AT&T thrives in 1st quarter, despite iPhone shift

The company logs its best-ever first quarter for smartphone sales, even as it has to adapt to a world in which someone else also sells Apple's iPhone in the U.S.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
4 min read

AT&T may not have the exclusive rights on the iPhone anymore, but the company still managed to turn in strong earnings buoyed by revenue growth in wireless as well as strong wireless subscriber growth.

"We entered this quarter with some uncertainty, especially regarding the iPhone," AT&T Chief Financial Officer Rick Lindner said during the quarterly conference call. "Hopefully, we answered those concerns. We saw a small increase in postpaid churn, but the impacts are significantly less than everyone on Wall Street or in the media had expected. Frankly, it was less than what we expected."

Profits for the telecommunications company were up a robust 39 percent for the first quarter. AT&T reported today that its earnings for the quarter, which ended March 31, were $3.41 billion, or 57 cents a share, up from $2.45 billion, or 41 cents, a year earlier. Excluding costs related to a tax issue, the year-ago profit was 58 cents. Revenue rose 2.3 percent to $31.25 billion.

Analysts had expected AT&T to report profits of 57 cents on revenue of $31.26 billion, according to Thomson Reuters.

Despite losing its exclusive rights to sell the Apple iPhone in U.S., AT&T still managed to add 2 million new wireless subscribers during the quarter. This was up from 1.9 million new customers added during the same quarter last year. AT&T now has a subscriber base of 97.5 million, which is 12 percent higher than last year's level.

The churn rate or the rate at which customers cancel their service was about 1.18 percent. This was higher than last year, but still flat compared to the fourth quarter.

Some experts had speculated that AT&T may not grow its wireless business as quickly after Verizon Wireless began selling the iPhone in February. But AT&T actually saw its best-ever first quarter for smartphone sales. The company sold more than 5.5 million units. This was an increase of 60 percent compared to the same quarter a year ago, the company said. During the quarter, AT&T activated 3.6 million iPhones.

"Expectations for wireless post-paid growth were low, as we and investors feared that the loss of exclusivity would raise churn and impair gross additions," Craig Moffett, an analyst with Sanford Bernstein, said in a research note. "Neither impact was as large as feared. And that left subscriber results somewhat better than expected."

But Verizon's entrée into the iPhone market wasn't without any effect on AT&T. During the fourth quarter of 2010, AT&T had activated 4.1 million iPhones.

Ralph de la Vega the head of AT&T's wireless business said that once it was announced in January that the iPhone would also be sold by Verizon Wireless, AT&T felt customers' hesitation. Sales slowed initially, but then resumed.

"Customers waited to see what would happen," he said. "Then they compared the networks and offerings and we saw an increase in sales in February and March."

De la Vega added that when customers compared the offerings, they determined they could get faster network speeds on AT&T, simultaneous voice and data usage, and more usage overseas with an AT&T iPhone.

"We're very pleased that the marketing message got through," he said.

AT&T also said about 65 percent of its postpaid, or contract, sales in wireless were related to smartphones. And at the end of the quarter, the company said that 46.2 percent of its 68.1 million postpaid subscribers had smartphones, up from 34.7 percent a year earlier. This is important for the company because smartphone subscribers tend to spend more money. AT&T says smartphone customers spend 1.8 times more than customers on regular phones.

De la Vega pointed out that the company has also seen strong sales of smartphones other than the iPhone. Sales of BlackBerry devices, Android phones, and Windows Phone 7 devices made up about 40 percent of AT&T's smartphone sales. In fact, de la Vega said in the past six months, sales of Android smartphones have more than doubled on a monthly basis.

As a result, the average monthly revenue per subscriber increased 2.4 percent from the year-earlier quarter to $63.39. This marked the ninth-consecutive quarter AT&T has posted a year-over-year increase in postpaid ARPU, the company said.

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Last month, AT&T surprised the market by announcing it plans to spend $39 billion to acquire T-Mobile from Deutsche Telekom. The deal is expected to be scrutinized by regulators, but AT&T's CEO is confident it will go through. And he said that the addition of T-Mobile will make the company even stronger.

"Mobile broadband networks are driving unprecedented growth and innovation, and AT&T is playing a leading role in bringing these benefits to customers," Randall Stephenson, AT&T chairman and chief executive officer, said in a statement. "That's why our agreement to acquire T-Mobile USA, which we announced in March, is so important. Combined, the two companies' spectrum and network assets will allow us to simultaneously address spectrum issues created by this increased demand and improve customers' network experience as volumes continue to grow."

Verizon Communications reports its first quarter earnings on Thursday.

Update 8:50 a.m. PT: This story was updated with comments from AT&T's conference call and comments from an analyst.