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April 22, 2008

AT&T: Steady As She Goes

AT&T reported very solid 1Q08 results. Almost every key metric matched analyst estimates with the exception of wireline line loss which continues to accelerate. Guidance was restated and the numbers suggest that the company will have little trouble meeting 2008 estimates for EPS, revenue, free cash flow, and subscriber growth. Most importantly, there was no indication that the economy is taking an accelerating toll on T's business. Challenges on that front remain and competition across all business lines is intense but the shares remain attractive as a defensive investment with offensive characteristics. I think in a decent market the shares can trade back in the $40s over the next couple of months.

The highlight of the quarter was wireless. Service revenues grew 17% and margins expanded a better than expected 280 basis points. Gross and net adds met expectations and data revenues continued to ramp, up 57%. Churn remained stable with slight improvement in prepaid. On the call, management noted that consumers with integrated devices (smart phones) had ARPU's more than twice the corporate average. ARPU continued to grow in 1Q, up 5%, to over $50. Wireless represented 40% of total revenue so the impact of double digit growth is increasingly important and helpful for T to drive mid-single digit or better total corporate revenue growth.

The other highlight was Enterprise which returned to positive revenue growth driven by data applications. Management said it had seen little impact from the economy so far and did not take the bait in questioning to discuss trends in financial services.

The consumer business continues to be pressured by falling access lines (count me for eliminating two in 1Q)....

....Access line loss accelerated to 7.7%, worse than analyst estimates. U-Verse continues to ramp with more subscribers added this quarter on a sequential basis. Management indicated they were having some success selling wireless/TV bundles. Margin expansion thanks to merger synergies continues to provide growth for this business on the operating income line. The company announced another round of job cuts last week which should extend the margin story into 2009.

Overall, I have nothing to complain about this quarter. The great fears that surrounded T earlier this year when management noted the economy was clipping wireline growth have receded. The shares reflect that risk even after the recent run up so I think T remains a good place to invest. You'll get downside protection but also can participate in upside given the growth businesses that reside within T. T shares are another investment that are high on my wish list for Northlake client accounts.

Posted by Steve Birenberg at April 22, 2008 10:14 AM in Telephone