Earnings Call: AT&T Addresses Economy Calls iPhone an "Investment In Our Future"

This story was written by Tricia Duryee.
AT&T (NYSE: T) reported strong Q3 earnings today, boosted by wireless results, including impressive iPhone sales. During the earnings call, Ralph De La Vega, AT&T's President and CEO for Mobility and Consumer Markets, addressed the iPhone's success and how it put pressure on wireless margins. AT&T also reported that wireless broadband grew by 2.8 million, and U-Verse subscribers will hit 1 million by year-end.
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Highlights from the Seeking Alpha Transcript:

iPhone Sales: In the 82 selling days of the quarter, AT&T activated 2.4 million iPhones, 40 percent of them to new AT&T customers. In comparison, the first iPhone a year ago, took nine months to reach the 2.4 million mark. De La Vega called the iPhone's halo effect impressive. Same-store Two-thirds of Q3 post-paid net adds chose a device with either a qwerty keyboard or touch-screen. On average, the iPhone 3G generates ARPU that is more than 1.6 times the average of our post-paid base. "The iPhone 3G is helping us win at the high-end. This customer profile strongly supports the investment case for this initiative, which is to say that we are creating substantial long-term value for our company."

On Wireless Margins: However, the cost of the iPhone for AT&T is not significant. The company's "reported service OIBDA margin" was 33.5 percent, but if you add back in the costs associated with the iPhone launch and hurricane-related costs ($900 million on iPhone expenses, and $145 million on hurricane impacts), it would jump to 42 percent. But De La Vega said that "It is clear that as up-front iPhone impacts lessen and recurring service revenues build, margins will expand and the iPhone 3G will be a terrific investment for us." He said it's an investment in high value customers at a high ARPU and low churn. "It's an investment that we are confident is one of our great opportunities and the best growth area in telecom and that's wireless data."

On Wired/Wireless Broadband And U-Verse: Things are shifting from traditional voice to broadband, video and mobility. Bundles of broadband plus U-verse services, were up 19 percent, allowing overall revenues per household to grow. Other bundles include wireline broadband with wireless laptop connect service, and WiFi. In Q3, AT&T added 148,000 wired broadband connections and 2.8 million wireless broadband connections. The U-verse network now reaches 14 million living units, AT&T has 781,000 subscribers and plans to exceed more than 1 million by year-end.

More from the Q&A after the jump...

Q&A:

What's been the impact of the economy?: De la Vega: "What we are seeing in October of '08 versus September of '08 is an increase in traffic. Our same-store traffic is up 4 percent and total traffic is up 7 percent vs. a month ago, and that's just through half the month, so I have to caution that this is through about half the month of what we are seeing." He also said they have a wide range of devices from the iPhone to the Blackberry Bold announced today and low-end devices that offer Qwerty's. "So, 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 growthdespite the economic conditions, at least in wireless."

On the economy and the iPhone impacts: Richard Lindner AT&T's CFO acknowledged that these are challenging times, and it's a good to be conservative, and disciplined, but it's also smart to identify clear growth opportunities. "One of these clear opportunities is our exclusive with Apple (NSDQ: AAPL) to distribute the iPhone 3G. And I know some of you will be concerned with the dilution we experienced this quarter with the new iPhone launch but I believe our results will bear it out, that it is an important investment in our future. This investment funded the acquisition of nearly a million high-end iPhone customers that are new to AT&T and we will enjoy those customer relationships for years to come. It also allowed us to upgrade some 1.4 million existing customers to this device and virtually every one of them will increase their spend with AT&T...The dilution from this investment will fall next quarter and again in the following quarter as the benefits of this customer base are realized and the returns and the margins will grow. "


By Tricia Duryee
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