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AT&T Growth Driven by Smartphones

AT&T's smartphone base is increasing faster than its overall wireless subscriber base, driving average monthly revenue per user up.
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is one of the biggest mobile operators in the U.S. with more than 85 million subscribers. The company primarily competes with


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in the mobile business. AT&T recently released its earnings for the first quarter of 2010, based on which we have updated our price estimate from $37 to $38.

The company reported 22% growth in the monthly revenue that it earns from its subscribers. The company's ARPU (average monthly revenue per user) for postpaid subscribers (e.g. subscribers on monthly plans) includes charges associated with both voice and data (internet, SMS) service.

We estimate that AT&T's mobile phones and plans business, which includes both voice and data services, accounts for about

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43% of the $38 Trefis price estimate for AT&T's stock.

We believe that data usage will be a key component for driving future wireless revenue growth for the company as the voice component of its ARPU continues to decline. You can modify the forecast below to see how AT&T's stock price depends

The key factors driving data ARPU growth for AT&T are increasing penetration of smartphones and a growing base of e-readers and other connected devices. Below we discuss them in detail:

Fast Growth in AT&T Smartphone Subscribers

AT&T's smartphone base is increasing faster than its overall wireless subscriber base, driving data ARPU up. About 50% of AT&T's postpaid subscribers use smartphones (or integrated devices). Over the years, this percentage has been expanding, driven by the increasing popularity of smartphones and a large number of iPhone activations. There were about 2.7 million iPhone activations in the first quarter of 2010 on AT&T's network out of which, about one-third were new subscribers.

It is estimated that about 70% of new subscribers that are joining AT&T are smartphone users. Smartphone users tend to have 70% to 80% higher ARPU than normal phone users.

About 60% of AT&T's smartphone users are on family plans with the rest being on business related plans. These types of subscribers tend to have lower churn levels meaning that AT&T is better able to retain them as customers. With ever increasing smartphone user base and lower churn levels, AT&T is sustainably driving data ARPU and overall wireless revenue growth.

Growing Base of E-readers and Other Connected Devices Boosting ARPUs

AT&T experienced strong subscriber gains in the first quarter of 2010. It added about 1.9 million net wireless subscribers in the quarter making it AT&T's best first quarter in terms of subscriber additions. Interestingly, the high amount of subscriber additions was driven by an increase in connected device subscribers of more than 1 million. Connected devices include e-readers, alarm monitoring and other devices.

Although ARPU for connected devices is typically much lower than the ARPU for smartphones, connected devices contribute positively to overall ARPU due to the fact that they are not used as a replacement for smartphones. Instead, smartphone (and feature phone) users tend to subscribe to AT&T's data services for such devices thereby increasing the total amount of money they spend on data through AT&T.

AT&T maintains that such connected devices will be one of the key growth area for the company as they have higher margins and lower churn.

For additional analysis and forecasts, here is

our complete model for AT&T's stock.


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