AT&T's third-quarter profit rises 41.5%

WASHINGTON (MarketWatch) -- AT&T Inc. on Tuesday said third-quarter earnings rose 41.5%, boosted by the acquisition of BellSouth and the addition of 2 million net wireless customers.

The San Antonio-based phone giant got a big lift from the iPhone. Since the mobile device went on sale June 29, 1.1 million customers have activated service with AT&T, the exclusive U.S. partner of Apple Inc.

More than 950,000 have signed up since the start of the third quarter.

AT&T, meanwhile, said net income totaled $3.06 billion, or 50 cents a share, compared with $2.17 billion, or 56 cents a share, a year ago. The company had fewer shares outstanding in the 2006 third quarter.

Much of the increase in earnings stemmed from the company's acquisition of BellSouth in December 2006.

Revenue rose almost 93% to $30.1 billion from $15.6 billion a year earlier, mostly due to wireless growth and the inclusion of BellSouth.

Adjusted for the acquisition, sales rose a much smaller 3.2% to 30.3 billion. AT&T said savings generated by the purchase of BellSouth are expected to surpass its original forecasts and top $3 billion in 2007.

As a result, the company also increased its annual target for "free cash flow after dividends" to a range of $6 billion to $7 billion from its prior estimate of $5 billion to $6 billion. Shares of AT&T a component of the Dow Jones industrial average, rose in early Tuesday trades, up 0.7% to $41.46.

Excluding acquisition-related expenses and other one-time costs, AT&T said it would have earned $4.3 billion, or 71 cents a share, compared with income of $2.4 billion, or 63 cents a share, a year ago.

The adjusted profit met Wall Street's forecast. The carrier was expected to earn 71 cents a share on revenue of $30.12 billion, according to the consensus of analysts surveyed by Thomson Financial.

Wireless revenue jumped 14.4% to $10.9 billion from a year earlier, with operating margin rising to 18% from 14.8% omitted merger-related costs. AT&T ended the third quarter with a nation-leading 65.7 million mobile customers.

The company also added 499,000 high-speed Internet customers to bring its total to 13.8 million, also the No. 1 market position in the U.S., and AT&T ended the quarter with 126,000 customers for its new U-Verse fiber-TV service.

Wireless growth

The large gain in wireless customers indicates the iPhone has given AT&T a big boost in its battle to fend off Verizon Wireless for the No. 1 position in the U.S. mobile market. Most analysts were expecting AT&T to add no more than 1.7 million mobile customers.

While AT&T has activated 1.1 million iPhone accounts, Apple said late Monday that it's sold 1.4 million devices. That means AT&T has as many as 300,000 iPhones in stock to sell ahead of the upcoming holiday season. During the quarter, AT&T said average monthly revenue per user rose 2% to $50.82, the result of higher usage of wireless-data services and Internet access.

Churn, or the percentage of customers who cancel service each month, rose slightly to 1.7% from 1.6% in the prior quarter. Among valuable post-paid subscribers, or those who sign up for annual plans and pay at the end of each month, churn edged up to 1.3% from a company low 1.2% in prior quarter.

AT&T said the higher sequential churn reflected "typical third-quarter seasonality." The company still trails Verizon Wireless, whose overall churn rate is close to 1%.

Verizon also generates more revenue from its wireless business than AT&T does. Verizon Wireless is jointly owned by Verizon Communications Inc. and Vodafone Group PLC AT&T believes the iPhone will improve customer loyalty and pull away customers from rivals such as Sprint Nextel Corp. Carriers are trying to differentiate themselves as the competition for customers intensifies.

Since most adult Americans now own mobile phones, subscriber growth will eventually taper off. Revenue expansion is more likely to stem from gains in market share and the introduction of new services such as mobile video.

Wireline business

In AT&T's more traditional phone business, often referred to as the landline or wireline market, results were mixed again. AT&T said revenue in its corporate-services unit fell 0.3% to $4.8 billion, although sales were up 1% from the prior quarter. In the consumer market, more local-phone customers disconnected service to continue a long-term trend. Subscribers switched to cable or Internet-phone service, or dropped wireline service entirely.

To win back customers, AT&T is adding video and other offerings. During the quarter, the carrier gained said it's approaching its goal of adding 10,000 customers each week for its fledging U-Verse service. AT&T plans to ramp up its TV service over the next few years to stem the loss of local-phone customers to cable companies that operate in its territory. Yet many investors and analysts question the company's technological approach and limited spending plan. Verizon is spending much more on an advanced fiber strategy.

Rumors persist that AT&T might buy one of the nation's two major satellite-television operators, EchoStar Communications Inc. or DirecTV. AT&T already sells their satellite services through prior marketing arrangements.

SOURCE