AT&T's mixed Q4 driven by iPhone mixed blessing

AT&T’s fourth-quarter earnings were buoyed by growth in wireless data services and wireless subscriber gains, although this quarter its exclusive partnership with Apple for the iPhone proved both a hindrance and a help. Despite higher wireless sales, AT&T’s fourth-quarter profits fell as the now-second-largest carrier paid high upfront subsidies to support the iconic device.

The iPhone 3G’s momentum continued in the last quarter of 2008, with AT&T activating 1.9 million units, compared to Apple’s 4.4 million sold in the same quarter. Of the AT&T activations, 40% were new customers the carrier won from its competitors. According to AT&T, average revenue per user (ARPU) for iPhone owners has been approximately 1.6 times higher and churn rates are significantly lower than the company’s overall postpaid subscriber base. Still, the carrier heavily subsidizes the upfront cost of the 3G version, offsetting its gain in new customers. The result has been sagging short-term profit. According to AT&T, subsidies subtracted five cents a share from adjusted fourth-quarter earnings.

“The iPhone is a success for both AT&T and for Apple; however, the deal AT&T struck with Apple for this latest iPhone version has AT&T paying Apple up front per phone and then earning that amount back, plus profits, from the customer over two years,” telecom analyst Jeff Kagan explained in a research note. “So it was expected that as AT&T sold iPhones, they would incur this short-term expense, but they would earn it back over the next two years, along with profits.”

The iPhone, credited with redefining how mobile data is done, was also responsible for driving data growth in AT&T’s wireless division. Mobile data revenue grew 51.2% year-over-year to $3.1 billion. In the fourth quarter, nearly 80 billion text messages were sent on AT&T’s network, more than double the year before. Internet access revenue and multimedia message volumes also grew this quarter, making the fourth quarter AT&T’s 12^th consecutive quarter with wireless data revenue growth above 50%.

“The upfront approach has hurt us in the short term but will help us expand margins in the years ahead,” AT&T Chief Financial Officer Rick Lindner said on the call. In total, AT&T had 15 cents dilution in the last two quarters from the iPhone but benefited from the additional customers added in the third quarter. “We expect some dilution in 2009, from the iPhone, but down from 2008 levels,” he added.