AT&T's Wireless Customers Increase, But Profit Falls?

Today, AT&T reported that its third-quarter profit fell 1.2%, year-over-year. Yet, a few days ago, Apple reported a record quarter, due in large part to fantastic iPhone sales. I found this confusing. Since AT&T is the only U.S. iPhone service provider, how could its profit have fallen?

First, here's the raw news blurb, via Bloomberg:

Sales fell 1.6 percent to $30.9 billion, AT&T said today in a statement. AT&T added 2 million wireless users, the biggest third-quarter figure in its history, with 1.4 million signing up for contracts.

A record quarter for wireless users, but sales fell? To understand this, one need look no further than the income statement AT&T provides (opens excel doc). Here's an excerpt:



The first line is the good news. Wireless service revenue has increased by 10.2% year-over-year. No surprise there. The third line is also good news, with data (wireline) revenue increasing by 4.6%. The rest, however, is bad news. Voice (wireline) sales declined by 14.7%. Directory assistance and other operating revenue also declined. Wireline voice is the real killer though. Its decline alone nearly erases the entire gain from wireless and data.

I think this shows that AT&T has a pretty significant problem. Even with a record number of new wireless users, their decline in wireline voice revenue not only wipes it completely away, but also kills a hefty increase in wireline data sales.

Clearly, data and wireless are the product lines where AT&T would hope to increase its revenue going forward, but I find it pretty implausible that they can keep having record quarters like this indefinitely -- especially if Apple finally decides to end AT&T's iPhone exclusivity deal. Yet, their wireline voice revenue will likely continue to decline, wiping out most sales growth in their two positive segments.

And revenue isn't even the whole story. If you dig deeper into the segment net income results (opens excel doc), the profit story also looks grim. Wireline net income (which includes better data sales) was down 30% year-over-year. Similar to sales, that wireline profit decline of $824 million almost entirely neutralizes the $980 million increase in wireless net income, which was 41% better than in Q3 2008.

To me, this indicates that AT&T might have to raise its wireless and/or data prices before long. Having a record quarter in wireless subscribers but a decrease in net income isn't a sustainable path. Of course, if Apple decides to no longer force iPhone buyers to use AT&T's services then its terrific wireless growth will probably come to a screeching halt. At that time, I'm not sure what AT&T can do.