AT&T Reels In 202,000 U-verse TV Customers

In what is historically a seasonally weak period for cable TV, AT&T added 202,000 U-verse TV subscribers in the second quarter lifting its total to 3.4 million, and while it gained 439,000 U-verse broadband subs it lost 451,000 traditional DSL customers.

With 3.4 million U-verse TV customers -- up 36% from 2.5 million a year ago -- AT&T is now the eighth-largest pay-TV provider in the U.S., moving ahead of Cablevision Systems. The 202,000 quarterly net adds slightly beat the Wall Street consensus of 199,000.

U-verse services now represent a $6.5 billion annual run rate, up from $6 billion the previous quarter, AT&T chief financial officer John Stephens said on an earnings call Thursday. The company said U-verse revenue grew 57% from the year-ago period, and 10.7% sequentially.

"U-verse has transformed our consumer business," Stephens said, adding that the advanced IP services were also gaining momentum among small business customers.

On the wireless front, AT&T said it continues to expect its bid to acquire T-Mobile USA for $39 billion to close in the first quarter of 2012, with general counsel Wayne Watts saying the telco was "comfortable" with the review process. The company still needs regulatory approval from the Federal Communications Commission and Department of Justice.

AT&T's U-verse network now reaches 29 million living units, and the telco said it is on track to complete the U-verse network buildout -- to reach 30 million -- by the end of 2011. Overall penetration of eligible living units is 15.5%, while penetration in areas marketed to for 36 months or more is 25%, according to the company.

At 30 million homes, U-verse will have coverage of about 50% of the residential living units and 33% of businesses in its footprint.

More than three-fourths of AT&T U-verse TV subscribers have a triple- or quad-play option, and the average revenue per unit for U-verse triple-play customers in Q2 2011 was $170, up 8.3% year over year.

But AT&T's legacy businesses continued to suffer. The higher-speed U-verse DSL product gained 439,000 net subscribers to reach a total of 4.1 million, but that was not enough to offset a net loss of 451,000 legacy DSL connections. At the end of the second quarter, AT&T had 16.5 million total wired consumer broadband connections, up 3.3% over the past year but essentially flat -- down by a net 12,000 subscribers -- from the first quarter of 2011. AT&T said the sequential decline was "largely due to seasonality."

As Sanford Bernstein senior analyst Craig Moffett noted in a research note, "Earlier this week at a regulatory conference, AT&T CEO Randall Stephenson called legacy DSL 'obsolete.' Now we know why."

On the earnings call, CFO Stephens said, "The reality is we had over 400,000 customers convert from DSL to higher-speed U-verse broadband, including some small-business customers. We're transitioning the business... to the next generation of services."

In non-U-verse markets, Stephens acknowledged that on broadband "we are seeing some challenges in those markets." He said the long-term response to that will be deploying LTE. With T-Mobile, "we'll have 97% of the country covered; we'll be able to if necessary to provide that kind of service to them. I think that's the longer-term answer."

Meanwhile, as has been the trend the last several years for telephone companies, AT&T's consumer voice lines dropped 11.8% year-over-year, to stand at 22.7 million at the end of June. AT&T's satellite connections, through its reseller deal with DirecTV and now-expired arrangement with Dish Network, fell 9.8% year over year, to 1.85 million connections.

AT&T's total wireline revenue for the second quarter was $14.9 billion, down 3.2% versus the year-earlier quarter and flat sequentially. Wireline operating income margin was 13.1%, down from 13.2% in the year-earlier quarter but up from 11.5% in the first quarter of 2011, with AT&T citing improved consumer and business IP data revenue trends and cost-cutting initiatives helping to partially offset decline in voice revenue.

Total wireline consumer revenue was $5.4 billion in the quarter ended June 30, 2011, up only 0.1% year over year, while AT&T touted the fact that increased U-verse penetration and growth of triple- and quad-play options drove 21.9% year-over-year growth in IP revenues from residential customers (broadband, U-verse TV and U-verse Voice) and 5.6% sequential growth. Consumer IP revenues now represent 49.2% of that segment (up from 40.4% in the year-earlier quarter).

On wireless, AT&T posted a net gain in total wireless subscribers of 1.1 million, to reach 98.6 million in service. The telco said it had record growth in "branded computing" subscribers, adding 545,000 tablets, aircards, MiFi devices, tethering plans and other data-only devices in the quarter to reach 4.0 million. Total wireless revenue, which includes equipment sales, was up 9.5% year over year to $15.6 billion.

Moffett wrote that "AT&T appears to be adapting to the loss of iPhone exclusivity [to Verizon Wireless] relatively well, with stable churn rates and still passably strong net subscriber growth, and with in-line or better results everywhere else across the Wireless business."

Overall, AT&T's consolidated revenue for the second quarter was $31.5 billion, up 2.2% from the year-earlier quarter, while net income of $3.6 billion was down 10.3% from $4.0 billion last year. According to AT&T, earnings per share for the second quarter of 2011 matched earnings per share for the year-ago period excluding the Telmex Internacional transaction.

Citing increased wireless demand, AT&T increased its forecast for capital spending to "in the $20 billion range" for full-year 2011. Previously, the telco expected capex in the low-to-mid $19 billion range.

AT&T's total employee base was 258,870 at the end of June, down 5% from 272,450 in the second quarter of 2010.