iPhone and AT&T: How Goes?

Starting with this post on AT&T, I will analyze the US carriers and how the launch of iPhone has affected them. Earlier posts on AT&T available here and here can make for interesting reading. AT&T is the exclusive US carrier partner for the iPhone. To get the iPhone, subscribers need to sign up for a 2-year contract with price plans ranging from $60 to $100 dollars per month.

AT&T Inc. (NYSE:T) is one of the world’s largest telecommunications holding companies with operating revenue of 63.05 billion in 2006. AT&T companies are leading providers of IP-based communications services, high-speed DSL Internet, local and long distance voice, and directory publishing and advertising services. Its business is organized into four segments: (1) wireline; (2) wireless; (3) advertising & publishing; and (4) others. In December, 2006, AT&T acquired BellSouth. With the BellSouth acquisition, the Company acquired BellSouth’s 40% interest in AT&T Mobility, formerly Cingular Wireless LLC, resulting in 100% ownership of AT&T Mobility.

On the financial front, AT&T reported revenues of $29.5 billion for Q2 of fiscal 2007, up from $15.8 billion in the year-earlier quarter. Its earnings per diluted share were $0.47 compared to $0.46 in the year-earlier quarter. Revenues in the wireless segment were $10.4 billion, up 12.7 % from the year-earlier quarter. It added 1.5 million wireless customers in the quarter to reach 63.7 million customers, maintaining its position as the No.1 carrier. However, Verizon still maintains its lead in terms of revenue. In Q2 2007, it reported revenue of $10.8 billion and a lower churn rate of 1.08% compared with AT&T’s 1.6%.

Following the iPhone launch on June 29, AT&T activated 146,000 iPhone subscribers in the second quarter that included less than two days of sales. More than 40% of iPhone subscribers were new subscribers. Meanwhile, AT&T has also announced its agreement to acquire Dobson Communications, a rural cell phone carrier with 1.5 million customers.

If not for the slow speed of its EDGE network, AT&T could expect more customers to line up for the iPhone and could perhaps have a smoother run up. The company expects to expand its market share by several % points by the end of 2008, causing its stock to do quite well, with the price ranging between $37 and $41 because of the iPhone. I don’t see any reason why they cannot deliver on that expectation, so after the market settles down from its macro gyrations, AT&T should continue its nice ramp, especially as Q3 results start to validate the assumptions. Several analysts have given the stock a well-reasoned BUY rating, and I agree with them.

The iPhone alignment gives them an opportunity to diversify their customer base from mainly local and long distance, to wireless. Especially with the iPhone, the newly acquired customer segment will be relatively high-end, thus, potentially offering some margin expansion headroom.