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AT&T beats profit estimates as phone discounts diminish

AT&T Inc. is getting a profit boost thanks to an industrywide shift, led by smaller rival T-Mobile US Inc., away from selling phones below cost.

Instead, more customers are opting for AT&T’s Next installment plans, paying full price for phones rather than signing two-year contracts. That helped AT&T (NYSE: T) boost first-quarter earnings to 71 a share, leaving out some items. Analysts had estimated 70 cents on average, according to data compiled by Bloomberg. AT&T records the entire phone sale to Next customers up front, rather than incurring expenses for the steep discounts it offers to users who commit to contracts.

While new phone financing is padding AT&T’s profits for now, it won’t be able to spread the revenue from those device sales over time, putting pressure on profits down the road. While the company boosted its forecast for sales this year, it kept its projection for earnings growth at a “mid-single- digit” rate, compared with the average analyst estimate of 9 percent.

“Better-than-expected overall results from AT&T Wireless won’t turn investors into U.S. telecom bulls,” said Kevin Roe, an analyst with Roe Equity Research in Dorset, Vt. “The coming quarterly results will continued to be negatively impacted by the repricing of AT&T’s installed base.”

Revenue will expand 4 percent in 2014, AT&T said, ahead of the average analyst estimate of 3 percent.

Shares fall

AT&T shares fell 1.9 percent to $35.60 in late trading. The stock is down 6.3 percent in the past year as of today’s close, compared with a 20 percent gain for the Standard & Poor’s 500 Index.

Price promotions helped AT&T add 625,000 monthly subscribers, up from 296,000 a year ago. The average estimate was 219,000, based on a survey of nine analysts. The gains show AT&T can hold its own even as competitive pressure rises, Chief Financial Officer John Stephens said in an interview.

“Customers want a quality network,” he said. “We did real well in this very noisy environment. We had a new level of transparency and gave customers a lot of good choices. We feel good.”

Monthly subscribers paid an average of $66.33 a month, up 0.4 percent from a year earlier and higher than the average analyst estimate of $65.90. If Next customers’ smartphone installment payments were included in that figure, the monthly bill would have risen 2 percent from a year earlier, AT&T said.

While that would be a slowdown from 2.1 percent growth in the fourth quarter of 2013, it’s faster than the growth rate in each of the four quarters prior to that.

Subsiding rush

About 25 percent of wireless customers are now on plans without phone subsidies, Stephens said today on a conference call. More than 40 percent of new smartphone subscriptions were on Next plans in the first quarter, a figure that will probably decline to 35 percent in the coming quarters as the initial rush subsides, Stephens said.

In Next plans, customers can choose to pay for their devices in installments of 20 or 26 months -- or in a single payment. Apple Inc.’s $650 iPhone 5s, for example, costs $32.50 a month on the 20-month plan. After as little as 12 months, customers can trade in their devices at no extra charge and start a new installment plan for a new smartphone.

The program had a sharp effect on device sales, which surged 52 percent from a year earlier to $2.48 billion. Wireless service revenue, meanwhile, gained 2.2 percent to $15.4 billion.

Aggressive pricing

AT&T introduced Next in July, responding to T-Mobile’s decision to get rid of contract plans altogether and offer installment payments for smartphones.

T-Mobile (NYSE: TMUS) has also introduced more aggressive pricing, such as international text messaging at no additional cost and free data access for tablet buyers. And AT&T and T-Mobile have engaged in customer-poaching, with each offering buyouts to cover early-termination penalties for people that switch service.

T-Mobile, which reports results May 1, probably added about 1 million new monthly customers last quarter, according to an average estimate of nine analysts compiled by Bloomberg. That subscriber growth would be about double the estimated first- quarter gains of 512,000 by Verizon (NYSE: VZ) and 60 percent higher than AT&T’s additions.

AT&T reported first-quarter net income of $3.65 billion, or 70 cents a share, compared with $3.7 billion, or 67 cents, a year earlier. Share repurchases helped increase per-share profit even as total net income fell.

Wireless-service profit margins were 45.4 percent, up from 43.2 percent a year ago. Analysts projected a wireless margin of 43.34 percent, based on an average of nine estimates compiled by Bloomberg.

In AT&T’s landline video-and-broadband business, called U- verse, the company added 634,000 Internet users and 201,000 video subscribers. That was down from the 731,000 U-verse Internet customers and 232,000 TV customers added a year ago.

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