AT&T Earnings Soar on Wireless Gains

Wireless once again has proven to be AT&T Inc.’s cash cow and the carrier will rely on its new spectrum holdings to power that trend.

On Tuesday, AT&T reported its first quarter earnings, highlighting continued strength in wireless and gains in wireline, even with residential landline losses.

AT&T racked up $3.5 billion in profit. That’s compared to net income of $2.8 billion a year earlier and $3.14 billion in the fourth quarter of 2007. The wireless unit contributed the most to the bottom line – it recorded $11.8 billion in sales and added 1.3 million net users for a total of 71.4 million, more than any other carrier in the United States.

Wireless fared well thanks to AT&T’s exclusive contract with Apple Inc. for the iPhone and because of ever-increasing demand for mobile data services such as Internet and e-mail. Wireless data sales shot up more than 57 percent compared to the first quarter of 2007.

But AT&T isn’t taking its advances for granted. The Texas-based conglomerate next will upgrade its network, using its spectrum holdings, to better compete with cablecos – they keep luring voice, video and data subscribers away from the telcos.

First, in 2008, AT&T will integrate its 850MHz spectrum with its 3G network. AT&T was using the 850MHz band for TDMA; it cut off 330,000 customers from the outdated service earlier this year.

Then, in 2009 and 2010, AT&T plans to boost speeds up to 28mpbs with HSPA Release 7. The outlook beyond 2010 calls for the carrier to use the Long-Term Evolution, or LTE, protocol. That will accommodate speeds up to 100mpbs, Rick Lindner, senior executive vice president and CFO of AT&T, told analysts on a conference call. CEO Randall Stephenson was conspicuously absent from that meeting.

All of the upgrades will make use of AT&T’s expanded spectrum coverage, from its Aloha Partners LP buyout to its winning bid for the B Block in the FCC’s recent spectrum auction. The licenses reside in the 700MHz band and provide “a terrific foundation for future wireless growth,” Lindner said.  

Yet even as AT&T preens over its wireless developments, it isn’t snubbing its wireline units. Landline revenue did slump from the defection of 1.6 million residential users, but sales climbed in the enterprise, wholesale and U-verse divisions.

For example, AT&T landed plush contracts with oil giant Shell and coffee distributor Starbucks. Those deals contributed to a 22.9 percent increase in enterprise IP data revenue from services including VPN and hosting.

The carrier also predicted that its wholesale unit will stabilize in the second quarter. The division took a loss, but less than in previous quarters. Declines went from 7.3 percent in the first quarter of 2007 to 3.9 percent. Lindner said improvements will show now that consolidation has slowed and government-mandated UNE-P pricing no longer exists – AT&T now charges commercial rates for wholesale access. Lindner further said the wholesale numbers will improve when concessions from the BellSouth merger lift, which, at the earliest, will happen at the end of the year.

Concessions include not filing for forbearance, as Qwest and Verizon keep doing, and not charging companies like Google Inc. extra for carrying their traffic.

Finally, AT&T is plowing ahead with its U-verse project, whose spending and rollout have been revised from original expectations of widespread availability back in 2006. The company added 148,000 U-verse customers in the first quarter and now serves 379,000.

AT&T shares closed higher on Tuesday, up 22 cents at $37.81.

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