AT&T's margins rebound as smartphone sales top 5.5M during Q1

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AT&T Mobility (NYSE:T) sold more than 5.5 million smartphones in the first quarter, of which 4.3 million were Apple (NASDAQ:AAPL) iPhones. Despite the strong smartphone sales, the company's service margins rebounded to 41.6 percent, which the company attributed to improved churn as well as reduced spending and the lingering impact of the integration of former Alltel and Centennial Communications customers. In the fourth quarter of 2011, AT&T reported service margins of 38.1 percent.

Click here for details on AT&T's performance in the first quarter.

During the company's call with investors, many analysts questioned whether the higher service margin was due to changes in AT&T's handset upgrade policy--in February the company increased its fee for customers who want to upgrade their handsets to $36 from $18. However, AT&T Mobility CEO Ralph de la Vega said there was minimal impact from the higher upgrade fee and instead touted the company's mobile data growth. AT&T's data revenues were $6.1 billion for the quarter, an increase of $1 billion from the year-earlier quarter. De la Vega added that mobile data is now a $24 billion annual revenue stream for the company.

The company added 726,000 wireless net adds in the quarter, bringing its total wireless subscriber base to 103.9 million. However, connected devices made up the majority of those net adds, with 230,000 for the quarter. Postpaid net adds were 187,000, prepaid net adds were 125,000 and reseller net adds were 184,000.

Interestingly, de la Vega said connected device net adds were lower than the previous quarter because the company sold more Wi-Fi-only devices and also made adjustments for inactive devices.

De la Vega also addressed the company's growing LTE coverage, noting that AT&T offers LTE in 35 markets so far and plans to double its coverage by year-end. In addition, he said that enhanced backhaul now carries 86 percent of the company's data traffic and said that AT&T has 3,000 distributed antenna systems in high traffic areas as well as 30,000 Wi-Fi hotspots to help deal with growing data usage from customers.

De la Vega declined to address questions regarding the company's interest in purchasing Verizon's (NYSE:VZ) 700 MHz B Block spectrum, which Verizon announced earlier this month it would consider selling. Instead, he noted that AT&T did receive low-band spectrum when it acquired Qualcomm's FLO spectrum. "We are looking to put that into play with LTE aggregation capability," de la Vega said. He added the company is open to smaller spectrum acquisitions as well.

Here's a look at other key metrics:

Financials: Wireless service revenues were $14.6 billion, up from $14 billion in first quarter 2011. Wireless operating income margin was up 27.2 percent and wireless EBITDA service margin was up to 41.6 percent. Wireless data revenues increased by more than $1 billion, or 19.9 percent, from the year-earlier quarter to $6.1 billion.

Smartphones: AT&T sold 5.5 million smartphones during the quarter, and 78 percent of those devices, or 4.3 million, were iPhones. About 30 percent of AT&T's postpaid smartphone subscribers have a 4G device. There are 41 million smartphones on AT&T's network, an increase of 10 million over the previous year. In addition, total smartphone penetration is now 59.3 percent, up from 57 percent in fourth quarter 2011. De la Vega also noted that 88 percent of the carrier's 40 million smartphone users are on business or family talk plans.

Tiered data: AT&T said 61 percent of its postpaid smartphone users are on tiered data plans. More than 70 percent of its customers have the higher priced data plans. In the first quarter of 2011, there were approximately 12 million customers on tiered data plans and in the first quarter of 2012 there are almost 25 million on the tiered data plans.

ARPU: AT&T's postpaid average revenue per user increased 1.7 percent to $64.46. The carrier's postpaid data ARPU was $26.92, up 15.3 percent from the year-earlier quarter.

Churn: Postpaid churn was 1.1 percent, compared with 1.18 percent in the year-earlier quarter. Total churn was 1.47 percent vs. 1.36 percent in first quarter 2011. AT&T said the reason for the increase in churn was due to higher reseller and connected device churn.

For more:
- see this release

Special Report: Wireless in the first quarter of 2012

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