AT&T: Drive In ARPU Indicates Pricing Power In Data

| About: AT&T Inc. (T)
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Shares of AT&T (NYSE:T) ended the day 3.6% higher after the telecommunication provider reported a strong set of first quarter results.

First Quarter Results

AT&T reported a headline earnings per share number of $0.60 vs. $0.57 in the first three months of 2011. Revenues increased 1.8% to $31.8 billion. The earnings of $3.58 billion where slightly ahead of analysts expectations who expected earnings per share to come in unchanged from last year. The earnings beat was driven by lower smartphone upgrade costs and an increase in wireless data sales driven by iPad sales.

"We continue to capitalize on our terrific momentum in mobile Internet," according to CEO Stephenson. "Smartphone and branded computing device sales continue to set a record pace, mobile data revenues were up nearly 20 percent, and we achieved this growth with expanding margins. These results add confidence in our outlook for the year."


Wireless revenues increased 5.4% to $16.1 billion. Operating efficiencies and revenue growth boosted operating margin which expanded 140 basis points to 27.2% resulting in an 11% increase in operating income to $4.4 billion.

Average revenue per user (ARPU) increased 1.7% to $64.46, marking the 13nd consecutive quarter in which postpaid ARPU rose on the year. In total the company net added 726,000 subscribers to end up with a customer base of 103.9 million at the end of the quarter. The company sold 5.5 million smartphones, representing 78% of cell phone sales. The increased smartphone penetration is the main driver behind ARPU growth as smartphone users spend 90% per month more compared to non-smartphone users. The company activated 4.3 million iPhone's and 240,000 iPad from Apple (NASDAQ:AAPL). Google's (NASDAQ:GOOG) Android sales were strong too.


Wireline revenues fell 0.8% on the year to $14.9 billion. Operating income increased 2.4% to $1.8 billion as a 1.2% decline in operating expenses boosted operating margins by 40 basis points to 12.2%

The business division reported a 0.8% revenue decline to $9.2 billion vs. a decline of 4.4% last year as strategic business revenues kept increasing. Demand for business services such as Ethernet, VPN, hosting and IP conferencing grew 19.0% on the year.

Revenues from consumer services increased 1.0% to $5.4 billion driven by increased U-verse penetration and a significant number of subscribers upgrading to triple- or quad play options which drives up ARPU. The company had over 6.2 million customers taking their TV and internet subscriptions from AT&T, enough to offset the continuous decline in landline phone and legacy revenues.

Advertising Solutions

Revenues in the smaller advertising division fell 14.3% to $744 million. Segment income fell to $120 million as margins fell to 16.1%.

Earlier this months AT&T announced that Cerberus Capital Management L.P. agreed to acquire AT&T Advertising Solutions and the Interactive business in a deal valued at $950 million. AT&T will hold a 47% equity stake in the new entity.


AT&T ended its first quarter with $2.4 billion in cash and equivalents and operated with $57.7 billion in short and long term debt for a net debt position of $55.3 billion. After today's share price increase the market values the firm at $188 billion or 1.6 times annual revenues or 48 times 2011's annual earnings. This compares to a revenue multiple of 1.0 times to its main competitor Verizon Communications (NYSE:VZ).

The company used its strong cash flow to repurchase almost 68 million shares for a total consideration of $2 billion. This comes on top of the quarterly dividend of $0.44 which provides investors with an annual dividend yield of 5.5%

Investment Thesis

An investment in AT&T can easily be labeled as a defensive investment. Shares have traded flat over the last decade and have traded in a range of $25 to $40 per share. While long term shareholders have not seen steep capital gains, they have received a generous dividend payout, currently running at 5.5%. Additionally AT&T has hiked its dividend in steps of 4 cents over the last couple of years, thereby compensating shareholders for inflation.

Shareholders should take comfort that despite a saturated market, (there are more phones and tablet subscriptions than US residents) ARPU continues to rise as AT&T successfully manages to price its data bundles.

Today's strong results are not directly a reason to aggressively acquire shares in the telecommunication company. Investors who hold AT&T trust on their dividend income and an annual inflation adjustment to cater their need for current income.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.