Highlights From T's Q3 Conference Call: Incredible Quarter Across Every Metric Including 5.2 Million iPhone Activations

October 21, 2010 3:50 PM EDT
This morning, AT&T (NYSE: T) reported Q3 EPS of $0.55, ex-items, inline with estimates. Revenues were $31.58 billion vs. consensus estimate of $31.23 billion.

Highlights From T's Q3 Conference Call:

  • Wireless subscriber additions were 2.6 million, iPhone activations came in at 5.2 million.
  • (Rick Lindner, Senior Vice President and CFO) First off we are excited about the trends we are seeing with revenue growth. Not only did we have a solid consolidated revenue growth quarter that was fueled by double digit wireless revenue growth, but we also saw right airline consumer revenues grow for the first time in more than two years.
  • Second we continue to see the benefits of our mobile broadband strategy.
  • We had an incredible quarter across every metric. New customers are choosing AT&T and existing customers are renewing their contract in record numbers.
  • We also continue to see improving revenue trends in our business markets.
  • From my perspective, the thing I am most encouraged by is even with pressure on margins from integrated device sales we delivered good consolidated margins with earnings growth and continued free cash flow and I think that puts us in great position to have a solid year in 2010 with good momentum going forward.
  • Consolidated revenue totaled 31.6 billion that is up nearly 850 million verses third quarter a year ago. That growth is due to strong wireless growth, solid U-verse gaines into improved business trends.
  • Our overall revenue mix continued its transformation in the third quarter with 73% of revenue coming from wireless, wireline data and managed services. That is up from 68% a year ago and 62% two years ago.
  • Combined the revenues from these sources were up nearly 10% in the third quarter. And we expect this shift to continue and it is one of the reasons we have a positive long-term view of the business going forward as growth of wireless and data outstrips declines of legacy services.
  • (Ralph de la Vega, President and Chief Executive Officer-Mobility and Consumer Markets) record sales of integrated devices, record gross adds, record customer upgrades, record third-quarter net as of 2.6 million, record wireless data sales, we also had the best ever third-quarter total churn.
  • Our seventh consecutive quarter of growth and postpaid ARPU and we added 1.2 connected devices in Q3 setting the pace for the industry.
  • First, we still see a lot of growth opportunity with integrated devices. About 57% of our postpaid base have these devices, but our sales rate is more than 80%.
  • Total wireless revenues were up 1.6 billion or 11.4% and wireless service revenues grew 10.5%, up more than 1.3 billion verses the third quarter a year ago. Mobile broadband and strong data adoption drove our seventh consecutive quarter of postpaid ARPU gain, a record matched by our peers up 2.0% which includes about 40 basis points of pressure from properties acquired from Verizon wireless.
  • The strongest first ever was followed by our strongest second-quarter answer and now our strongest third-quarter ever with 2.6 million net adds. Postpaid net adds for about 750,000, up 50% sequentially. Prepaid net as totaled more than 320,000 with continued strong sales of the iPad 3G.
  • Customer response has been very strong since the iPad 3G was first introduced in late April and we expect that momentum to continue as we go through the fourth quarter. We also added 1.2 million connected devices in our third quarter.
  • In the third quarter more than 80% of postpaid sales were integrated devices.
  • In the third quarter we had our largest integrated device quarter ever signing up more than 8 million subscribers including both upgrades and net adds. We added 3.8 million 3G postpaid devices in the quarter, up more than 14 million in the past 12 months.
  • More than 5 million were activated during the quarter. That is more than 60% higher then our previous record in sales continue to be strong. As a result data revenues also continue to be strong. We group wireless data revenues by more than 30% up more than 1.1 billion year-over-year.
  • We have the best portfolio of integrated devices in the industry using all major operating systems. That includes Android, Rim, Apple OS, Web OS, Symbian, and last week we announced the addition of three new devices using Windows seven. Our portfolio keeps getting better. Three new Motorola android devices are scheduled for the fourth quarter giving us seven great android devices for our company. Plus the Blackberry Torch which is exclusive to AT&T continues to do well.
  • This year alone we will have already spent almost 6 billion or almost half of our capital expenditures so far this year on wireless related investments.
  • Our LTE trials are currently underway in Dallas and Baltimore. We have been expected launch in mid- 2011 to reach 70-75 million pops by the end of next year.
  • In the third quarter are wireless service margin was 36-point 4% down from the earlier quarter. We believe the impact on margins will be temporary and our expectations for the total year wireless over the service margins continue to be in the low 40% range.
  • U-verse update: We had another solid quarter in U-verse TV subscribers helping to drive the first year-over-year growth in consumer revenue in more than two years. We had an increase of 236,000 U-verse TV subscribers bringing our total to 2.7 million up more than 900,000 over the past year. Broadband and U-verse voice over IP attach rates remain very high.
  • These revenues now represent more than 42% of total wireline consumer revenue was up almost 1,000 basis points over just the past year. ARPU for U-verse triple play customers was about $160 in the third quarter up 14% year-over-year.
  • (Rick Lindner, Senior Vice President and Chief Financial Officer) Revenues from these products such as Ethernet, virtual private networks and application services were up again this quarter more than 15%. Business IP's revenue overall were up 8%
  • For the third-quarter consolidated operating margins were relatively stable at 17.3% and that is despite wireless margin pressures from integrated device sales. This reflects solid performance across the company.
  • Our wireline operating income margin was 12% in Q3 that is up from 11.2% in third quarter last year.
  • In the first three quarters of this year cash from operations totaled $25.4 billion. Our capital expenditures were $13.7 billion. That includes a 55% year-over-year increase in wireless related capital.
  • We continue to expect full year capital investment of 18 take a $19 billion although we are trending toward the upper end of that range. Free cash flow before dividends was $11.6 billion in dividend payments totaled $7.4 billion.
  • Over the last six quarters we have generated free cash flow in excess of dividends of more than $9 billion. In terms of uses of cash, debt is down almost 4 billion over the past 12 months.
  • That gives us a debt to capital ratio of 37.8%. And net debt to EBITDA of 1.5. And all of this gives us the flexibility to continue to invest in the business and return substantial value to share owners.
  • (Q&A) Could we talk a little bit about sequential margin trends in wireless and wireline? In wireless it would make sense given the fourth-quarter seasonality we would normally see that you could see some additional pressure on there especially if the upgrades stay high if you could comment on that and then on wireline some of the growth metrics were better than we thought and despite that you still had better-than-expected margins I was wondering if that trend could continue as well? (A) Let's talk a little bit about margin trends. First off as Ralph mentioned in his remarks, we would expect at this point margins in wireless to rebound and be stronger in the fourth quarter versus the 37.6% we had in third quarter. The amount of increase and improvement is a little difficult to project at this point. It will be based on the volume of integrated device sales particularly as we go through the holiday season. But even with that I would expect margins to be a bit stronger in wireless. One other thing that is impacting or will impact wireless margins in the fourth quarter and probably for the next two or three quarters is the transition and conversion of the customer base that we acquired from the former ALLTEL properties. As we are now getting to the point where we will begin aggressively moving that customer base from their current network to new GSM networks and new billing systems and in the course of doing that we are going to have to provide that base with new devices and there will be subsidies involved in that. We talked about all of that as part of the acquisition when we first announced it, but I just wanted to remind you as we move into the fourth quarter we are going to be getting into that period where we will be going through that activity. But even with those I would expect some improvement in wireless margins. On the wireline side as you mentioned John with that very good results -- we have had very good results and wireline margins and that business is going through a massive transformation as it moves increasingly from voice and legacy data services to U-verse, to IP-based data services into managed services. We have managed that transition I think very well. It's an ongoing effort here believe me in terms of finding ways to be more efficient in the business and the one AT&T initiative that I mentioned in my remarks have been a major contributor to that. And it really does involve almost an internal merger and integration of organizations, processes, systems that support wireless and wireline. And we have to move in that direction in order to be able to interface with customers and provide single points of contact and that is really the way customers want to deal with a across both are wireless and wireline products. But at the same time, it has contributed to our ability to take a lot of cost out of the business. As we go into the fourth quarter I would expect there to be the normal seasonal pressure that we have on wireline margins. You have seen that typically every year. It's a function of two or three things. One being the fourth quarter typically has fewer business days which affects things like long-distance revenues for examples so it impacts both revenues and margins. We also typically have a bit higher overtime rates in the fourth quarter due to holidays and some of the typical seasonal weather -- weather patterns that we get in some of our regions. But beyond that, you know, we will continue to focus on margins on the wireline side. When you step back from all of that, our expectation is still to be in total for the year -- as we guided in the low 40s in EBITDA of margins for wireless and in the lower '30s in either the margins for the wireline business.

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