost to existing customers looking to upgrade, ultimately prompting it to relent on its upgrade pricing plans.

Still, upgrades in iPhone models continue to provide revenue to the wireless carrier. Lindner said of all iPhone upgrades in the quarter, more than half didn’t previously have a data plan, and that 20 percent were moving from the original iPhone to 3GS model, rather than from the 3G.

“So this helps us in ARPU [Average Revenue Per User], it increases the size of their data plans -- our upgrade activity is positive,” he said.

This is also happening in the non-iPhone upgrades. “What’s interesting in upgrades, and encouraging, is that 60 percent or more of upgrades in the quarter are coming from non-iPhone devices, and they’re adding data packages,” Lindner said.

The wireless carrier also came under fire for fumbling aspects of the 3GS launch. At issue had been the delayed support and potential extra costs for two new features -- tethering and MMS.

Gains in data

The company is still experiencing strong growth in its wireless data business, reporting a 37.2 percent increase in wireless data revenues to $3.4 billion -- more than double its revenue two years earlier.

Growth is being driven by messaging, Internet access and mobile applications, the company said.

Data represented 28.7 percent of AT&T's second-quarter wireless service revenues, up from 22.9 percent in the year-earlier quarter and 17.3 percent in the second quarter of 2007.

Wireless text messages on the AT&T network exceeded 108 billion, more than 1 billion text messages a day and nearly double the total for the year-earlier quarter. Internet access, data access and media bundle revenues also continued their strong growth. The number of 3G LaptopConnect cards on AT&T's network increased by nearly 50 percent over the past year to 1.4 million.

Upgrading the network

Yet that reliance on data revenue is also costing AT&T as it seeks to update its network for better performance. The company recently announced it is upgrading its network infrastructure to improve coverage and speed and to meet the huge consumer demand.

During today's earnings call, Lindner outlined the plan, which AT&T aim to complete by 2011 through a "logical and elegant transition for the customer base in terms of wireless data upgrades and rollout," he said.

For starters, AT&T's deployment of technology designed to boost mobile broadband performance, High Speed Packet Access (HSPA) 7.2, begins at the end of this year. It's expected to double performance of the iPhone 3GS, which is 7.2-compatible.

“Once we roll out 7.2, we’ll move it through our 3G footprint fairly quickly, because it’s primarily a software upgrade in the network, though we’re also making enhancements in the backhaul to support it that we’ll also need for 4G," he said.

”The 3GS is compatible with 7.2, so as soon as we turn that up, users will immediately be able to take advantage -- it will nearly double their throughput, their bandwidth, so they’ll see and experience much faster data experience," he added. "For us, it doubles the capacity we can handle in our network."

In addition to the HSPA 7.2 rollout and spectrum enhancements to increase coverage, AT&T is also improving cell site connections to its network, adding 2,100 new cell sites nationwide and ramping up Wi-Fi integration. Also part of the initiative are customer trials for "microcells," small mobile cell sites that use femtocells for power and are geared chiefly for in-building wireless coverage.

Capital investment for these projects fits within AT&T's previously outlined expectation of total capital expenditures for 2009, targeted toward the $17 billion to $18 billion range.

At least one industry observer gave AT&T the thumbs-up on the plan.

"I think the upgrade plan is realistic, though in terms of a completion date, with infrastructure, there's always issues -- it's hard to say exactly when and where it will happen for certain due to unanticipated costs and challenges, especially in the backhaul area," William Stofega, mobile analyst at IDC, told InternetNews.com. "This will be key for them moving forward."

The move also could help AT&T better prepare for a wider set of mobile devices expected to use its network, in an effort to diversify sources of new revenue. For instance, AT&T announced it will be the carrier for the e-reader coming next year from Plastic Logic that will support Barnes & Noble's new digital book store.

"That's a great sort of thing for AT&T to have in their back pocket, regardless of how many units sell," Stofega said.

Strengthening the network and adding new device partners could also help soften the blow in case AT&T one day loses its iPhone exclusivity.

"It won't be a great day to be an AT&T executive when the Apple contract goes away, but my take is that they'll be fine," Stofega added. "There's a lot of moving parts in getting a new handset deal and getting it on the market, and they know how to do this, and they're planning for that."

Update adds comments by Lindner and Stofega and additional details of AT&T network upgrades.