AT&T Reports Earnings: What You Need to Know

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The holiday season brought record smartphone sales for AT&T (NYSE: T), and U-Verse sales that finally eclipsed the 8-million subscriber mark. Sounds great, right? Quarterly earnings must have skyrocketed!

Well, as you can probably guess by the tone, they didn’t. Unfortunately for the telecommunications giant, pension costs and lingering effects from, believe it or not, Hurricane Sandy sent earnings per share a penny below analyst expectations of 45 cents per share.

Yet, even with the minor setbacks, AT&T managed to sell more smartphones than Verizon (NYSE: VZ), increase U-Verse sales, add wireless subscribers, and increase revenue from mobile data usage. In response, Randall Stephenson, AT&T’s CEO, remarked, “We had an excellent 2012.”

An interesting statement, considering that the company had just reported a fourth quarter loss of $3.9 billion, meaning 68 cents per share, to accompany essentially flat revenue of $32.6 billion; however, the numbers are worth relishing considering the improvement over the same quarter last year in which AT&T reported losses of $6.7 billion, meaning $1.12 per share.

These numbers seem puzzling. AT&T sold a record amount of smartphones—most of which (84%, to be exact) were iPhones. The iPhone sales crushed Verizon’s by 39%. However, while they did claim the advantage in smartphone sales over Verizon, they failed to prevail in a possibly more critical area: the quantity of new wireless contract subscribers—regarded as the most valuable type of consumer in the telecommunications market. In fact, Verizon torched AT&T in this area, boasting a 269% advantage in new contract subscribers. 

Another new tactic used by both major providers is the idea of shared data plans. Although Verizon may advertise theirs more than AT&T, both have similar shareable data plans. A rumored 6.6 million customers for AT&T have already flocked to such plans, 25% of whom are choosing plans with caps with at least 10 gigabytes. As a result, mobile data revenue grew 15% in the fourth quarter alone, finishing at $6.8 billion—good news for the company which is still trying to erase the ever-disappearing flat rate unlimited data plan.

AT&T doesn’t plan on stopping there, either. They recently announced a major $14 billion investment plan to expand wireless services through 2015. Furthermore, they plan to introduce their new home security division in March, a market they are particularly excited about. Only 20% of homes in America have security systems, leaving a mostly untapped market for the taking, unlike the cell phone market.

AT&T isn’t the only company that’s noticed this. Dish Network and Comcast (NASDAQ: CMCSA) have also jumped into this market. Comcast is using the home security market to provide a new revenue stream as it continues to lose its cable customers to satellite companies and AT&T U-Verse. “It’s a new market and a new revenue stream, but it makes sense because we’re already there with the broadband,” said Bryan Byrd, a spokesman for Comcast.

So, in a quarter when AT&T sold more smartphones—10.2 million—than any American carrier ever has in one quarter, how were numbers so dismal?

High pension costs and the impact of Hurricane Sandy increased costs and decreased earnings in the fourth quarter.  While revenue was higher than expected from the cell phone and subscription service sales, high costs prevented high profitability. Hurricane Sandy brought with it tons of damage costs for AT&T, as well as decreased sales. High pension costs also added to the mountain of costs AT&T endured.

However, in the coming quarters, it will be very important for AT&T to increase their sales to new wireless customers. Home security will also be a critical field for them to gain new revenue streams. In a mostly tapped wireless market, it will be difficult for AT&T in the coming months. For now, AT&T hasn’t earned a place in my portfolio.

Michael Nolan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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