AT&T Feels iPhone Effect and U-Verse Gains Traction in Q3

Consolidated results: AT&T has reported strong results for the third quarter of 2007 with the iPhone helping it to broach the 2 million mark for wireless subscriber additions while the U-Verse IP TV project finally gained traction, more than doubling subscribers from 51,000 at the end of the second quarter to 126,000 at the end of the third quarter. This has helped revenues to continue growing with the merger with BellSouth and consolidation of Cingular pushing third-quarter revenues up from US$15.6 billion a year earlier to US$30.1 billion. On a pro-forma basis, revenues were 3.2% higher year-on-year (y/y) or 1.8% quarter-on-quarter (q/q) at US$30.3 billion, an accelerating rate of growth from the 2.0% y/y growth rate achieved in the second quarter of 2007 (which saw the opening weekend for iPhone sales) and 1.7% y/y on the first quarter. Reported operating income was US$5.3 billion and adjusted operating income (excluding merger and acquisition costs) was US$7.2 billion, up from US$5.4 billion in pro-forma revenues the prior year, while pro-forma net income was marginally up from just over US$3.0 billion to US$3.1 billion. Operating income margins slipped slightly from 18.7% to 17.6% reflecting merger-related costs.

Wireless: Wireless was a big winner for AT&T in the third quarter with operating income margins up from 14.8% a year earlier to 18.0%. Unit revenues were US$10.9 billion, up 14.4% y/y, while operating income rose 38.6% y/y to US$2.0 billion, as the iPhone helped push the mobility division to record the highest third-quarter net additions for AT&T in the company's history at 2.0 million net adds. This was 46.8% up on the prior year and included 1.2 million retail post-paid additions, up 30.6% y/y. However, the proportion of post-pay customers has been falling, from 83.7% of the user base a year earlier to 80.2%. In the second quarter of 2007, Verizon recorded 93.0% of its retail user base as post-pay, Sprint 90.5%, and T-Mobile 84.2%, giving AT&T the largest proportion of retail customers as lower value prepay users.

Other indicators were positive with blended churn at 1.7%, down 0.1% y/y but up 0.1% on the previous quarter—the latter reflecting the seasonal trend of the last two years. Post-pay churn was similarly down 0.2% y/y to and up 0.1% q/q to 1.3%. ARPU was up 2.0% y/y to US$50.82, helped by the 63.9% y/y growth in data revenues.

Wireline: Although a slight setback in deploying video in Connecticut might have a limited effect in the fourth quarter (see United States: 22 October 2007: AT&T Not Interested in Building Out Cable Statewide in Connecticut), U-Verse appears to have finally taken off for AT&T, adding some 75,000 subscribers over the quarter to more than double the total number of subscribers to 126,000. Weekly install rates are approaching 10,000, reflecting continued expansion of the IP TV service. Total video connections reached 2.1 million including satellite re-sale, which tripled subscribers in the year to just under 2 million. Up from 4.2% a year previously, 6.7% of voice access line subscribers took a video service supplied by AT&T.

Broadband services gained 499,000 subscribers over the quarter, and 2.2 million or 18.6% over the year, reaching 13.8 million. Total consumer revenue connections (or "revenue generating units" in the terms used by cable providers) reached 49.6 million, up 895,000 or 1.8% y/y as the 2.7 million growth in broadband and video outpaced voice access line losses.

This was not, however, enough to prevent a fall in revenue for the newly consolidated wireline entity, with pro-forma revenues in the third quarter of 2006 reported at US$18.5 billion, while third-quarter 2007 revenues for the wireline segment reached only US$17.9 billion. This was largely the result of a rapid fall in national mass market revenues, which have seen something of a collapse, falling 31.4% y/y to US$901 million, but it is expected as a result of AT&T discontinuing marketing of these legacy long-distance services.

Wholesale and enterprise revenues saw a significant drop in the immediate aftermath of the merger, losing 4.3% (wholesale) and 3.9% (enterprise) respectively between the last quarter and the first quarter of 2007. While enterprise revenues have since seen solid growth to limit the fall to 0.33% y/y, reaching back to US$4.79 billion, wholesale revenues have stayed subdued and are still 6.97% down at US$3.50 billion. Local business and consumer markets have, however, rallied with consumer-in-region revenues relatively static at US$5.61 billion and business-in-region revenues up 3.42% to US$3.15 billion.

The transition to IP continued with the 4.36% y/y growth in total data revenues to US$6.1 billion led by the 12.75% growth in IP revenue to US$2.4 billion, while legacy packet-switched protocols fell 5.35% to US$761 million and transport revenues rose 0.8% to US$2.89 billion. The recent forbearance decision will benefit AT&T in the business broadband market, which should help it to increase its market share in this area (see United States: 12 October 2007: AT&T Granted Limited Relief on Business Broadband Regulation).

Outlook and Implications

Basic voice revenues have continued to decline, and the additional revenues from added-value services such as video and broadband data products have become increasingly important. AT&T has performed well, beginning to tap the market for IP TV services through the U-Verse deployment while rapidly building its base of video customers—and reputation as a sales channel for video services—through the satellite re-sale deals. The consolidation of Cingular to become the wireless division of AT&T was likely the primary objective and with growth continuing to be high, while a raft of attractive products that tap closer links between the two companies, the rationale looks sound. AT&T noted that the cost savings totalled US$2.8 billion in the first three quarters and expects them to reach US$3 billion for the full year, reaching US$5 billion in 2008 and US$6 billion in 2009.