AT&T Q3 Hurt by iPhone 5 Delays Despite Record Android, WP Sales

AT&T activated 4.7 million iPhones during the third quarter and enjoyed record cash flow, but without enough iPhone 5 units to meet demand, few new customers signed on.

AT&T was hobbled by Apple's iPhone 5 in the third quarter—there were only 10 days during the period to sell the long-awaited devices, and inventory quickly ran low—resulting in only 151,000 net new subscribers during the three months, a fraction of what Wall Street expected and competitor Verizon Wireless added.

During those 10 days, AT&T CEO of Mobility Ralph de la Vega said during an Oct. 24 earnings call, demand for the iPhone 5 was strong and "immediate," and its supplies went to existing customers, leaving little, if any, for new subscribers.

Still, by AT&T's telling, it was a good quarter. It activated 4.7 million total iPhones, sold record numbers of Android- and Windows Phone-running smartphones, saw wireless revenues rise by 6.6 percent and net income of $3.6 billion on revenues of $31.5 billion. It also saw record cash from operations of $11.5 billion and record free cash flow of $6.5 billion during the quarter.

Adoption of its shared data plans, introduced in August, also exceeded expectations—2 million users signed up in the first five weeks, a "take rate" that de la Vega called "outstanding," adding that the average revenue per user (ARPU) that AT&T is experiencing is "actually higher than we expected."

He said that, despite knowledge that an iPhone 5 was coming, upgrade figures held steady during the quarter.

"We had a solid quarter, which gives us strong momentum as we finish our year," said CFO John Stephens.

While AT&T's iPhone 5 inventory came up short, it still received more of the devices than its competitors. Analysts with investment firm Jefferies wrote in an Oct. 24 research note that, "as we suspected after Verizon's earnings call, it appears that AT&T received more than its share of iPhone 5 shipments [during the third quarter]."

Verizon, during its third quarter, activated 3.1 million iPhones, 651,000 of which were iPhone 5s.

"With the iPhone 5 we had supply constraints," Verizon CFO Fran Shammo said during the company's Oct. 18 earnings call. "We're not sure where we're going to stand in the fourth quarter with those constraints."

The Jefferies analysts, however, are confident about the iPhone 5's prospects for the fourth quarter, which historically is strong for all the carriers, due to holiday sales.

"Our checks continue to indicate that the display bottleneck has been worked through, that the current bottleneck is now assembly, and that Apple recently raised its [fourth quarter] iPhone build plan from 55 million to 60 million to 60 million to 65 million," said the Jefferies note.

Again pointing to the fourth quarter, but looking beyond the iPhone, de la Vega noted that AT&T has a lineup of 14 new Long Term Evolution (LTE) devices in place, in time for the holiday season. It will be the exclusive provider of the Nokia Lumia 920 and 820, as well as the Samsung Galaxy Camera and the Novatel MiFi Liberate, a personal hotspot with a touch-screen. It will also begin selling the LG Optimus G, the Asus Vivo Tablet, the Samsung Smart PC and the Amazon Kindle Fire.

In addition to suiting customer interest—AT&T executives repeatedly pointed to those record Android and Windows Phone sales—these devices give AT&T some freedom from the steep subsidies it pays Apple for the iPhone.

"We have the Lumia 920 and 820 from Nokia, and they're very nice devices ... and they give us an opportunity to work on [lowering] subsidies," said de la Vega. "We're not at all trying to scrimp on what we give the customer—I feel comfortable that we're going to have a lot of options to [offer great devices while lowering subsidies]."

Despite internal excitement, analysts still worried over those slow postpaid subscriber additions.

"What I love about the strategy we have is we're not reliant on signing up more people," de la Vega said in response.

AT&T will hold an analyst Webcast Nov. 7, during which it plans to share more details about the "strategic direction" of the company, which includes more machine-to-machine (M2M) connections.

"Connecting more houses, more cars, more things that drive significant revenue streams. This is what I see in our future," de la Vega said, "and I feel very comfortable about that."

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