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AT&T, Inc: Wireless Headwinds May Hurt 2013 Revenue Outlook

 April 25, 2013 01:05 PM

(By Mani) The wireless business of AT&T, Inc. (NYSE: T) is slowing faster than expected, with service revenue growth of 3.4 percent compared to 4.2 percent last quarter. These trends may impact the full-year revenue outlook.

AT&T's postpaid results were driven by tablets, suggesting the company actually lost high-ARPU handset customers on a net basis. Average revenue per user, or ARPU, is a key metric in the telecom industry and is used to measure the revenue generated per user or unit.

Postpaid net adds of 296,000 were actually better than a year ago and probably will be throughout the year, but the composition is changing. The total includes 365,000 postpaid tablets and an undisclosed number of Home Phone customers, suggesting traditional mobile voice (i.e. high ARPU) customers fell by about 200,000.

[Related -T-Mobile US Inc (NYSE:TMUS): AT&T Inc.(NYSE:T) Could Suffer In Wireless War]

"We believe AT&T lost handsets in 3Q12 as well, and this trend will likely accelerate in 2Q, following T-Mo's iPhone launch," UBS analyst John Hodulik wrote in a note to clients.

Postpaid ARPU grew just 0.9 percent, decelerating from 1.9 percent growth in the fourth quarter and 1.7 percent growth in the first quarter of 2012. Almost 70 percent of smartphone customers are now on tiered data plans, up from two-thirds in the fourth quarter, and more than a quarter of accounts continue to take 10 GB or more, flat with the fraction seen in the fourth quarter.

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Total data ARPU rose 17 percent to $15.95, similar to the growth seen in the fourth quarter. This implies a 6.9 percent decline in total voice ARPU to $30.94, in-line with the drop seen in the last quarter.

"We believe these factors would make it difficult for AT&T to follow Verizon in moving to the 24-month upgrade cycle," Hodulik noted.

However, management did maintain its guidance for mid-single-digit service revenue growth in 2013.

The company appears to be relying on the launch of Digital Life—its new wireless home-security and automation business—to help arrest the deceleration in the second half. Fifteen markets will be launching this spring, with 50 up and running by year-end.

In addition, total churn was 1.38 percent, down from 1.42 percent last quarter and 1.47 percent a year ago. Wireless EBITDA rose 5.7 percent, accelerating from the 3.9 percent growth seen in the October to December period. Wireless margins of 43.2 percent were up 1,400 basis points (bps) sequentially and 90 bps from last year, driven by continuing adoption of smartphones and shared data plans, to which customers are attaching more devices.

Moreover, consolidated revenues fell 0.9 percent versus 2.7 percent growth in the fourth quarter, due largely to a slowdown in wireless and enterprise.

Consolidated EBITDA declined 1.8 percent while adjusted EBIT fell 3.5 percent. Given these results and underlying trends, it may be difficult for the company to hit guidance for annual top-line growth above 2 percent in 2013.

For the fourth quarter, Dallas, Texas-based AT&T reported net income of $3.7 billion or 67 cents per share, compared to $3.58 billion or 60 cents per share last year. Excluding items, adjusted earnings for the quarter increased to 64 cents per share from 59 cents a year ago. Total operating revenues of $31.36 billion in the quarter, down from $31.82 billion in the prior year.



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