ATT sidesteps the soft spots

By Scott Moritz, writer

Phone giant AT&T (T) — No.10 on the Fortune 500 list — boosted first-quarter results by finding enough growth in segments like wireless to help offset its weakening core business.

The shrinkage in Ma Bell’s total phone lines continued in the first quarter with land — or access – lines dropping 7.7% from a year ago as customers fled to rivals or simply canceled their home phone service.

On a conference call with analysts, CFO Rick Lindner said the company “still sees softness in access lines,” but he added that the impact was offset by new broadband and video customers.

Lindner now says this balancing act “supports our premise that our business continues to be more defensive than most when the economy is under stress.”

For example, Ma Bell’s sputtering video-over-the-Net offering, dubbed U-Verse, is finally starting to stem customer defections to competing services offered by cable companies such as Comcast (CMCSA) and Time Warner Cable (TWC). AT&T added 148,000 new U-Verse customers in the first quarter and says it is on target to reach 1 million subscribers at year-end.

AT&T was one of the first telcos to wave the warning flag on consumer spending. In January, the company reported that it saw “softness” in some regions with high foreclosure rates. The weak housing market comes amid an acceleration in phone and high-definition TV competition from cable and satellite service providers.

Asked if he could comment on the health of the market Lindner declined, saying he chose “not to enter the debate on the state of the economy,” and will let AT&T’s “numbers speak for themselves.”

For the first quarter, AT&T posted an adjusted profit of 74 cents a share, up from the 65 cents a year ago and in line with analysts expectations. Sales for the quarter were $30.7 billion, up from $28.9 billion at the same time last year, and also in line with the Street.

In wireless, the San Antonio, Tex.-based company added 1.3 million net new users, down from the 2.7 million in the prior quarter, but more than the 1.19 million that signed on a year ago. The net gain in retail post-paid subscribers (users who have signed on with one or two-year contracts) was 705,000. That number is below the 1.7 million logged in the Christmas quarter and up slightly from the 678,915 users that were added a year ago.

Churn, the measure of monthly subscriber cancellations remained flat at 1.7%, both sequentially and for the year. Post-paid customer loyalty remained steady at 1.2% in the quarter.

AT&T managed to squeeze more profit out of its wireless business in the first quarter. Adjusted operating income was $3.5 billion, up from $2.5 billion a year ago. Some of the improvement came from a 2% increase in the average revenue per user, or ARPU, which came in at $50.18, as wireless customers racked up more data charges for messaging, e-mail and Net access.

On the iPhone front, where AT&T serves as the exclusive sales partner for Apple (AAPL), the company said it saw “stable demand” in the first quarter. About 40% of iPhone buyers are new to AT&T, and the ARPU for iPhone customers was more than $95 a month — considerably higher than for the average AT&T customer.

But total access lines continued to decrease. Total lines fell 7.7%, to 60.4 million, from 65 million a year ago. That pace is slightly slower than the overall 8.1% line loss rate in 2007.

One area of massive growth that caught little attention was AT&T’s total debt, which grew 15% to $73.4 billion from $64 billion a year ago.

AT&T shares were up a quarter to $37.84 Tuesday.