Apple Full Steam Ahead
AT&T ( T) is urging Wall Street to think about it as more than the Apple ( AAPL) iPhone. Executives on an earnings call with analysts Thuresday declined to reveal when the exclusive iPhone sales agreement ends. It's next June, for those keeping score. But instead of fussing about the future of a phone deal that accounts for nearly 9 million, or 11% of its 79.6 million subscribers, Ma Bell pointed out that it has loads of other smartphones owned by family plan members and business users. AT&T says this emphasizes the "stickiness of this base."
The translation: AT&T is a leader in the smartphone race against rivals Verizon ( VZ), Sprint ( S) and Deutsche Telecom's ( DT) T-Mobile. And smartphone customers are loyal. The alternative read: Smartphone customers might be more loyal to their phones than to their carrier. The big loyalty test will come as early as next year if and when a new version of the iPhone goes to Verizon, you could say. And until then, AT&T is shelling out an estimated $300 per iPhone, putting a drag on profits. AT&T had hopes of low 40% margins on operating income before depreciation and amortization or OIBDA. But the company took a big hit on iPhone expenses, which dragged margins down to 38.3%. Executives on the call said the iPhone success may continue to crimp profits this year. "If iPhone volumes are strong in the next quarters, it's going to be more of a challenge to drive margins up over 40%."
The takeaway there is that AT&T will enjoy hot, though less profitable, iPhone growth until it loses the iPhone. And then, to ease the shock of growth's sudden departure, margins will at least look better.