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April 22, 2009

Clean Beat for AT&T -- Shares Headed Higher

AT&T reported better than expected 1Q09 results. The upside was driven by margins in both the wireline and wireless business segments. Cost control and better than forecast benefits from the iPhone were the drivers as revenues fell a bit shy of estimates. Overall, EPS of 53 cents beat the 48 estimate handily. It was a clean beat with no unusual one-time benefits. Morgan Stanley even noted that the tax rate was the highest since 1Q07.

Guidance was maintained but clearly looks conservative. Most of the conference call Q&A centered on margins. Analysts clearly were trying to determine why margins won't exceed current guidance and estimates. Management's only real pushback was the uncertain revenue environment but even here I though it was interesting that management now seems to fully understand the magnitude and sources of the revenue pressure. The street will probably play it safe and maintain estimates while noting they have upside. I fully expect the 2009 EPS number to eventually go higher.

At the subscriber level, wireless net additions were better than expected as were U-Verse TV and broadband subs. Wireless voice ARPU was a bit light but data ARPU continued to grow strongly, up almost 40%. Data now represents 27% of total wireless ARPU. Churn was low. The iPhone is going gangbusters with quicker and larger financial benefits materializing. This is a substantial source of EPS upside for 2009 as the original guidance was for heavy dilution form handset subsidies.

The only significant shortfall was in enterprise revenues which fell 4%. This was at the high end of expectations.

With 2009 EPS going higher and growth initiatives in wireless, U-Verse, and business data in place, I think T shares can increasingly look ahead to a resumption of growth in 2010. EPS could rise toward to $2.40-$2.50, good enough to push the stock into the $30s without stretching the P-E multiple. The stock gets further support from the very secure 6% plus dividend yield. The dividend is almost certain to go up again next year.

T shares continue to offer one of the best offense/defense combinations. Offense comes from growth business in wireless, business data, and U-Verse. Defense comes form the dividend, a strong balance sheet, and high free cash flow. New this quarter to the both sides of the ball is superior cost controls.

There is still the possibility of a strike on the wireline side and the company faces $10 billion in debt refinancing. The strike is a risk only if is prolonged and nasty enough to generate front page headlines. The refinancing should not be a problem given the company's free cash flow and the significant recent narrowing of spreads on the outstanding debt.

Disclosure: AT&T is widely held in Northlake client accounts including Steve Birenberg's personal accounts.

Posted by Steve Birenberg at April 22, 2009 12:33 PM in Telephone