AT&T Surprises The Industry

AT&T has been slammed by its iPhone customers for dropouts and overall poor performance of its 3G network. Combined with attack ads from Verizon and media bashing from analysts, most thought that Apple would cancel their AT&T exclusivity contract for the iPhone, and hand over their new iPad tablet (a hand-held computer device touting a 9.7 inch screen, weighing 1.5 pounds and supporting 140,000 applications) to Verizon, when Apple held their iPad launch event this week.

Most were wrong on both fronts. Apple praised AT&T as a great partner, despite the technical problems, and will continue iPhone exclusivity with AT&T. The new iPad will also go to AT&T as the sole carrier. This is clearly a coup for the company, which will certainly take customers away from Verizon. Although most people are shocked that Verizon was not included, Apple executives realized that the grass is not always greener. No one anticipated the incredible data usage demands from the iPhone, and I do not believe that Verizon could have done a better job, despite their claim to having a superior network. AT&T has vowed to improve their service and will invest billions in the upcoming months to backup their promise.

Looking at the financial side, both companies have seen decreases in their share price by over 10% since the beginning of the year. This is due to price cutting, declining wireline revenues and the major indices contracting by more than 6%. However, Q4 revenues and cash flows reported this week were strong from both firms. Over 2 million wireless customers were added by each company, respectively. AT&T showed an increase in earnings of over 25%, and both companies have current dividends topping 6.5%. Notwithstanding the positive financial points, it is clear that the Telecoms have lost favor with Wall Street. With pummeled stock prices and high yields, maybe it is time for the institutions and hedge funds to realize investment value in these stable cash-cow giants.

C. Cohn

Telecoms Decline As The Market Climbs

The major indexes rallied over the last six sessions, approaching twelve month highs established in September. This was bolstered by the first government to raise interest rates in over a year - the Australian Central Bank, and Alcoa, the traditional first Dow component to report earnings, beating analysts expectations by sixteen cents.

The Telecoms did not participate in the week long rally - why? On Wednesday, AT&T surprised the industry by announcing that they will allow Apple’s iPhone to carry VOIP (Voice Over Internet) applications, such as Skype, over AT&T’s 3G Network. This was applauded by analysts and financial journalists, but the public reacted adversely, dragging down the sector each day since the announcement was made. The investor knee-jerk reaction was due to the concern that long distance earnings will suffer, because customers will use Skype to make overseas calls for free, avoiding the regular per minute charge that is a lucrative source of income.

The same kind of reaction occurred when AT&T decided to subsidize the purchase of the iPhone, resulting in an upfront hit to their revenue stream. This strategy and the opening up of voice Internet applications on their network are both designed to meet customer demands and more importantly, as a long term goal, attract new subscribers. After all, you cannot use the iPhone in this country, unless you sign up to AT&T, and you will not be able to use Skype on your cell phone for international calls, unless you become a subscriber as well. Currently, Verizon and the other Telecoms are not offering this service, so AT&T has a jump on the competition. It is even rumored that AT&T may partner with Google in the near future, to further solidify integrating Internet applications with wireless phones.

Although there is stiff competition and declining revenues in the wire-line area, the major Telecoms have been consistently performing well through the recession. Last quarter, AT&T earned $3.2 Billion, with total revenues of $30.7 Billion. Verizon earned $3.1 Billion with revenues of 26 Billion. Not many companies can make such a claim during these tough times. They are basically cash cows with many sources of income and increasing wireless bases, both consistently paying dividends, with current yields over 6%. Try getting a return like that at your local bank!

Earnings season is upon us and AT&T will be reporting on October 21 - Verizon on October 26. We will be watching closely to see if they can continue their successful track records.

DISCLOSURE: Charlie Cohn owns shares of AT&T and Verizon common stock.

Click Here for Telecom Earning (Oct. '09)

C. Cohn