Domestic wireless carriers are living through a strange time when slower sales of high-revenue generating devices is a good thing, at least to the investor community. Those are the folks that judge carriers on a minute-by-minute basis and where long-term strategies are measured in quarters and not years.
This sentiment was evident for AT&T Mobility during the second quarter where the carrier reported a slowdown in the sales of smartphones that helped the carrier bolster operating margins that makes investors glow with greed. This was lauded by the investment community, though AT&T’s stock (T) took a hit as those same investors expressed concerns that the second quarter might have been a high-water mark for the carrier for the year. It should be noted that AT&T’s stock price drop following the release of its results was nearly erased by mid-day Wednesday.
AT&T Mobility managed to sell 5.1 million smartphones during the quarter, including 3.7 million subsidy-rich iPhone devices, which came in under expectations and was down year-over-year. AT&T Mobility’s management attributed some of that slow down to altered upgrade policies late last year that slowed the upgrade cycle during the first half of this year.
The slower growth resulted in less spent on device subsidies, which has been a fiscal issues surrounding smartphones. AT&T Mobility stuck with its forecast of selling 25 million smartphones for the year, which leaves a lot of headroom going into the final two quarters. Wells Fargo Securities noted that AT&T Mobility has so far sold 10.6 million smartphones, leaving strong growth prospects and a potential hit to margins for the remaining six months of the year.
“We are taking a more conservative approach to margins as a result of this event,” noted Wells Fargo Securities senior analyst Jennifer Fritzsche in a research note. “Our new Q4 2012 wireless margin estimate of 30% assumes a 15% sequential decline (same as Q4 2011 levels).”
AT&T Mobility’s iPhone growth is an interesting result as the carrier continues to sell more of those devices than rival Verizon Wireless, which managed just 2.7 million iPhone sales during the quarter. Prior to the device expanding to Verizon Wireless in early 2011, consumer sentiment seemed to indicate a vast willingness for an alternative to what many saw as an inferior network product from AT&T Mobility. However, since the launch at Verizon Wireless, AT&T Mobility has continued to post stronger sales of the device seeming to indicate that people are not quite as fed-up with AT&T Mobility’s network as had been expected. Also bolstering AT&T Mobility’s sales has been its continued offering of legacy iPhone models that the carrier has been selling at price points below $100 that seem to continue attracting customers.
One topic AT&T Mobility is still open to talking about is growth from non-traditional sectors. While Verizon Wireless has recently stopped breaking out growth outside of its direct channels, AT&T Mobility proudly noted that it added 472,000 customers through reseller partners and 382,000 new connected devices during the quarter. Those two segments made up nearly 70% of the carrier’s net additions for the quarter, so that emphasis would seem justified.
Analysts did however point out that AT&T Mobility continues to lag Verizon Wireless in direct customer growth, which tend to have a greater positive impact on a carrier’s bottom line. AT&T Mobility’s 412,000 direct net additions was less than half the 888,000 reported by Verizon Wireless.
AT&T also reported that more than half of the $8.9 billion it spent on capital expenditures during the first half of the year went to its wireless operations. Those operations are currently centered on an aggressive build out of its LTE network, which in coverage greatly falls behind that of Verizon Wireless. The carrier said it expects to meet previous guidance of $20 billion in company-wide capex for the year, with wireless set to garner around 60% of that spend.
The carrier noted that roughly 90% of its cell sites have had their backhaul capabilities upgraded, which is an important component to being able to handle traffic from LTE and HSPA+ devices.
AT&T’s management was also a bit cautious on revenue impacts from its recently announced shared data plans that are scheduled to come into effect next month. That caution is based on the carrier’s continued offering of its current data plans once the new plans become available, and what it thinks will be a measured uptake of the new offerings.
“So we’re expecting it to transition in, but over time we expect it to be accretive because it will allow, if you will our customers the more they share, the more they are going to save,” noted AT&T’s CFO John Stephens in a conference call with analysts.
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