AT&T Misses Earnings Estimates as Customers Shift to Phone Financing

AT&T Inc. (T), the second-largest U.S. wireless carrier, fell short of earnings estimates as more customers started paying for devices with installment plans, an option thats reducing profits as it cuts monthly service bills.

Second-quarter profit of 62 cents a share, excluding some items, missed the 63-cent average estimate of analysts, according to data compiled by Bloomberg. Sales rose 1.6 percent to $32.6 billion, below the $33.2 billion average estimate. The company, which is buying satellite carrier DirecTV, already had raised its 2014 sales forecast and cut its range of earnings estimates on June 3 due to the effect of the installment plans, called Next. It reiterated the outlook yesterday.

The company added more than 1 million monthly wireless subscribers. The shift to Next helps keep customers from switching to T-Mobile US Inc., whose offer of smartphone financing early last year forced Dallas-based AT&T and the other carriers to catch up. The downside for AT&T and its rivals is that the trend cuts into their revenue from wireless services, since the companies have to account for smartphone installment payments separately.

Theyre seeing pressure on the margin side of things, but theyre hanging in there. Thats the best thing you can do in this type of environment, Angelo Zino, an analyst with S&P Capital IQ, said in an interview before the earnings release.

Shares of AT&T dropped 1.1 percent to $35.49 yesterday in late trading.

The average monthly wireless-phone bill fell to $62.28 from $67.49 a year earlier. Including Next installment payments for smartphones, the average bill was $64.35. Bills will increase substantially in the second half of the year as customers spend more on data for their new devices, AT&T said in a presentation posted online.

AT&T started promoting Next, along with its shared-data Family Value plan, to keep subscribers from fleeing to a smaller rival like T-Mobile for quicker device upgrades and lower service charges.

The best thing to do in this environment is keep the most valuable customers we have, said Ralph de la Vega, chief executive officer of AT&Ts mobile-services unit, in an interview. Our smartphone customers are crucial -- if you lose them, you lose growth opportunities in areas like connected cars and smart-home services.

The companys 1 million new monthly subscribers surpassed the 816,000 average of analysts estimates, though it fell short of Verizon Communications Inc.s gain of 1.4 million. AT&Ts additions included about 700,000 smartphone subscribers, compared with Verizons 304,000 new phone subscriptions. About half of the smartphones AT&T sold were through Next plans.

AT&Ts wireless-service profit margin expanded 0.2 percentage point from a year earlier to 42.6 percent. Analysts had projected a service margin of 42.4 percent, based on a Bloomberg survey of nine estimates.

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AT&T Misses Earnings Estimates as Customers Shift to Phone Financing