iPhone Hits AT&T Margins
AT&T lowered its full-year adjusted wireless operating income margin to "better than 37 percent," from the original forecast of 39 percent to 40 percent, and cut its consolidated operating income margin to 23 percent, down from its forecast of 24 percent, because of the higher-than-expected iPhone sales.
But CFO Rick Lindner insisted that while the iPhone is costly to deliver now, the initiative will pay off in the long run.
"Some of you are concerned about [margin] dilution," said Lindner on the third quarter conference call today. "I believe our results will bear out that the [iPhone] is an important investment for AT&T. We have nearly one million customers that are new and we've upgraded 1.4 million existing customers. Every one of them will increase their spend with AT&T."
The operator activated 2.4 million iPhone 3G customers in the third quarter, of which 1 million were new to the operator. And the operator reported a record 1.7 million postpaid subscriber additions, which is the highest total for a quarter ever, according to the operator. The total of wireless net subscribers additions was 2 million in the quarter.
But those subscriber additions, and the heavy iPhone subsidies in particular, took their toll on wireless margins in the quarter. The costs associated with rolling out the device were about $900 million in the quarter, or 10 cents per share.
The iPhone's hit to wireless margins is expected to be slightly less in the fourth quarter, but it will still be more than AT&T was expecting earlier this year, according to Lindner.
But AT&T thinks the cost is worth it. The operator said that average revenue per user (ARPU) for iPhone 3G customers on average, at $95 in the third quarter, was more than 1.6 times higher than the average ARPU of its post-paid customer base, which was $58.99 in the quarter.
AT&T says the iPhone is bringing more people into its stores and may be instrumental in sparking sales of other integrated devices, defying the economic slowdown.
Ralph de la Vega, president and CEO of AT&T Mobility and consumer markets, says that two thirds of AT&T's third quarter post-paid customers chose an integrated device, which AT&T describes as devices with QWERTY keyboards or touch screens.
In the quarter, 22 percent of post-paid subscribers had integrated devices. And this is important as de la Vega says that ARPUs on integrated devices were "much higher" than average post-paid customers.
Adding to its integrated devices, AT&T announced that it will launch BlackBerry 's Blackberry Bold smartphone on November 4. (See America the Bold? and CTIA: RIM Confirms October for the Bold.)
And the operator says that more people are coming into its stores, which is unusual for this time of year, as shoppers typically slow down before the run-up to the holiday season.
"Despite the economy, we have good growth, at least in wireless," says de la Vega. "The traffic in our stores and the close rates are encouraging given the economic climate we're in."
— Michelle Donegan, European Editor, Unstrung