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Leading telecom company, AT&T Inc. (T - Analyst Report) reported third-quarter 2013 adjusted earnings per share of 66 cents, surpassing the Zacks Consensus Estimate by a penny. Comparing year over year, the results improved 6.5% from adjusted earnings of 62 cents. The growth was attributable to growing demand for wireless data service along with strong U-verse and strategic business.

Quarterly revenues increased 2.2% from the prior-year quarter to $32.2 billion, which was in line with the Zacks Consensus Estimate. The growth was attributed to efficient network operations and an expanding broadband segment.

Operating income rose 2.5% year over year to $6.2 billion, resulting in an operating margin of 19.2%, flat year over year. Operating expenses increased 2.2% year over year to $25.97 billion.

Segment Results

Wireless revenues, including equipment sales, rose 5.1% year over year to $17.5 billion in the quarter, primarily on the higher number of smartphones sold and more upgrades. Wireless data revenues leaped 17.6% year over year to approximately $5.5 billion, driven by increased Internet access, multimedia and text messages.

AT&T added 989,000 wireless customers in the reported quarter, totaling 109.5 million. This was primarily attributed to continued adoption of smartphones, including Apple Inc.’s (AAPL - Analyst Report) iPhones and Google Inc.’s Android-based phones.

The company added 178,000 post-paid smartphone users and sold 6.7 million smartphones of which 89% were post-paid phones. At quarter end, nearly 75% of AT&T’s post-paid phone users used smartphones. Almost 70% post-paid smartphone subscribers have 4G-based handsets.

Total churn was 1.31% compared with 1.34% in the prior-year quarter. Post-paid ARPU (average revenue per user) grew 1.5% year over year driven by healthy data growth.

Wirelinerevenues dipped 1.0% year over year to $14.7 billion. Although the company experienced growth in U-verse TV and High Speed Internet segments, lower voice and legacy revenues impacted the overall revenue figure.

Revenues from residential customers increased 2.4% year over year to $5.6 billion, driven by robust activities in consumer IP data services. Business revenues slid 2.6% year over year to $8.8 billion, reflecting a drop in legacy service. Strategic business services such as Ethernet, Virtual Private Networks, hosting, IP conferencing and application services, increased 15.7% year over year.

AT&T's total U-verse subscribers, which include TV and high-speed Internet customers, touched 10 million at the end of the third quarter. Total U-verse TV subscribers reached 5.3 million (265,000 users added) and high-speed Internet users touched 9.7 million (655,000 subscribers added).

Liquidity

As of Sep 30, 2013, AT&T had $1.4 billion in cash and cash equivalents. The company had long-term debt (including current portion) of $76.2 billion, representing a net-debt-to-EBITDA ratio of 1.76%.

AT&T generated $9.2 billion of cash from operations in the quarter, while capital expenditure totaled $6 billion. Free cash flow for the third quarter was $3.2 billion. The company repurchased 55 million shares for $1.9 billion.

Another Major Telecom Stock

Another U.S. mobile service giant Verizon Communications Inc. (VZ - Analyst Report) reported third quarter 2013 earnings of 77 cents per share, surpassing the Zacks Consensus Estimate of 75 cents. The results improved 20.3% from the adjusted earnings of 64 cents a year ago.

Our Take

AT&T currently holds a Zacks Rank #3 (Hold). Although AT&T is favorably poised to reap benefits from the long-term industry catalysts, we remain concerned about the effect of lofty subsidies and huge competition on margins. We expect AT&T to generate more profits from its planned investment program and new data plan offers.

However, the company faces limitations in the wireless spectrum division that it is trying to turn around through acquisitions of spectrum licenses. On the financial front, pension obligations and promotional costs associated with Project Velocity IP pose significant headwinds to the company’s growth story.  

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