by Kathleen Martin
The telecom business is burdened with capital requirements and expenditures that continue to strain margins at any carriers offering a suite of services that comprise voice, broadband, television, wireless, managed IT and cloud services. The competition is particularly fierce in the broadband and wireless space where new hardware offerings and customer demand for more and better bundles of services continue to be impacted by capacity issues and service requirements.
Lately, there have been some steps taken to address the challenges of capacity, capital expenditures and improving margins. Verizon (VZ), one of the top three carriers in the U.S. along with its closest competitor AT&T (T) have started to show some promise in the areas of strategic expenditures and increasing margins and are viewed as relatively safe compared to other market sectors as the domestic economy is better relative to Europe.
AT&T trades around $33.70, has a year low of $27.29 and a year high of $33.94. The price earnings ratio is 48.47. The earnings per share are $0.69. The dividend yield is 5.2%. The company has total cash of $2.59 billion and total debt of $65.71 billion. It has a current ratio of 0.64. A current ratio of less than one indicates that the company may have some difficulty in meeting current obligations as they come due. The book value per share is $17.86. The stock is held 81.4% by institutions and 0.03% by insiders. 1.2% of the float is short as of April 39, 2012.
AT&T's first quarter 2012 results showed earnings per share of $0.60 compared to $0.57 per share in the first period of 2011. Consolidated revenues were $31.8 billion, an increase of 1.8% from the same period in 2011. Wireless operating margins increased 27.2%. AT&T's growth focused sectors, wireless, wire-line data and managed services increased 6.2% from the same period last year and accounted for 78% of total revenues in the quarter. The company had record smart-phone sales of 5.5 million units in the quarter. 30% of these phones were post-paid subscribers on 4G devices. AT&T added 726,000 new wireless customers.
The addition of branded computing (tablets and wireless modems) added 460,000 customers, an increase of almost 70% from the first quarter of 2011. Average monthly revenue per subscriber for wireless was up 1.7% from the same period last year. Wire-line business revenues showed some improvement and consumer revenues were up 1% from the same period in 2011. TV, high speed and Internet subscribers were six million at the end of the quarter with branded U-Verse TV subscribers making up four million of all subscribers. Improvements were led by 4G mobile data sales and improved wireless margins. Capital expenditures totaled $4.3 billion. AT&T repurchased 67.7 million shares for $2.1 billion in the quarter.
Wireless data revenues showed an increase of $1 billion or 19.9% for internet access, applications, messaging and related services. Wireless operating expenses in the first quarter were up 3.4% from the same period in the previous year. Wireless margins showed significant increases as a result of better operating efficiencies and gains from 41 million smartphone subscribers. Wireless margin improved to 27.2% compared to 25.8% in the previous year. The company experienced subscriber gains in every sector of its business.
Smartphone sales were a record at 5.5 million which represented more than 78% of post-paid devices. There were 59.3% of post paid subscribers using smart phones up from 46.2% in the previous year. Android and Apple (AAPL) iPhone sales were strong. The sales were assisted by the company's 4G network. The network provides a download time for the new iPhone that is three times faster than other domestic carriers' networks. Subsidies given to smartphone users were part of the deal with the manufacturers. Carriers had to find a way to contain the costs of the subsidies and generate growth in the wireless sector. In the U.S., carriers started to implement upgrade fees in 2011.
In April the company sold its advertising and interactive units to Cerberus Capital management. As part of the transaction it acquired an equity interest equal to 47% in the resulting new entity YP Holdings. YP Holdings has The Real Yellow Pages print directory title that reaches approximately 150 million customers in 22 states. It also includes a website and a YP Local Ad Network which provides digital reach to over 71 million unique visitors per month. It also includes YPmobile app which provides mobile search information from mobile devices. The sale and acquisition allows AT&T to focus on its leadership in wireless, broadband, cloud and application based services. The transaction is expected to close in mid 2012. AT&T will receive $750 million in cash, a $200 million note and the interest in YP. There is no expected material gain or loss to AT&T on the transaction.
Consensus estimates for 2012 earnings and price for AT&T are $2.42 and $36.50 up from $2.39 and $30. The stock now has an "outperform" rating by Credit Suisse. The proliferation of smartphones has driven up costs and capital spending ahead of revenue. Analysts have upgraded ratings on AT&T, Verizon Communications and Sprint Nextel (S) as they have all managed to increase wireless margins despite brisk smartphone sales. Regional carriers such as Leap Wireless (LEAP) and MetroPCS (PCS) will also benefit from rising device prices and decreasing subsidies. The towers should also receive additional benefit if carriers are better able to invest in capacity to meet growing data demand.
AT&T has had a great quarter and appears to be on target to continue to perform well throughout the year. AT&T is a giant U.S. telecom with vast reach and is proving to be adept and managing its resources very well. AT&T is in every sector of telecom and is performing particularly well in wireless, a sector that has been a challenge for growth. It has the ability to make the capital expenditures and investments necessary to remain competitive in the industry. It is has cleaned up its corporate house with the sale of its advertising and interactive units and is now capable of focusing on wireless and wire-line.
As long as AT&T keeps making measured decisions with respect to improving margins and making expenditures that will add value to shareholders, AT&T can continue to attract investors who are looking to put money in a mature industry. With resource markets entering a different cycle, investors are looking for less volatility and the safety of dividends. Even the most seasoned investors with a high risk tolerance like to have dividend income and predictability in terms of price and volume. AT&T is a great place to wait for another bull market.