AT&T Wireless Beats Estimates, but With Mixed Metrics

Wireless carrier reports an unexpected profit, but its prepaid base still presents problems.
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AT&T Wireless

(AWE)

is still struggling against the pull of prepaid customers.

The wireless network operator reported third-quarter earnings Tuesday morning, beating the Street's $3.2 billion revenue predictions with $3.5 billion in revenue and posting an unexpected 3 cents a share profit rather than the anticipated 2 cent loss, as compiled by Thomson Financial/First Call.

The surprise profit came in the form of income related to AT&T Wireless warrants held by

NTT DoCoMo

, according to CFO Joe McCabe, not the company's core business. AT&T Wireless stock was up more than 5% in morning trading, going as high as $13.85.

Wireless carriers would like to think that revenue and earnings projections are for older, slower industries, however, and favoritewireless metrics showed AT&T Wireless to be lacking. Profit's second cousin,

EBITDA, dropped to $718 million in the third quarter from the second quarter's $765 million. AT&T Wireless hovered in the range of Street expectations by adding 748,000 new subscribers, a solid step up from the second quarter's 668,000 additions, for 17.1 million total customers. But the amount of revenue it got out of each of those new subscribers fell from $63.80 last quarter to $63.60.

AT&T Wireless CEO and Chairman John Zeglis attributed the drop in performance to a "more intense focus on higher value segments" and said the company's population of less-lucrative prepaid customers dropped as a percentage of the customer base in the third quarter.

Meanwhile, the money AT&T Wireless spent to acquire new customers was reduced slightly from $333 to $332 in the quarter, and the amount of time subscribers spent calling went up from 383 minutes in the second quarter to 389 in the third quarter. Nonetheless, churn headed in the wrong direction, with the rate increasing from 2.9% in the second quarter to 3.1% in the third quarter.

AT&T Wireless President and CEO Mohan Gyani explained that churn among higher-paying postpaid customers held steady, but the flaky prepaid base dropped out in greater numbers. Investors have been harping on the prepaid population's drag on AT&T Wireless' results for several quarters, andrepentant management detailed a variety of ongoing measures designed to reduce the carrier's prepaid segment.

To meets its goal of 20% subscriber growth in 2001 over 2000's 15.1 million base, AT&T Wireless expects to enroll 900,000 to 1 million new customers in the fourth quarter. It spent $1.1 billion in the third quarter on network enhancements and upgrades of several cities from an older TDMA network to data-friendly 2.5G GSM/GPRS networks.Management says the company is on track to upgrade 40% of its network to GSM/GPRS by the end of 2001. AT&T Wireless will spend $2 billion in thefourth quarter to improve capacity of its existing networks and continue the upgrade to 2.5G as part of $5 billion in total capital expenditure spending goals for2001.

CFO McCabe said AT&T Wireless was sticking with its forecast for mid-60% growth in EBITDA from 2000 to 2001, which would require $909 million in fourth-quarter EBITDA to manage a $3.1 billion full-year finish.

In the bigger corporate picture, AT&T Wireless used its second quarter as an independent company to decide to shed the wireline business unit it inherited from parent company

AT&T

(T) - Get Report

. The company expects to be able to sell some of the intellectual property involved in the last-mile connectivity service, but Zeglis said the company will take a $1.3 billion charge in the fourth quarter to exit the business, $300million of which will come out of cash to pay for severance of contracts and other transitions. Additionally, the company is beginning to solidify plans to fund

TeleCorp's

(TLCP)

operations as the two companies pursue merger plans.