AT&T Touts Wireless Gains, But Wireline Suffers

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AT&T’s top line climbed 4% for the third quarter on robust wireless growth and the telco’s U-verse TV service gained momentum to stand at 781,000 subscribers, but its traditional wireline businesses continued to deteriorate with a loss of 3.9 million consumer voice customers year over year.

The telco emphasized its wireless performance, which AT&T said was driven by sales of the Apple iPhone 3G. Activations of the iPhone 3G, launched in the U.S. on July 11, totaled 2.4 million in the quarter, 40% of them to new wireless AT&T customers.

AT&T also grew its U-verse TV service with a net gain of 232,000 subscribers in the third quarter, compared with 170,000 added in the second quarter

The telco reiterated that it’s on track to exceed its target of more than 1 million subscribers by year-end. The U-verse network deployment now passes 14 million living units, up from 11 million as of June 30. The company previously said it expects to pass 17 million homes by the end of 2008.

Ralph de la Vega, president and CEO of AT&T Mobility and consumer markets, said the iPhone 3G far exceeded expectations, adding that the pace of customer activations was 2.4 times the original iPhone.

Asked about the outlook in the current quarter given broader economic concerns, de la Vega said AT&T has seen a 4% uptick in same-store traffic to its retail outlets through mid-October.

“Despite the economy, I feel very confident that we have a great portfolio, a great marketing strategy and a great distribution strategy that is going to lead us to see continued good growth despite the economic conditions, at least in wireless,” he said. 

AT&T recently put de la Vega, who has run the wireless division since October 2007, in charge of all consumer marketing and product strategy in a recent reorganization to consolidate the company’s customer-facing units in one group. De la Vega noted that AT&T customers increasingly use both wireline and wireless connections for broadband connectivity, and pointed to this trend as a driver behind the move.

AT&T’s total wireless revenues grew 15.4% for the quarter ended Sept. 30, to $12.6 billion. Within that segment, wireless data revenues grew to $2.7 billion, up 50.5% over the year-earlier quarter.

AT&T grew wireline broadband subscribers, too, after several DSL price promotions in the quarter. Wireline subscribers totaled 14.8 million for the third quarter, up 148,000 sequentially and 1.1 million year over year. In the second quarter, AT&T had posted a net gain of 46,000 DSL subscribers.

Sanford Bernstein analyst Craig Moffett in a research note called the unexpectedly strong iPhone activations “eye-popping,” but said wireline results “were a clear disappointment, and appear poised to further deteriorate as economic conditions worsen.”

AT&T reported 31.9 million consumer voice connections as of Sept. 30, a 10.9% year-over-year decline.

“On an annualized basis, access line loses are now running at a -12.0% rate,” Moffett wrote. “Our worry has been that wireline telephony is increasingly viewed as a discretionary item; the easy alternatives of ‘cutting the cord’ or switching to lower-priced cable telephony threaten to make an already bad situation worse.”

AT&T chief financial officer Rick Lindner acknowledged on the earnings call that the telco is “seeing declines in voice revenues across the portfolio,” but he said the company is replacing that with new wireline revenues from broadband and U-verse TV, as well as managed enterprise services.

Overall, AT&T’s revenues were $31.3 billion for the quarter ended Sept. 30, up 4% from a year earlier. Net income was $3.2 billion, compared with $3.1 billion in the year-earlier quarter, and reported earnings per diluted share was $0.55, which was 4 cents lower than analysts expected.

AT&T's reported third-quarter wireline operating expenses totaled $14.8 billion, down 1.1% from results in the year-earlier quarter. The company said third-quarter wireline costs included expenses of approximately $90 million related to hurricanes.

“While the macro-environment is obviously not ideal, there are still opportunities to improve operations,” Lindner said, noting that “we’ll have more to report in the quarters ahead” on cost-cutting measures.

He said AT&T's mergers -- combining the legacy AT&T with SBC Communications, Cingular and BellSouth -- would result in an annual cost benefit of about $6 billion in 2008, and that "as we look ahead to next year, our plan was to add an additional billion" in cost savings.