AT&T quarterly earnings fall on cost of iPhone subsidy

[AppleInsider]

AT&T's second quarter earnings beat Wall Street estimates, but still fell 15 percent year over year, as the highly successful launch of Apple's iPhone 3GS -- a phone subsidized by AT&T -- affected the company's bottom line.

With $0.54 earnings per share reported, AT&T stock fell from $0.63 earnings a year prior. The company's overall revenue fell less than a percent to $30.7 billion.

More than 2.4 million iPhones were activated in the quarter, with more than a third of those new customers.

In all, AT&T gained 1.4 million wireless subscribers. Its total number of customers sits at 79.6 million, which is 6.7 million higher than last year.

The iPhone helped AT&T reach a 3.5 million user increase in devices with 3G capabilities. That resulted in the carrier seeing a 37.2 percent increase in wireless data revenues, including Internet access and text messaging, totaling $3.4 billion. That's more than double the total for 2Q 2007.

"Our wireless momentum is excellent, operational execution and cost management continue to be strong, and in a challenging economy we delivered solid results," said Randall Stephenson, AT&T chairman and chief executive officer.

Net income was $3.2 billion, down from the $3.8 billion a year prior, due partially to the increased operating expenses associated with subsidizing the sale of the iPhone.

"Increased operating expenses in the second quarter of 2009, in part, reflect volume-based acquisition costs associated with the success of the iPhone 3GS launch, which started June 19," a statement from the company reads. "AT&T’s iPhone customer characteristics are attractive, with (average revenue per user) significantly higher than and churn rates well below the company’s postpaid averages; as a result, robust iPhone demand drives strong recurring revenues and substantial long-term value."

When the iPhone 3GS launched on June 19, it was the best sales day ever for the company's retail locations and Web site.

Despite the initial investment on the part of AT&T in iPhone customers, the company said it remains confident that those consumers will bolster the company in the future.

"AT&T iPhone subscribers, both new customers and upgrades, take two-year contracts with data packages," the company said. "As a result, robust iPhone demand drives strong recurring revenues and substantial long-term value."

[Chintan100]

Isnt iPhone the real hearo for AT&T?.

[teckstud]

Despite the initial investment on the part of AT&T in iPhone customers, the company said it remains confident that those consumers will bolster the company in the future.

They do flatter themselves a bit much, don't they? Unless this is a hint that they know the exclusive contract goes out for years to come.

[fraklinc]

Yeah right. They subsidy the iPhone just like they do with any other device, and No they don't lose a freggin dime, matter fact they only Pony up $100 or less for each iPhone that they subsidy, They pony up 2x as much for the HTC Fuze, So no they're not fooling anyone here.

[Techslacker]

Originally Posted by fraklinc

Yeah right. They subsidy the iPhone just like they do with any other device, and No they don't lose a freggin dime, matter fact they only Pony up $100 or less for each iPhone that they subsidy, They pony up 2x as much for the HTC Fuze, So no they're not fooling anyone here.

I was thinking the same thing. They subsidized the 3G last year so how can their year over year be worse? There have been cost breakdowns of the parts and the 3G and 3GS were very close. I guess the only catch could be Apple charging more for the R&D needed but I have my doubts there.

[KT Walrus]

Originally Posted by Techslacker

I was thinking the same thing. They subsidized the 3G last year so how can their year over year be worse? There have been cost breakdowns of the parts and the 3G and 3GS were very close. I guess the only catch could be Apple charging more for the R&D needed but I have my doubts there.

The 3G didn't come out until July so no 3G subsidies were in the quarter a year ago. In fact, the 2G had it's subsidies in the monthly fees and not upfront like for the 3G and 3GS.

Still, AT&T earned billions in the quarter. I just wish they would pour more investment into their infrastructure (their service sucks in my area) and not pat themselves on the back for "cost containment". I dropped my iPhone service last month because I was fed up with AT&T.

I'm hoping Apple drops the exclusive and starts offering us consumers a choice of carriers. Both companies are making too much money to feel any real pressure to do what is right for consumers so I don't expect any changes. But, it sucks for me that I turned my iPhone 3G into an iPod Touch and have to carry a separate cell phone from a company that has a better network.

[GregAlexander]

Originally Posted by fraklinc

Yeah right. They subsidy the iPhone just like they do with any other device, and No they don't lose a freggin dime, matter fact they only Pony up $100 or less for each iPhone that they subsidy, They pony up 2x as much for the HTC Fuze, So no they're not fooling anyone here.

Yeah it's kind of the opposite to what Apple does to account for the phones. It receives the money upfront, but accounts for it over 2 years. AT&T subsidises (& loses) the money upfront, but makes that money back via the contract over 2 years.

The pity of it is that then people expect to be able to get a free upgrade at 12 months.

There's a guy on an Australian podcast who wanted to stay on the same 2 year contract as he started 1 year ago (ie stay committed to one more year), but pay $99 to switch to the 3GS. Now THAT would lose a telco a lot of money...

ps. Anyone know why the Apple store was down the last 2 hours? I only checked US, Australia, & HongKong.
I'm trying to price the Airport Extreme, but it says "item currently unavailable".

[goodcow]

Originally Posted by fraklinc

Yeah right. They subsidy the iPhone just like they do with any other device, and No they don't lose a freggin dime, matter fact they only Pony up $100 or less for each iPhone that they subsidy, They pony up 2x as much for the HTC Fuze, So no they're not fooling anyone here.

Where do you get $100 as the subsidy for the iPhone? From what I've read it's closer to $400.

[nace33]

I can't wait until iPhone is available on another carrier. I think we should have a national "Good-bye AT&T Day" and all leave their "wonderful" service.

[anantksundaram]

A lot of the coverage - e.g., WSJ, and this one - headlines this earnings report as being 'bad news' for ATT. Looks to me like 'good news' for the company's shareholders: some margin pressure up front from increased iPhone sales volume, to be offset with post-paid revenues in the next two years. In other words, exactly as they are saying. The market obviously believes them: the stock is up over 3.5% today.

Their revenue confidence also probably signals that they are factoring in a potential tethering fee, and possibly even an MMS fee.

[closenough]

Originally Posted by goodcow

Where do you get $100 as the subsidy for the iPhone? From what I've read it's closer to $400.

$400? Preposterous! Apple just reported that the average revenue per phone is $325 (5.2m units/$1.689b) Making the "average" subsidy range from $225 per 8gb 3G to $25 per 32gb 3GS.

[MacTel]

If they are negotiating a longer exclusive deal with Apple for the iPhone then they must not be concerned. Gaining market share for a reocurring revenue stream should have upped the stock. Apparently there's plenty day traders taking profit from the build-up to the financial report. Good for them.

[TenoBell]

The year over year is worse because they sold more iPhone's this year than they did last year.

Originally Posted by Techslacker

I was thinking the same thing. They subsidized the 3G last year so how can their year over year be worse?

[TenoBell]

That average is across carriers around the world. Each subsidy may be different for every carrier. Regardless, the iPhone is extremely expensive for AT&T.

Originally Posted by closenough

$400? Preposterous! Apple just reported that the average revenue per phone is $325 (5.2m units/$1.689b) Making the "average" subsidy range from $225 per 8gb 3G to $25 per 32gb 3GS.

[samab]

Originally Posted by closenough

$400? Preposterous! Apple just reported that the average revenue per phone is $325 (5.2m units/$1.689b) Making the "average" subsidy range from $225 per 8gb 3G to $25 per 32gb 3GS.

You do realize that there are $1.405 billion in deferred revenue for the quarter.

Last chart:

http://www.apple.com/pr/library/2009/07/21results.html

$1.689 billion + $1.405 billion = $3.094 billion / 5.208 million iphones = $594.09 per iphone.

[anantksundaram]

Originally Posted by samab

You do realize that there are $1.405 billion in deferred revenue for the quarter.

Last chart:

http://www.apple.com/pr/library/2009/07/21results.html

$1.689 billion + $1.405 billion = $3.094 billion / 5.208 million iphones = $594.09 per iphone.

Nice analysis!

It is interesting to see that 55% of the revenue is being recognized up front, and 45% over the subsequent seven quarters. It is, indeed, consistent with ATT saying that they are paying a good chunk of the subsidy up front, thereby impacting margins in the short run.

[piot]

Originally Posted by closenough

$400? Preposterous! Apple just reported that the average revenue per phone is $325 (5.2m units/$1.689b) Making the "average" subsidy range from $225 per 8gb 3G to $25 per 32gb 3GS.

Brilliant* first post!






*See post #15

[willychu]

"The pity of it is that then people expect to be able to get a free upgrade at 12 months."

Here's what's pitiful. After two years, when AT&T has recouped its so-called "subsidy," why does my monthly rate NOT GO DOWN??? Hmmmm.......

This subsidy-over-two-years scheme is obviously a sham , an out right lie , just a sneaky way to gouge us

[samab]

Originally Posted by willychu

"The pity of it is that then people expect to be able to get a free upgrade at 12 months."

Here's what's pitiful. After two years, when AT&T has recouped its so-called "subsidy," why does my monthly rate NOT GO DOWN??? Hmmmm.......

This subsidy-over-two-years scheme is obviously a sham , an out right lie , just a sneaky way to gouge us

After they recoup their subsidy, they offer you a brand new opportunity to buy a new phone at a subsidized price.

[willychu]

Originally Posted by samab

After they recoup their subsidy, they offer you a brand new opportunity to buy a new phone at a subsidized price.

But if you want to keep your old phone, which is in theory paid for free and clear after two years, shouldn't your monthly rate go down?

I tell you, this whole concept of paying back AT&T's subsidy over two years is a farce . Before the two years are up, AT&T certainly keeps close accounting of how much of this "subsidy" you have paid back to see when you qualify for a newly subsidized phone, but after two years, why does this "subsidy" continue??? What are you subsidizing now, other than AT&T's coffers?

[closenough]

Originally Posted by samab

You do realize that there are $1.405 billion in deferred revenue for the quarter.

Last chart:

http://www.apple.com/pr/library/2009/07/21results.html

$1.689 billion + $1.405 billion = $3.094 billion / 5.208 million iphones = $594.09 per iphone.

Yes, there is the deferred revenue, but I don't think that you can just add that in to the numerator and result in $595 per phone.

You see underlying the "recognized" revenue number includes deferred revenue from earlier periods. For simplicity I've chosen to assume they cancel each other out.

I think it's great that Apple can make a superior product and make good money. What I'm tired of is the straw argument that ATT is not making enough money because they have to subsidize. They outlay 100 to 400 and then get a buyer to put in another 2400 (roughly) over two years and still manage a net 10% profit. Sounds pretty good for a commodity service.

Brilliant!

[GregAlexander]

Optus here had a similar report 9 months ago after the first iPhone 3G. It basically said how much money they'd lost by subsidising the iPhone, but that they expected it to be made up.

That, of course, was not a "hope" but a guaranteed result... it just wasn't reported that way. And at the end of the financial year the report was that they had increased numbers of subscribers with increased spending and overall a better financial position through their high subsidies of the phone... a very good result.

(Optus sold the high end iPhone for US$140 on a US$50/mth plan, free on higher plans).

Originally Posted by willychu

"The pity of it is that then people expect to be able to get a free upgrade at 12 months."

Here's what's pitiful. After two years, when AT&T has recouped its so-called "subsidy," why does my monthly rate NOT GO DOWN??? Hmmmm.......

This subsidy-over-two-years scheme is obviously a sham , an out right lie , just a sneaky way to gouge us

The system is geared to a 2 year lifespan of phones. The plans nearly all seem to assume that - and if you replace your phone every 2 years then you get the best you can out of it. And if you don't replace your phone that often the phone company makes extra.

Originally Posted by willychu

But if you want to keep your old phone, which is in theory paid for free and clear after two years, shouldn't your monthly rate go down?

In theory, absolutely.
You are free to change plans once your contract is up, and sometimes there are plans that are cheaper if you "BYO Phone", at least there are in Australia.

Vodafone here, 5 years back, tried making all phones paid upfront with lower monthly and call charges. Unfortunately lots of business moved to the other telcos as people wanted a "cheap phone", and perceived Vodafone as more expensive. So they gave up on that.

[samab]

Originally Posted by closenough

Yes, there is the deferred revenue, but I don't think that you can just add that in to the numerator and result in $595 per phone.

You see underlying the "recognized" revenue number includes deferred revenue from earlier periods. For simplicity I've chosen to assume they cancel each other out. If the earning cycle is in fact 24 months then you end up with a ramp up/ramp down revenue situation with a plateau in between (if they stopped making phones today they would still see "revenue" for another two years.) Revenue can look much "smoother" than it really is with this approach. In the middle, the amount deferred can be easily offset by some amount now recognized from an earlier period. I don't know the exact pattern they are using to recognize it but it not unreasonable that it would be proportional over 24 periods.

I think it's great that Apple can make a superior product and make good money. What I'm tired of is the straw argument that ATT is not making enough money because they have to subsidize. They outlay 100 to 400 and then get a buyer to put in another 2400 (roughly) over two years and still manage a net 10% profit. Sounds pretty good for a commodity service.

Brilliant!

Please read that paragraph of footnote (a) carefully:

It specifically stated that non-GAAP adjustment of $1.405 billion is by:

(1) REVERSING all previous deferred revenue (that is included in this current period) as if Apple never decided to have deferred revenue recognization in the last 2 years;
(2) ADDING all the future deferred revenue from the 5.208 million iphones sold in the current period.

$1.689 billion + (MINUS all previous deferred revenue that is being recognized in this current period PLUS all the future deferred iphone revenue from the 5.208 iphones sold = $1.405 billion) = $3.094 billion.

You have absolutely no clue what you are talking about.

PS: AT&T is NOT making enough money off the iphone --- that's why since the iphone was launched 2 years ago --- AT&T's share price dropped 40% and Verizon's share price dropped only 30%. That's why on today's AT&T's earning announcement, AT&T share price went up 2.5% and Verizon's share price went up almost 4%.

[samab]

Originally Posted by GregAlexander

Optus here had a similar report 9 months ago after the first iPhone 3G. It basically said how much money they'd lost by subsidising the iPhone, but that they expected it to be made up.

That, of course, was not a "hope" but a guaranteed result... it just wasn't reported that way. And at the end of the financial year the report was that they had increased numbers of subscribers with increased spending and overall a better financial position through their high subsidies of the phone... a very good result.

(Optus sold the high end iPhone for US$140 on a US$50/mth plan, free on higher plans).

I think it's more or less an "accounting" issue.

Even though it is the US that is creating all the current economic mess in the whole world right now --- unfortunately they are still better than everybody else in terms of public company disclosure laws and accounting laws.

Strange, isn't it --- that there are dozens and dozens of carriers around the world giving out "zero" dollar iphones --- but none of them had to announce anything on how that massive handset subsidy would affect their earnings. AT&T is the ONLY carrier in the whole world that had to legally announce a profit margin warning due to the iphone handset subsidy --- and they don't even have a zero dollar iphone.

[closenough]

Originally Posted by samab

You have absolutely no clue what you are talking about.

You nailed it, I have absolutely no clue what I am talking about.

Thanks for the clarification.

[cameronj]

Originally Posted by willychu

But if you want to keep your old phone, which is in theory paid for free and clear after two years, shouldn't your monthly rate go down?

I tell you, this whole concept of paying back AT&T's subsidy over two years is a farce . Before the two years are up, AT&T certainly keeps close accounting of how much of this "subsidy" you have paid back to see when you qualify for a newly subsidized phone, but after two years, why does this "subsidy" continue??? What are you subsidizing now, other than AT&T's coffers?

Of course it's a farce. Which is fine, since ATT never said you were paying back any subsidy over two years.

You sign a two year contract to use the iPhone in America.
Your monthly fee is $x.

That's all.

There's no repayment of anything - all your money goes to ATT and they can use it as they wish. If you don't like it, there's one sure way to make sure your monthly ATT bill goes down - stop using the iPhone and stop using ATT.

[cameronj]

Originally Posted by closenough

I think it's great that Apple can make a superior product and make good money. What I'm tired of is the straw argument that ATT is not making enough money because they have to subsidize. They outlay 100 to 400 and then get a buyer to put in another 2400 (roughly) over two years and still manage a net 10% profit. Sounds pretty good for a commodity service.

The great thing about a commodity service is that anyone can join in the competition.

So, let us know when you start your wireless company, and how your negotiations with Apple go.

[SGSStateStudent]

Originally Posted by Chintan100

Isnt iPhone the real hearo for AT&T?.

Yeah. HERO.