AT&T (T) reported Q4 2012 earnings on January 24. The company’s operating revenues remained flat at $32.6 billion for the fourth quarter, and at $127.4 billion for 2012. The wireless segment revenues grew by nearly 6% to $17.6 billion, largely due to a 15% increase in equipment revenues. The company had previously announced that it sold over 10 million smartphones during the fourth quarter, and disclosed that 8.6 million of them were iPhones. However, only 16% of these were first-time AT&T subscribers, and the company needs to improve its numbers this to halt Verizon’s (VZ) aggressive growth.
Losing Out To Verizon In The Wireless Market
AT&T announced net additions of 780,000 for postpaid customers in the fourth quarter. When compared to the 2.1 million that Verizon added in the same period (see Verizon’s Smartphone Growth Lifts Results Despite Weak Wireline), it is clear that AT&T is losing out to Verizon in new customer additions. In 2012, AT&T added 1.4 million postpaid subscribers, while Verizon added a staggering 5 million new subscribers. At the end of 2012, Verizon had 92.5 million subscribers, compared to 70.5 million for AT&T.
The wireless segment operating margin declined by 1% to 14.5% in Q4 due to a 6% jump in operations and support expenses to $13.3 billion. Higher smartphone subsidies caused a decline in margins, and wireless CapEx increased by 19.4% to $3.4 billion in the fourth quarter
Postpaid wireless ARPU (Average Revenue Per User) declined to $64.98 in 4Q12, from $65.02 in 3Q12. This is good when compared to Verizon’s postpaid ARPU of $55.61.
Wireline Posts Strong Results
The wireline operating segment reported a slight revenue decline to $14.9 billion in 4Q12 from $15 billion in 4Q11. However, the data business grew by nearly 7%, which was offset by a 9% decline in voice. Operations and support expense remained flat at $10.4 billion, and the segment operating income grew by nearly 2% to 1.8 billion, helped by a 4% decline in depreciation and amortization in the fourth quarter.
Robust growth of 3% in the consumer market segment is a positive sign for the company. The wireline voice experienced a 11% decline in users, ending the year at 34.8 million customers, and video saw a 10% increase to 6.1 million. We are optimistic about the potential for U-verse, as its customer base grew by 20%.
Management alluded to putting some effort into looking abroad for international growth opportunities as part of its plan to leverage its existing technological expertise and drive growth. However, with competition in the U.S. heating up between AT&T and Verizon, coupled with a newly invigorated Sprint (S) and DISH Network's (DISH) potential entry into the wireless business, we believe that AT&T would be better served investing further in the United States to defend market share, or returning capital to its shareholders.
At the end of the day, we feel this earnings report was a mixed bag for AT&T. On one hand, we are impressed by the growth in the wireline business and specifically U-verse, but the lower operating margin in the wireless segment is a cause for concern. With landlines experiencing a painful decline, we were hoping for the wireless business to outperform to make up for the landline loss. Also, higher smartphone sales is good for customer additions, but AT&T's inability to match up to Verizon’s customer additions in the postpaid segment is a serious headwind for the company.
Disclosure: No positions.