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AT & T 2Q Profits Climb on Lower Smartphone Costs

Tue, 07/24/2012 - 7:36am
Maisie Ramsay

AT&T posted best-ever profit margins in its wireless business today as new data plans and policies limiting expensive smartphone upgrades began to take hold.

The company made $3.9 billion on sales of $31.57 billion during the second quarter on healthy results in its mobile division. 

"Growth metrics were weak, but profitability metrics were good," Bernstein Research Analyst Craig Moffett said in notes on AT&T's earnings.

Smartphone subsidies have pressured profit margins in recent quarters, prompting operators to take steps to rein in costs. For its part, AT&T has rolled out more lucrative tiered data plans, reduced operating expenses and made it more expensive to upgrade to a new device.

After doubling its upgrade fee to $36 in February, AT&T sold slightly fewer smartphones in the second quarter as the more expensive fee caused customers to rein in purchases of new phones.

"We are seeing our policy kick in... that's now taking hold and I think you're seeing the effects of that," AT&T CFO John Stephens said in an earnings call today. 

AT&T sold 5.1 million smartphones during the second quarter, less than the 5.6 million smartphones it sold during the same period last year. 

Stephens also noted that the second quarter smartphone sales were also the effect of a "healthy upgrade cycle in the fourth quarter of last year." AT&T still expects its 2012 smartphone sales to remain flat year-over-year at 25 million, he said. 

The dip in smartphone sales reduced the impact of costly device subsidies. Together with a nearly 19 percent increase in data revenue, profit margins in AT&T’s wireless division soared to 30 percent, from about 27 percent last year. The division made $4.9 billion on sales of $16.35 billion.

Sales of the iPhone stayed relatively flat year-over-year as subscribers postponed purchases ahead of Apple's expected release of the iPhone 5.  

"There is an almost palpable sense of an entire industry in waiting, whiling away time until the next iPhone arrives," Moffett said.

AT&T activated 3.7 million iPhones, compared to 3.6 million last year. AT&T is also facing new competition for the iPhone from Cricket Communications and Leap Wireless International, which are offering the device on a prepaid basis.

Even as smartphone sales held steady, AT&T posted a slight rise in the number of new customers signing up for its service. It added 1.3 million net new wireless subscribers, up from 1.1 million last year, as a dip in contract and prepaid customers was offset by a rise in connected devices and reseller subscribers. 

The number of new contract customers dipped to 320,000, compared to 331,000 last year. Prepaid net adds dropped to 92,000, from 137,000 last year. 

The number of new connected devices and reseller net adds far outpaced AT&T's other customer numbers. The operator added 382,000 new connected devices and 472,000 reseller net adds, up from the 379,000 connected devices and 248,000 reseller customers it added last year.

Despite its stricter upgrade policies and changes to its data plans, AT&T managed to post record lows for churn across its wireless customer base. Postpaid churn dropped to 0.97 percent from 1.15 percent last year, and total churn fell 25 basis points to 1.18 percent. 

"Customers are choosing higher-tiered plans... and so we're doing well and they are choosing to have that usage available to them without additional charges. That's all happening in this churn environment," Stephens said. AT&T has made a number of changes to its data plans so far this year, adding extra data, raising fees and rolling out shared plans similar to Verizon Wireless' new rates.

About two-thirds of AT&T's smartphone are now on tiered data plans, compared to less than half a year ago. Of those customers to go with tiered data, 75 percent have chosen higher tier plans, AT&T said. 

The changes appeared to have a positive effect on postpaid ARPU, which rose 1.7 percent to $64.93. Postpaid data ARPU hit $28.04, up 14 percent over last year. 

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