AT&T’s successful relationship with Apple comes at a price: $900 million.
That is the amount of money AT&T paid to Apple for the 2.4 million iPhones the phone company sold in the third quarter. It is a number that surprised even AT&T, which did not anticipate such huge demand for the smartphone.
The company said Wednesday while announcing its financial results that it expected to make up the difference in iPhone-related revenue over the two-year contracts of the iPhone buyers. Users of smartphones, like the iPhone, are heavy users of the Internet and text messaging, which are more profitable for AT&T than voice calls. Those customers also tend to spend more than customers who use their telephones just to make calls.
“We are winning share at the high end,” Ralph de la Vega, the executive overseeing AT&T’s wireless operations, said in a conference call with analysts. Same-store traffic to AT&T retail centers has increased 15 percent, largely because of interest in Apple’s phone, he said. With the iPhone, he said, “there is a significant halo effect.”
AT&T announced net income of $3.23 billion, or 55 cents a share, up 5.5 percent from $3.06 billion, or 50 cents a share, a year ago. Revenue rose 4 percent, to $31.3 billion from $30.3 billion a year ago, largely because of wireless gains. The $900 million payment to Apple amounted to 10 cents a share.
Investors, though, might be forgiven if they missed any halo after watching AT&T’s shares drop Wednesday by $1.95, or 7.6 percent, to close at $23.78. Analysts said the iPhone’s negative impact on earnings caught them and investors off guard.
There is also uncertainty — if sales of the iPhone continue at this pace — about how much more AT&T will have to pay Apple next quarter. (AT&T also had costs related to Hurricane Ike, amounting to about 2 cents a share.)
But Roger Entner, a senior vice president at IAG Research, which studies market trends, said iPhone sales made now would pay off in the long term because they provide AT&T with more predictable earnings. In the quarter, the company had 50.5 percent growth in wireless data revenue from Internet access, text messaging, e-mail and other services. Total wireless revenue was up 15.4 percent.
“That is a short-sighted view,” Mr. Entner said of concerns about iPhone sales. “It is a nice problem to have.”
The company said it added two million new customers, totaling 74.9 million subscribers over all. AT&T also said that 40 percent of the iPhone accounts were new customers.
And fewer customers are leaving. Churn, or the percentage of customers switching to a rival carrier, dropped to 1.2 percent, compared with 1.3 percent in the previous quarter. AT&T plans to begin selling the new BlackBerry Bold, Research in Motion’s consumer-oriented smartphone, on Nov. 4., which it hopes will increase the flow of new customers.
The company tries to play down any effects of the ailing economy, but some analysts are concerned about losses in the wired phone business, a trend that is affecting all telephone companies.
AT&T is losing phone lines at the rate of 12 percent, on an annualized basis, said Craig E. Moffett, a research analyst at Sanford C. Bernstein. “Our worry has been that wireline telephony is increasingly viewed as a discretionary item,” he said. “The easy alternative of cutting the cord” or switching to a lower-price cable company, he added, “threatens to make an already bad situation worse.”
In the conference call with securities analysts, Richard Lindner, AT&T’s chief financial officer, said the company was reorganizing to make it easier to sell customers data services across a number of devices, including phones, televisions and computers.
He acknowledged that the company’s high-speed Internet service to the home was growing slowly, adding only 148,000 customers in the quarter, compared with 499,000 a year earlier. The service has been trumped by cable companies, which analysts said were offering more competitive deals. AT&T has also had limited growth in the fledgling U-Verse, its television service, which gained 232,000 new customers in the quarter — for a total of 781,000 — and is expected to exceed its goal of 1 million customers by year end.
Mr. Lindner said AT&T was not immune to the economic crisis but added that “our business mix is more resilient than most.” He added that, “while the macro environment is not ideal, there are ways to improve.”
He said the company planned to use free cash flow to reduce its $76.8 billion in debt. “I think that is a prudent way to operate in this environment,” he said, adding that the company was looking at other ways to cut costs.