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AT&T’s Q3 Wireless Income, Net Adds Drop As Smartphones Surge

Dallas – AT&T’s wireless operating income and wireless margins slipped in the third quarter, interrupting two consecutive quarters of gains in both metrics, despite the highest wireless revenue growth in five quarters.

Wireless revenues grew 6.6 percent to $16.6 billion, driven up by a data-driven 2.4 percent post-paid ARPU gain to $65.20, marking the highest growth rate in six quarters and the 15th consecutive quarter of year-over-year postpaid ARPU increases.

Despite revenue growth, the number of net new subscribers fell markedly in the quarter, dropping to 678,000 from a year-ago 2.1 million, a second-quarter 1.3 million, and first-quarter 726,000. AT&T Mobility president/CEO Ralph de la Vega blamed the drop in net adds to “significant supply constraints” in the iPhone 5, which was available for the last 10 days of the quarter. The “vast majority” of iPhone 5 models went to existing subscribers, he said.

The president/CEO also said he expects supply constraints to ease in the fourth quarter, as is usually the case with new iPhone launches.

iPhones and other smartphones played a major role in the decline in wireless operating income and wireless margins because smartphones and iPhone are more heavily subsidized than feature phones, with iPhone subsidies the highest.

Despite that, de la Vega said smartphones contribute to growing ARPU, and he said smartphones will be the base that the company will use to “grow a host of other services” that will further raise ARPU.

Those services will include connecting the car to entertainment services and the launch, now scheduled for next year, of the company’s Digital Life home-automation and monitoring service, which uses smartphones to control and monitor home systems, including security.

On Nov. 7, the company will outline its plans for adding services for cars and homes to grow revenues, making revenue growth less dependent on increasing the number of net new subscribers, de la Vega said.

Wireless operating income fell 5.8 percent from the year-ago quarter, and wireless operating margins dropped to 26.2 percent from a year-ago 29.5 percent and second-quarter 30.3 percent.

As operating income and margins fell, smartphone activations soared 27.1 percent to 6.1 million from the year-ago period and grew sequentially from a second-quarter 5.1 million and first-quarter 5.5 million.

Out of total smartphone activations, iPhone activations soared 74.1 percent to 4.7 million from the year-ago 2.7 million, when activations dropped dramatically as consumers awaited the next-generation iPhone.

iPhone activations in the quarter also exceeded the second quarter’s 3.7 million and first-quarter’s 4.3 million.

As a percent of smartphone activations, iPhones accounted for 77 percent of smartphone activations in the quarter, up from the year-ago 56.3 percent and the second quarter’s 72.5 percent.

Compared to Verizon, AT&T sold fewer smartphones in the quarter at 6.1 million than Verizon’s 6.8 million but sold more iPhones at 4.7 million than Verizon’s 3.1 million. Verizon’s iPhone sales accounted for only 45.6 percent of its smartphone activations.

Despite the iPhone’s high and still-growing percentage of AT&T’s smartphone sales, AT&T said it also posted its best-ever sales quarter in Android and Windows Phone activations.

In other wireless metrics, AT&T said ARPU is rising in part because of the company’s Mobile Share plans, launched in August. De la Vega called the take rate of 2 million subscribers in five weeks as “fantastic” and said the ARPU of the plans is higher than expected because more than a third of share plan subscribers are opting for data plans of 10GB or more,

Postpaid churn was the best for any previous third quarter at 1.08 percent, down from the year-ago 1.15 percent but up from the second quarter’s 0.97 percent.

The number of postpaid smartphone subscribers hit 44.5 million, up by 1.4 million from the second quarter. Postpaid smartphone subscribers represented 63.8 percent of total postpaid phone users, up from a year-ago 52.6 percent, or 36.1 million.

Smartphones accounted for 80 percent of postpaid phone sales in the quarter. The rate at which subscribers upgrade their phones before the expiration of a contract held steady at 7 percent because of stricter upgrade policies put in place last year.

In other comments, de la Vega said the company’s 4G LTE rollout is ahead of schedule, with service now reaching a population of 135 million people.