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AT&T third-quarter profit falls short even as it adds 2M wireless customers

The company's growth was driven largely by connected devices like the connected car, but there was also a healthy mix of smartphone and tablet growth.

AT&T reported strong customer growth even as its profit fell below both Wall Street expectations and its results from a year ago.

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Roger Cheng/CNET

The Dallas telecommunications giant posted third-quarter adjusted earnings per share of 63 cents, on revenue of $33 billion, just shy of the analysts' average forecast of 64 cents a share in earnings and $33.25 billion in revenue.

AT&T's stock fell 0.3 percent, to $34.53, in the regular session before the earnings results came out. Shares fell 2 percent, to $33.85, in after-hours trading.

AT&T's results come a day after Verizon posted impressive subscriber growth, suggesting a potentially strong period for most of the wireless carriers. The increased activity is likely a result of the flurry of promotional activity that has popped up, underscoring the competitive environment that AT&T faces. The industry -- particular top players Verizon and AT&T -- is facing a slowdown in growth in traditional phone customers, but it's finding other ways to grow.

While T-Mobile and Sprint have led the pack in promotions, AT&T hasn't stood still. The carrier in February led off with a successful family plan that it touted as its "best ever," and late last month it doubled the amount of data it would offer to families on high-end shared plans. In both cases, the other carriers came in and offered better deals, but AT&T has remained in the thick of the fight.

The company, which is the No. 2 wireless carrier by customer base, added 2 million customers in the period, driven largely by its connected-devices business. That includes 500,000 connected cars, a large bulk of which are the fleet of General Motors cars with built-in LTE radios. Customers will get a trial period with the LTE connection before they have to decide on whether to pay and keep the service. It's areas such as connected cars where AT&T sees its future growth.

In its more traditional business, AT&T added a net 785,000 postpaid customers, or customers who pay their wireless bill at the end of the month, a category that typically includes tablets and phones. In the period, AT&T added 466,000 new net smartphones and 434,000 tablets, though it likely lost a hefty amount of basic phone customers.

AT&T said it added or upgraded 6.8 million postpaid smartphone customers, with 3.4 million on its AT&T Next program, in which the customer pays for their own smartphone in monthly installments. Once a champion of the contract, AT&T has in the last year reversed course and embraced the no-contract model because it leads to less volatility due to the elimination of smartphone subsidies.

Still, there were enough customers on a regular contract that the addition of so many new customers cut into its profitability. Carriers typically tend to take a hit on earnings if their subscriber growth jumps as a result of the costs associated with adding a customer, including paying out the subsidy for a discounted smartphone.

AT&T also continued to struggle with the prepaid business, losing 140,000 subscribers in the period. The company has placed a bet on prepaid with the $1.2 billion of Leap Wireless and its Cricket Wireless offering, which AT&T is using to push its nationwide prepaid service. The company said the reduction was expected as it works through the transition of the customer base.

At the same time, T-Mobile's MetroPCS and Sprint's Boost Mobile and Virgin Mobile have been aggressive in offering promotions and adding new customers.

On the wireline side, AT&T added 601,000 U-Verse Internet customers and 216,000 U-Verse TV customers in the period, though it continued to lose legacy DSL customers. The company is awaiting the approval of its acquisition of DirecTV, which will give it a nationwide video service to bundle with its wireless offering.

As with Verizon, AT&T likely saw a boost from the arrival of Apple's iPhone 6 and iPhone 6 Plus , both of which launched on September 19, right at the end of the quarter.

The supply constraints with the new iPhones may have affected the adoption of AT&T's Next plan, according to Chief Financial Officer John Stevens. Because AT&T's own stores had a limited supply of iPhones, customers went to other places, including the Apple store or at big-box electronic retailers, where the sales staff likely wasn't as versed in the Next program. Once inventory issues are resolved, more customers will return to AT&T stores, where they can learn about Next, Stephens said.

Overall, AT&T reported a net profit of $3 billion, or 58 cents a share, compared with a year-earlier profit of $3.81 billion, or 72 cents a share. Revenue rose 2 percent to $33 billion.