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Shares of AT&T Inc. (NYSE:T) fell 0.8% in Wednesday's trading session. The provider of telecommunication services reported its third quarter results before the market open.

Third Quarter Results

AT&T reported third quarter revenues of $31.5 billion, flat on the year. Excluding the divestment of the Advertising Solutions business unit, revenues increased 2.6% on the year. Like many companies reporting this earnings season, revenues fell slightly short of analysts expectations of $31.6 billion.

Operating income fell from $6.2 billion to $6.0 billion on the year. Operating margins compressed by 60 basis points to 19.2% as operating expenses rose in the wireless unit.

Net income came in unchanged at $3.6 billion. Diluted earnings per share rose by two cents to $0.63 per share. Adjusting for the contribution of Advertising Solutions, earnings rose three cents to $0.62 per share. Earnings came in ahead of analysts consensus of $0.60 per share.

During the quarter, the company repurchased 101.1 million shares for a total consideration of $3.8 billion. Up to last week, the company has repurchased 271 million shares from its current authorization of 300 million shares. The company announced a second 300 million repurchase program during the quarter.

CEO and Chairman Randall Stephenson commented on the results:

"We had another impressive quarter with strong earnings growth, record cash flows and solid returns to shareholders through dividends and share buyback. In wireless we had another excellent smartphone quarter, penetration of usage-based mobile data plants continues to climb, and our 4G LTE network build is ahead of schedule. Our strong performance allows us to increase our free cash flow guidance to $18 billion or higher this year, exceeding our previous outlook by $2 billion."

Segmental Information

Wireless

Total wireless revenues, including equipment sales, rose 6.6% to $16.6 billion. Wireless revenues rose 4.5% to $14.9 billion. Wireless data revenues rose 18.3% to $6.6 billion, as users made more use of mobile internet applications. Postpaid ARPU rose 2.4% to $65.20 per month, the strongest growth in six quarters.

The company sold 6.1 million smartphones during the quarter, compared to 4.8 million in the third quarter last year. Some 63.8% of AT&T's mobile subscriber base had a smartphone. The company activated 4.7 million iPhones, of which 18% were new to AT&T. Postpaid churn rates fell 7 basis points to 1.08% on the year. Churn rates were up 11 basis points on the quarter.

Net subscriber growth totaled 678,000, boosting the customer base to 105.9 million. Sales were negatively impacted by iPhone5 inventory constraints. Operating income margins fell 330 basis points to 26.2%.

Wireline

Wireline revenues fell 1.6% on the year to $14.8 billion. Operating income rose 2.0% to $1.9 billion. Positive trends in the consumer and business strategic trends offset declines in voice revenues. Wireline operating margins rose 50 basis points to 12.9%.

Revenues from residential customers rose 2.0% to $5.4 billion. Growth in IP data services more than offset revenue declines from voice and legacy products. U-verse now makes up 59% of the division's revenues. The company ended the third quarter with 7.4 million U-Verse customers. Strong subscription growth was driven by television - which was up by 198,000 subscribers, and high speed internet - which was up by 613,000 subscribers. The number of broadband connections fell 42,000 on the year.

Business revenues fell 2.6% to $9.1 billion. Declines in legacy products was offset by growth in strategic business services, which was up 11.4% on the year.

Valuation

AT&T ended its third quarter with $2.2 billion in cash and equivalents. The company operates with $63.6 billion in short- and long-term debt, for a net debt position of $61.4 billion.

For the first nine months of 2012, AT&T generated revenues of $94.9 billion. The company net earned $11.1 billion of $1.90 per diluted share. The company is on track to generate revenues of roughly $127 billion. Net earnings could come in at $15 billion, or $2.50 per share.

The market currently values the firm at $200 billion. This values the firm at 0.6 times annual revenues and 13-14 times annual earnings.

AT&T currently pays a quarterly dividend of $0.44 per share, for an annual dividend yield of 5.1%.

Investment Thesis

Year to date, shares of AT&T have risen some 15%. Shares steadily moved from $30 in January to highs of $38 earlier in October. In recent weeks shares have lost some 10%, now exchanging hands at $34.70 per share. Shareholders are concerned that Softbank's involvement in the consolidation of the US wireless industry could create a third large competitor.

Over the past five years, shares have fallen some 15%. Shares fell from $40 in 2008 and hit lows of $20 in the beginning of 2009. Shares recovered from that point in time. Between 2008 and 2012, revenues rose slightly from $123.4 billion to an expected $127 billion in 2012. The company reported a $2.6 billion loss in 2008, net profits could come in at $15 billion this year.

AT&T is not sitting still in the current consolidation phase. In August of this year, the company acquired NextWave Wireless (OTC:WAVE) in a deal valued at $600 million, in an attempt to boost the carrier's network capacity. A direct deal with MetroPCS Communications (PCS) or Sprint Nextel (S) is not possible on the back of anti-trust concerns. Last year, AT&T had to pay T-Mobile USA already a $3 billion break-up fee after talks between the two carriers collapsed on those grounds.

Despite the earnings beat, investors are a little fearful that growth is slowing down. AT&T reported net addition growth of 678,000 customers over the quarter. That is significantly less than the 1.8 million in net additions at Verizon Communications (VZ) reported at its third quarter results.

The recent correction offers investors a good opportunity to pick up some shares. The current dividend yield is over 5%, proving very appealing to 'income' investors, including retirees.

AT&T has proven that it can still innovate. Data revenues are rapidly rising, while traditional wireline services continue to deteriorate. The increase in ARPU is impressive and combined with modest subscription growth drives the company forward. Many smartphone users are happy to foot their increasing monthly bills, as they see the benefits of unlimited data on their smartphones.

Don't expect speculator capital gains, but investors stand to receive a decent dividend yield exceeding 5% at the moment.

Source: AT&T: Investors Are Careful As Net Addition Growth Is Disappointing