Despite a profit slump of more than 9%, investors were warming to AT&T ( T) stock Wednesday after the firm posted solid first-quarter results. AT&T's shares rose $1, or 3.96%, to $26.28, as the tech bellwether appeared to side-step the worst of the recession. Despite missing analysts' revenue forecast and seeing its profit dip 9.7%, AT&T comfortably beat Wall Street's earnings estimate, and is enjoying improved margins. The telecom giant reported earnings of 53 cents a share on net income of $3.1 billion, compared to 57 cents and $3.5 billion in the prior year's quarter, well above analysts' estimate of 48 cents. Crucially, however, AT&T broke the 40% margin barrier for its wireless business, which positions the firm well for future growth. "AT&T reported a strong Q1 today, with better-than-expected margins on strong cost controls more than offsetting slightly weaker-than-expected revenues," wrote Craig Moffett, an analyst at Bernstein Research, in a note. The telecom firm's wireless margin has typically been dented by its Apple ( AAPL) iPhone subsidies, and analysts had expected a margin of just 37.5%. Speaking on a conference call early Wednesday, AT&T CFO Rick Lindner described the wireless margin as a "pleasant surprise" and predicted that this figure would stay in the low 40% range for the rest of the year. "Dilution from the iPhone 3G initiative is down significantly," he said. "The good news is that as we drive growth in wireless, we're also delivering strong margins." Even AT&T's revenue, which was flat year over year at $30.6 billion, and came in below Wall Street's forecast of $31.8 billion, was shrugged off by Bernstein's Moffett.
"Overall, the results are likely to draw a sigh of relief," he said. "Yes, revenue growth is now zero or less, but AT&T's results show that the company is well-positioned to handle the recession from a cost-management perspective, and equally well-positioned to emerge stronger when the recession eventually ends." As expected, wireless was the locomotive behind AT&T's quarter, with the company's wireline operations feeling the strain of access line losses. Despite enjoying growth of 38.6% in wireless data revenue, the Dallas, Texas-based firm saw its wireline revenue decline 5.4%. This was worse than the 4.6% year-over-decline in the prior quarter. AT&T's U-verse Internet and TV offering, however, offset some of this loss, and helped drive 16.4% revenue growth in wireline IP data revenue. By adding 284,000 new U-verse customers during the first quarter, AT&T is laying the foundations for future growth, according to Lindner. "One of the exciting things about U-verse is that it's coming into its own as an integrated platform," he said, explaining that Voice-Over-IP services have been launched for 86% of the U-Verse network. "The potential of U-verse is not just in video, but in a set of integrated services on the IP platform." The CFO nonetheless admitted that it could be some time before the economic climate gets back to where it was. "I can't say that in the first quarter we have seen significant changes in direction," he said, in response to an analyst's question. AT&T, which competes with Verizon ( VZ), Sprint Nextel ( S), and Qwest Communications ( Q), has promised low-single digit revenue growth through 2009, but did not offer specific second-quarter guidance. Describing the firm's results as a solid quarter in tough economy, Lindner said that AT&T will continue to invest in key growth areas such as wireless, advanced business services, and U-verse.