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AT&T Wireless Operating Income Drops Despite Record Subscriber Gain

Dallas – AT&T’s wireless operating income dropped in the first quarter compared to the year-ago period despite the carrier’s best-ever first-quarter gain in net new subscribers.

Most of the net subscriber growth came from the carrier’s best-ever first-quarter gain in net new connected-device subscriptions, which are less profitable and provide data service for such devices as e-readers, in-vehicle telematics systems, security systems, and other products whose users are billed for service by companies other than AT&T.

Operating income fell 5.3 percent to $3.95 billion even though total wireless operating revenues grew at a faster percentage rate than they did during the year-ago quarter. Operating revenues rose 10.2 percent to $15.3 billion compared to a year-ago gain of 8.2 percent.

Operating-income margins fell to 25.8 percent from the year-ago 30 percent because of increased operating costs resulting from strong smartphone sales and the costs associated with AT&T’s merger with the Alltel and Centennial carriers, the company said. Those increases were offset in part by improved operating efficiencies and higher revenues from a growing number of smartphone subscribers, the carrier said.

In other metrics, AT&T said sales of smartphones, tablets and iPhones were strong in the quarter.

The carrier’s iPhone sales were up over the year-ago quarter despite Verizon’s launch of a CDMA iPhone in mid-February. Sales hit 3.6 million, up from the year-ago 2.7 million though down sequentially from 4.1 million in the fourth quarter and 5.2 million in the third quarter, which marked the carrier’s best-ever iPhone sales quarter and was the first full quarter of iPhone 4 sales.

AT&T didn’t say how many of the first-quarter’s iPhones were sold to subscribers new to the AT&T network. For the year-ago quarter, AT&T said more than a third of iPhone purchasers were new to the network.

Other first-quarter statistics include:

Tablet sales: The carrier’s sales of these devices hit 322,000, down sequentially from the fourth-quarter’s 442,000. AT&T didn’t begin selling iPad and Galaxy Tab tablets until the fourth quarter of last year with prepaid 3G service.

Smartphone sales: More than 5.5 million smartphones, including iPhones, were sold in the first quarter, up more than 60 percent from the year-ago quarter and marking the carrier’s third-highest quarter ever for smartphone sales.
Sixty-five percent of the carrier’s postpaid-phone sales were smartphones.

Branded computing subscribers: The number of subscribers using such devices as tablets, wireless modems, tethering plans, personal Wi-Fi hot spots, and other data-only devices rose to 3.4 million, up during the quarter by 421,000. Most of the 421,000 gain came from the 322,000 tablets sold in the quarter.

Total subscriber gains: Although AT&T posted its best-ever first-quarter subscriber gain of 1.98 million to expand the subscriber base to 97.5 million, the gain was mainly the result of its best-ever first-quarter gain of 1.28 million new connected-device subscriptions.

Excluding connected-device gains, AT&T’s net-new subscriber gains would have slipped to 708,000 in the first quarter from a year-ago gain of 805,000.

The 708,000 include subscribers of AT&T-branded prepaid and postpaid services and subscribers gained through resellers. The number of postpaid subscribers fell to 62,000 from a year-ago 512,000. The number of AT&T prepaid subscribers, on the other hand, rose to 85,000 from a year-ago 24,000, and subscriptions gained through resellers rose to 561,000 from a year-ago 269,000.

The subscription numbers include data subscriptions for such devices as wireless USB modems, portable Wi-Fi hot spots, and portable computing devices, such as tablets and netbooks, whose owners pay AT&T for the data service.

Excluding AT&T’s connected-device subscriber base of 10.58 million, AT&T’s subscription base would be 86.2 million at the end of the first quarter. That would be below Verizon Wireless’s year-end 2010 subscriber base of 94.1 million (excluding 8.1 million connected devices).