AT&T (NYSE:T) which competes primarily with Verizon (NYSE:VZ) and Sprint (NYSE:S) in the wireless business, recently reported earnings for the second quarter of 2010. One notable trend was that AT&T’s wireless gross margins improved despite a record 3.2 million iPhone activations.
AT&T pays Apple a significant subsidy for every iPhone device that it sells, which tends to depress the company’s overall wireless margins. Factors driving gross margin growth include the increasing proportion of high-margin smartphone users in AT&T’s wireless customer base, as well as the company’s small but growing business providing service to connected devices such as e-readers and alarm monitoring systems.
If AT&T can continue to improve its margins, we forecast a potential 3% upside to the $37.91 Trefis estimate for the company’s stock price Our analysis follows below.
Smartphones, connected devices drive revenue and margin growth
As more customers adopt smartphones, AT&T’s average revenue per customer (ARPU) is rising. Last quarter, the company added about 2.9 million 3G smartphones, iPads and other so-called postpaid integrated devices to its network. Such devices generate about 70% higher ARPU compared to normal cellphones.
AT&T also added some 900,000 e-readers, alarm monitoring systems and other connected devices during the quarter. Although these devices have lower ARPUs than smartphones, their margins are typically higher.
Gross margin forecast
We currently expect AT&T’s wireless gross margins to rise slightly in 2010, to 60.1%, and decline slowly thereafter. You can drag the trend-line in the chart below to create your own gross margin estimate and see how it impacts AT&T’s stock price.
If the smartphone and connected device markets allow AT&T to sustain its current margins, however, the stock could see an upside of close to 3%.
You can see the complete $37.91 trefis price estimate for AT&T’s stock here.
