AT&T Gets Earnings Boost From iPhone

AT&T (T) is no doubt grateful for being the exclusive provider to the U.S. market of Apple’s (AAPL) iPhone. On Tuesday, AT&T released first quarter earnings and the news from its wireless business was quite positive (see conference call transcript). Overall, net income rose by 22% over last year’s first quarter and income per share was 57 cents compared to 1Q2007’s 45 cents. The results show the ability of AT&T to navigate a highly evolving and competitive business environment and also remain profitable in a tough consumer spending environment. A key piece of its wireless success has been thanks to the “must-have” technology of the iPhone, which continues to benefit from consumer willingness to spend aggressively when they believe a product worthy of the added cost.

AT&T has shifted its emphasis away from the traditional and increasingly antiquated wire-line business. In fact that business segment posted a 2.1% drop in earnings, as well as the worst line loss in the company’s history, netting a loss of 1.2 million phone lines. However, this is a sign of the times, and gains in the wireless segment more than made up the difference. Earnings at the nation’s largest wireless provider nearly doubled to $2.9 billion. Subscriber gains were up 8.7% or 1.3 million subscriptions and the rate of turnover (those leaving AT&T) was better than normal. Interestingly, more than 40% of U.S. iPhone buyers are new AT&T customers.

Not only did AT&T add subscribers at a strong clip, but the average subscriber paid more. Industry analysts carefully track the average monthly revenue per subscriber, which increased by a healthy 2% in the quarter. Much of that increase is attributable to the iPhone and other data-ready smart phones. iPhone customers pay an average of $90 each month which is a substantial increase over the $50.18 average for all other AT&T customers. Revenue for data services jumped 57%, and now data services account for 22% of wireless revenue.

From a valuation standpoint, AT&T stock has not has as rough a time as many so far this year, being down about 8.9%. By our methodology, the stock is slightly undervalued on a price-to-sales and price-to-cash flow basis. We think that AT&T’s sales growth has been most impressive and the stock has an attractive (and safe) dividend yield of 4.2%. Furthermore, we expect to see further cost savings from the $86 billion merger with Bellsouth. Recently unveiled job cuts are being used to restructure to accommodate the shrinking size of the wire-line business. A company spokesperson said that it will likely hire back a similar number of employees in its growing segments such as wireless, television, and internet. We have maintained a buy rating on the stock since late February, and have a long term price target in the range of $43-$51.

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