AT&T adds 3.7M iPhones in Q2 as margins improve

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AT&T Mobility (NYSE:T) posted solid wireless results in the second quarter, though it added fewer postpaid subscribers than a year ago. However, thanks to the carrier's tightened upgrade policies, AT&T's wireless service margin rose to its highest level ever. The trend was similar to that reported by AT&T rival Verizon Wireless (NYSE:VZ) in its second-quarter results.

Click here for video and slides from AT&T's second-quarter earnings presentation.

Though AT&T's smartphone sales in the quarter were still strong at 5.1 million, they were lower than the first quarter of 2012 (5.5 million) and the year-ago period (5.6 million). Still, AT&T managed to activate 3.7 million Apple (NASDAQ:AAPL) iPhones in the quarter, a full million more than Verizon did. AT&T said 22 percent of its activations were for new customers.

In the quarter AT&T posted 1.3 million total net wireless customer additions, up from 1.1 million a year ago. AT&T added 320,000 net postpaid customers, fewer than the 331,000 it had in the year-ago period, reflecting an overall industry slowdown in postpaid additions. AT&T's prepaid net adds in the second quarter of 2012 were 92,000, connected device net adds were 382,000 and reseller net adds were 472,000.

On the company's quarterly earnings conference call, AT&T CFO John Stephens also gave some insight into the company's network development and capital expenditure plans. Stephens said that AT&T's combined HSPA+ and LTE network now covers 275 million people, and that AT&T's LTE service is available in 47 markets (the company expects to cover around 150 million people with LTE by the end of the year). Stephens also said that 90 percent of AT&T's mobile data traffic is now traveling over "enhanced" backhaul, though he declined to be more specific.

Stephens said that roughly 60 percent of the $8.8 billion AT&T has spent on capital expenditures in the first half of the year was related to wireless, and that he expects this trend to continue. He said total capex spending will likely tick up in the second half of the year.

Here's a breakdown of the other key metrics for AT&T in the quarter:

Financials: Total wireless revenues, which include equipment sales, were up 4.8 percent from a year ago to $16.4 billion. Wireless service revenues increased 4.3 percent to $14.8 billion. AT&T said that wireless data revenues increased by $1 billion, or 18.8 percent, from the year-ago quarter, to $6.4 billion. In terms of margins, AT&T said it reported its best-ever wireless service margins, driven by "improved operating efficiencies, fewer handset upgrades and further revenue gains" from the company's 43 million smartphone subscribers.

AT&T's second-quarter wireless operating income margin was 30.3 percent compared to 26.9 percent in the year-earlier quarter, and AT&T's wireless EBITDA service margin was 45.0 percent, compared with 41.1 percent in the second quarter of last year. AT&T said changes it made last year to its upgrade policy, higher upgrade fees and altered priicng for mobile data (which icnreased the size of data tiers as well as pricing) all helped boost its margins. By comparison, Verizon said its wireless segment EBITDA margin was 49 percent in the quarter--a record high--up from 45.4 percent in the year-ago quarter and 46.3 percent in the first quarter of 2012.

"It's all related to the iPhone cycle," Joe Bonner, an analyst with Argus Research, told Bloomberg, referring to the expected fall introduction of a new iPhone model. "Margins go up without the iPhone, and they go down when they have to pay Apple all those subsidies."

Smartphones: AT&T said it sold 5.1 million smartphones in the second quarter and that smartphones represented 77 percent of postpaid device sales. At the end of the quarter, 61.9 percent, or 43.1 million, of AT&T's postpaid subscribers had smartphones, up from 49.9 percent, or 34.1 million, a year earlier. AT&T said its average revenue per user for smartphones is twice that of non-smartphone subscribers.

Although the company did not give many specifics, it said around 27 million, or about two-thirds, of all smartphone subscribers are on tiered data plans, compared to 45 percent a year ago, and about three-quarters of these have chosen its higher-tiered plans.

ARPU: The carrier said its postpaid ARPU increased 1.7 percent year-over-year to $64.93, an industry high. AT&T said this marked the 14th consecutive quarter it has posted a year-over-year increase in postpaid ARPU. Postpaid data ARPU reached $28.04, up 14.1 percent versus the year-ago quarter.

Churn: AT&T reported that its postpaid, prepaid and total churn reached their lowest levels ever. Postpaid churn was 0.97 percent, compared to 1.15 percent in the year-ago quarter and 1.10 percent in the first quarter of 2012. Total churn was 1.18 percent compared to 1.43 percent in the year-ago period and 1.47 percent in the first quarter of 2012.

For more:
- see this release
- see this Bloomberg article
- see this Reuters article

Special Report: Wireless in the second quarter of 2012

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