AT&T Profiting Off The iPhone 5

| About: AT&T Inc. (T)

AT&T (NYSE:T): An iPhone 5 Winner?

Apple (NASDAQ:AAPL) launched its iPhone 5 for carriers AT&T , Verizon Communications (NYSE:VZ) and Sprint Nextel (NYSE:S) back on September 21st, and already, analysts are speculating which of these carriers will come out as iPhone winners. In fact, data from ComScore shows that AT&T is dominating the US market for iPhone 5 connectivity and has accounted for 68% of pre-orders during the first three days followed by Verizon Communications with 24% and Sprint Nextel with just 8%. In contrast, during the first month of iPhone 4S sales, Verizon Communications was the winner with a 45% share, followed by AT&T with 43% and Sprint Nextel with 12%. The split for the first three days of iPhone 4S sales was 48% for AT&T, 35% for Verizon Communications and 17% for Sprint Nextel.

Of course, it's worth remembering that it's the carriers who bear the real cost of the iPhone, as they must pay Apple a subsidy that some analysts believe may be as much as $400 to $425 for every customer who signs up for a two-year iPhone service contract. That means the iPhone 5 is a real hit on the bottom line along with the margins of carriers for the first nine months or so of a contract. With that in mind, will AT&T still be the carrier that ultimately comes out the winner with the iPhone 5?

Some Background About AT&T

Before I write about AT&T and the iPhone 5, let me give a brief history of the stock. The modern AT&T evolved out of the old American Telephone and Telegraph Company which dates back to the late 1800s and at times was the largest company and employer in America. With the break up of American Telephone and Telegraph Company in 1982, AT&T exited much of the telephone business for a while, in a failed attempt to get into the computer business. However, in 1994, AT&T acquired McCaw Cellular, the largest cellular carrier in the country, and after various mergers, acquisitions and divestitures, "Baby Bell" SBC Communications acquired the company in 2005 and rebranded itself as AT&T (it also took the "T" ticker symbol on the NYSE).

Today, AT&T vies with Verizon Communications to be the largest mobile and telephone company in the United States, and it's among the largest publicly traded companies in the world. As of around the time of the iPhone 5 launch, AT&T stock was up 25.9% since the start of the year, down 10.5% over the past five years, and up 64.2% over the past ten years.

AT&T and the Apple iPhone 5

With the above in mind, how will the iPhone 5 impact AT&T? Well, at a Goldman Sachs (NYSE:GS) technology conference the week the iPhone 5 was launched, Randall Stephenson, the CEO of AT&T, did report that the new iPhone was "selling very, very well" but as usual for carriers, he did not give specific figures nor did he give any figures as to the magnitude of the impending data impact will be on the company's network.

However, AT&T may actually have an edge over rivals Verizon Communications and Sprint Nextel because it has been reported that users of their iPhone 5s will not be able to engage in data-hungry tasks like surfing the Internet or pulling data for apps while making a phone call (unless they are on wi-fi) but AT&T iPhone 5 users will be able to.

I am not so sure if that quirk will be a deal breaker for most new iPhone 5 users, but AT&T will definitely try to exploit their advantage for marketing purposes. On the other hand, Verizon Communications is busy touting the fact that it's ahead on its 4G buildout, but AT&T and other carriers globally are catching up fast, meaning the former may only have a short-term advantage on the 4G front.

On the financial front and as mentioned earlier, there is a big initial cost for carriers to have the iPhone 5. In fact, analyst Brett Feldman of Deutsche Bank (NYSE:DB) recently pointed out that AT&T's wireless business had a third quarter operating profit margin of 29.5% but by the end of the fourth quarter, those margins had fallen to around 15% thanks in large part to the iPhone 4S. To put that in perspective, that's about a $2 billion swing in just one quarter - meaning the impact of the iPhone 5 could be just as large or bigger, but it's also important to remember that all carriers offering the iPhone 5 will take a hit on their margins. (Note: Only Sprint Nextel has provided more detailed commentary with management commenting during its Q3 conference call that its iPhone line won't be profitable for the company until 2015).

For what it's worth, CEO Randall Stephenson told investors at the Goldman Sachs technology conference that he still believes AT&T will report wireless profit margins of 40% this year. He also maintained the company's outlook for selling 25 million total smartphones in 2012.

However, Ralph de la Vega, the president and CEO of mobility and consumer markets for AT&T, has stated that the company actually profits more from iPhone sales because it's a means to sell other services such as their Digital Life product (a home automation system allowing subscribers to use a mobile device like a remote control for their home). In fact, AT&T and other carriers like Verizon Communications have been pushing into the so-called "connected living" space to keep their bottom lines growing as revenues from mobile contracts plateau.

A Final Word About AT&T and the iPhone

At the end of the day, the most important financial indicators for carriers of whether or not the iPhone 5 can be called a financial success will be:

  • The percentage of iPhone 5 activations that are new customers as these activations represent new sources of revenue.
  • The amount of data any new iPhone 5 customers use.
  • The upcoming holiday season and the number of activations that result from it as subsidy payments could balloon during that time.
  • A low churn rate over the long-term.

Naturally, it's too early to have answers to all of these questions, but these are questions that watchers and investors in AT&T will need to be watching out for. Only then will we truly know whether the Apple iPhone 5 is worth all the trouble and hoopla for carriers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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