AT&T Surfs the 4S Wave to Record Smartphone Sales This Year

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AT&T (NYSE:T) announced Monday that it is on track to comfortably beat its earlier smartphone sales record of 6.1 million in a single quarter having already sold around 6 million smartphones with one more month to go for the quarter. [1] The company acknowledged that the huge surge in demand was mostly due to the iPhone 4S, 1 million of which it had managed to activate in the first five days of its debut itself in October this year. This is in spite of the phone now being available on the other two major U.S. carriers, Verizon (NYSE:VZ) and Sprint (NYSE:S) as well. AT&T also gave an LTE update saying that they expect to meet their earlier target of covering 70 million people with its LTE network by the year-end.

See our complete analysis for AT&T stock here

The huge demand that the iPhone 4S has seen is due to the huge pent-up demand from the last quarter when customers had postponed an iPhone purchase anticipating the launch of a new model this quarter. Canaccord Genuity recently came out with a report saying that the 4S continued to be the best selling smartphone across all the carriers that sell the phone for the second month running. [2] Despite heightened competition for iPhone customers from Verizon and Sprint and concerns about deteriorating customer service, AT&T has managed to hold its own and a record smartphone sales will help it push for more postpaid customers this quarter.

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Near-term hit to margins

However, the huge subsidies that AT&T has been giving on its smartphones to drive their sales will hit its margins in the near term. For example, a basic model of the iPhone 4S costs around$650 for the carriers who then subsidize it heavily to sell for $199. In return for the subsidy, carriers ask customers to enter a long-term contract for their postpaid plans. AT&T also warned about the margin hit, noting that “these record smartphone sales are expected to have a near-term negative impact on margins and therefore earnings.”

ARPU levels should rise in the long run

The subsidies will pay off the in the longer run though by ensuring a long-term patronage for its higher margin postpaid data plans, thereby reducing churn and bringing in steady cash flows. Smartphone users are typically heavy data users as well, which means that the average revenues generated per user will also increase. It therefore augurs well that the carrier has also been trying to improve its data speeds by expanding its LTE network into newer markets and bringing out more and more LTE phones next year.

In light of the increasing smartphone sales, we have a $38 price estimate for AT&T stock, which is about 30% above market price.

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Notes:
  1. AT&T press release, December 7th, 2011 []
  2. iPhone 4S best-selling phone at three top U.S. carriers in November, Samsung sales strong, BGR.com, December 6th, 2011 []