Earnings Preview: Eyes on iPhone for AT&T's 3Q

AT&T to deliver 3rd-quarter results; investors to closely watch performance of iPhone

• On 3:47 pm EDT, Tuesday October 20, 2009

NEW YORK (AP) -- AT&T Inc. reports its third-quarter results on Thursday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: AT&T has one great thing going for it: it's the exclusive U.S. carrier for the iPhone. That means it pulls in new, high-paying wireless subscribers every quarter. The third quarter should be a strong one, since a new iPhone model launched two weeks before the quarter started.

But apart from that, investors see little reason to cheer at the country's largest telecommunications company. The stock has failed to keep pace with the recovery of the broader market since March. In that time, the S&P 500 has risen 39 percent, while AT&T is up only 3 percent.

To some extent, this is because AT&T's stock never fell as hard as the overall market. But the company is also facing long-term headwinds. It's losing landlines at a rapid pace, since cable companies keep siphoning off subscribers, and many households are choosing to rely on cell phones alone. Demand from businesses has been weak in the recession. Even the wireless market isn't very healthy. Nearly everyone has a cell phone, and carriers are increasingly forced to compete on price.

The iPhone shields AT&T from some of these effects, but relying on one phone for growth puts AT&T in a precarious position. It has to subsidize the purchase price of the phone heavily, so each new wave of buyers costs the company money up front. Heavy data traffic generated by the phone is clogging AT&T's wireless network, forcing infrastructure upgrades. Apple, the maker of the iPhone, doesn't seem to consider exclusive carrier contracts a long-term strategy -- in many countries, there are now multiple iPhone carriers. The companies haven't said how long the U.S. exclusivity period lasts.

Apple said Monday that it sold more than 7.4 million iPhones in the quarter, half a million more than in same quarter a year ago. The figure includes overseas sales, so it's unclear what AT&T's share was. In the third quarter last year, AT&T activated 2.4 million iPhones, of which 40 percent were for subscribers who jumped over from other carriers.

BY THE NUMBERS: Analysts surveyed by Thomson Reuters expect AT&T to post earnings of 50 cents per share on $30.9 billion in revenue. In the same period last year, AT&T recorded profit of 55 cents per share on $31.3 billion in revenue.

ANALYST TAKE: Christopher King expects AT&T to report adding 1.4 million wireless subscribers, of which 1.25 million are the coveted customers who sign contracts rather than prepaying for service.

Craig Moffett at Sanford Bernstein expects 1.5 million new subscribers, of which 1.35 million are under contract. He's assuming about 2.4 million new iPhones were activated.

WHAT'S AHEAD: AT&T is wrapping up the last negotiations on a batch of labor contracts covering more than 100,000 workers on the wireline side. In the process, it has reduced its health care costs, curbing what it contended were extremely generous benefits.

AT&T expects to close its $2.8 billion acquisition of cellular carrier Centennial Communications Corp. in the fourth quarter. Regulatory scrutiny delayed a deal initially expected to close in the second quarter. The acquisition will expand AT&T's coverage, particularly in Puerto Rico.

STOCK PERFORMANCE: AT&T's shares rose 8 percent in the third quarter, compared to a 14 percent rise in the S&P 500.

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