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AT&T beats profit estimates as phone discounts diminish

Scott Moritz
(c) 2014, Bloomberg News.
NEW YORK — AT&T Inc. is getting a profit boost thanks to an industrywide shift, led by smaller rival T-Mobile US Inc., away from selling phones below cost.

Instead, more customers are opting for AT&T's Next program, paying full price for phones rather than signing two-year contracts. That helped AT&T boost first-quarter earnings to 71 a share, leaving out some items. Analysts had estimated 70 cents on average, according to data compiled by Bloomberg. AT&T records the entire phone sale to Next customers up front, rather than incurring expenses for the steep discounts it offers to users who commit to contracts.

While new phone financing is padding AT&T's profits, investors have been unnerved by the influence of T-Mobile, which has also ushered in a wave of industry price cuts. The size of AT&T's average mobile-phone bill rose just 0.4 percent in the first quarter from a year earlier, underscoring how the industry price fight is starting to provide savings to consumers.

"Better-than-expected overall results from AT&T Wireless won't turn investors into U.S. telecom bulls," said Kevin Roe, an analyst with Roe Equity Research in Dorset, Vt. The coming quarterly results will continued to be negatively impacted by the repricing of AT&T's installed base."

AT&T increased its forecast for 2014 sales growth to 4 percent, ahead of the average analyst estimate of 3 percent. Earnings per share will grow at a rate in the "mid-single digits," AT&T said. Analysts had projected a 9 percent gain.

AT&T shares fell 1.3 percent to $35.83 in late trading. The stock is up 3.2 percent this year as of Tuesday's close.

Lower prices helped AT&T add 625,000 monthly subscribers, up from 296,000 a year ago. The average estimate was 219,000, based on a survey of nine analysts.

Monthly subscribers paid an average of $66.33 a month, up 0.4 percent from a year earlier and compared with the average analyst estimate of $65.90. If Next customers' smartphone purchases were included in that figure, the monthly bill would have risen 2 percent from a year earlier, AT&T said.

T-Mobile has introduced more aggressive pricing, such as international text messaging at no additional cost and free data access for tablet buyers. AT&T and T-Mobile have also engaged in customer-poaching, with each offering buyouts to cover early- termination penalties for people that switch service.

T-Mobile added about 1 million new monthly customers last quarter, according to an average estimate of nine analysts compiled by Bloomberg. That subscriber growth would be about double the estimated first-quarter gains of 512,000 by Verizon and 60 percent higher than AT&T's additions.

AT&T reported first-quarter net income of $3.65 billion, or 70 cents a share, compared with $3.7 billion, or 67 cents, a year earlier. Share repurchases helped increase per-share profit even as total net income fell.

Wireless-service profit margins were 45.4 percent, up from 43.2 percent a year ago. Analysts projected a wireless margin of 43.34 percent, based on an average of nine estimates compiled by Bloomberg.

In AT&T's landline video-and-broadband business, called U- verse, the company added 634,000 Internet users and 201,000 video subscribers. That was down from the 731,000 U-verse Internet customers and 232,000 TV customers added a year ago.

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