Is iPhone the Wind Beneath AT&T's Wings?

AT&T's (NYSE: T) wireless business unit was the main driver behind the telecom's eye-popping 22 percent increase in net income this past quarter.

In line with analysts' expectations, AT&T registered US$3.5 billion, or 57 cents a share, in Q1 earnings. Nonrecurring charges for the quarter included costs associated with a number of mergers and $374 million in expenditures due to layoffs. They resulted in an aggregate $1.2 billion of one-time costs, which shaved 17 cents a share from profits.

Revenues rose 6.1 percent over a year ago, to $30.74 billion (compared with analyst estimates of $30.7 billion). In Q1 2007, AT&T's profits were $2.85 billion, or 45 cents a share.

Wireless Eclipses Other Units

AT&T's overall performance was driven by the strong showing of its wireless business unit, which saw growth that masked the stagnation of its traditional phone line subscriptions and the plodding progress of its data product line.

Last quarter, AT&T's wireless unit earned $2.9 billion, a 96 percent increase from the same quarter a year earlier. Wireline earnings, by contrast, dropped two percent to $2.8 billion. The data business unit registered $6.2 billion in earnings, a six percent increase.

How Now the Dow?

Many equity market watchers are delighted by AT&T's performance, of course -- and never mind the dive underneath the covers to see how it happened.

AT&T was among the few bright spots in the equity market Tuesday morning, independent market analyst Fred Ruffy told the E-Commerce Times. "The company is one of only six Dow stocks moving higher and this morning's second best percentage gainer in the industrial average."

AT&T appears to be weathering the recent economic slowdown well, Ruffy observed. "Consequently, the stock, which had fallen nearly 5 percent in the three weeks leading up to the earnings report, is edging higher in midday trading Tuesday."

Weak Subscriber Numbers

That said, some contrarians pointed to AT&T's flagging wireline unit and noted the iPhone's success in driving its wireless profits -- profits that must be shared with Apple (Nasdaq: AAPL).

AT&T added 1.3 million wireless subscribers, only 700,000 of which were post-pay, Christopher C. King, a principal at Stifel Nicolaus Research, told the E-Commerce Times. "Certainly the overwhelming majority of those were iPhone-related. So, if you strip out the iPhone sales, you can logically reach the conclusion that AT&T's subscriber metrics would be close to abysmal without the iPhone."

It's difficult to say whether AT&T's dependence on Apple is due to a strategic decision to spend more resources on marketing the iPhone, King acknowledged, but he noted that the market is expecting to see Verizon's post-pay retail additions double those of AT&T.

It could be that AT&T's weak subscriber performance is due to the economic slowdown, but the numbers for both wireline and wireless were softer than Stifel Nicolaus modeled, he pointed out. "Neither was a huge miss -- but both were definitely soft."

Also, AT&T's video strategy delivered less than expected. "That is something that bears watching in the future," King said.

Overall Strength

AT&T is performing well, and its only real problem is the ever-growing competition, maintained Jeff Kagan, an independent telecom analyst.

"AT&T is strong in a lot of areas -- including wireless -- and in wireless, one of its strengths is the iPhone," he told the E-Commerce Times, "but the iPhone is not the only reason behind AT&T's success."

For instance, AT&T's wireless broadband unit is performing well, as are its television, Internet and enterprise business units, he noted.

AT&T's main problem is that every day, more competitors enter the market with products or services aimed at one or more of these business units, said Kagan. These companies -- from the Baby Bells to VoIP providers to ISPs to television service companies -- are emerging from various points in the telecom spectrum, which makes it difficult to address all of them head on.

Its strategy of positioning itself to be a one-stop shop appears to be working, though. "So far, so good," Kagan said.