AT&T’s wireless results last quarter were the mirror image of those the quarter before. In Q1, AT&T (NYSE:T) saw a meager increase in wireless data revenues but saw a healthy expansion to its wireless operating margins. In Q2, the opposite occurred: AT&T’s data revenues shot up $200 million and its data ARPU’s increased by $1.24 per month, but its margins dropped back down below 40% to 38.3%. The explanation for this flip-flopping? The Apple (NASDAQ:AAPL) iPhone, of course.
The iPhone apparently is just as powerful a financial mechanism as its as technological one. When AT&T sells a lot of them, wireless data subscriptions soar, but it also must eat massive costs as it subsidizes the price of each phone. When AT&T launched the iPhone 3G last year, it sold 4.5 million devices in just over two quarters, causing its margins to crater at 33.5%. But by the first quarter, those millions of new subscribers–and there $30 a month data plans–pushed margins back up to 40.9%, despite AT&T having to absorb the cost of 1.6 million new iPhone activations that same period. With its expanding pool of data revenues appearing to balance out quarterly subsidy costs, AT&T declared the problem over, even going so far as to say its operating margins would remain above 40% for the year.
But AT&T introduced the iPhone 3G S, which spurred 2.4 million iPhone sales last quarter. The resulting customer acquisition costs sent its operating margins down below 40%, which contributed to AT&T’s 15% profit decline. That put chief financial officer Rick Lindner in the odd position of having to defend the new iPhone’s success to a bunch of financial analysts, who care about niggling things like profits. During AT&T’s Q2 earnings call, Lindner said even AT&T was caught off guard by the enormous popularity of the new iPhone, and if the demand keeps up it will be very difficult to keep AT&T’s margins above 40%.
So is this AT&T’s fate, to be so successful selling iPhones it starts reporting losses? Not exactly. Eventually the millions of activations every quarter will die down as everyone who wants an iPhone gets one–or when AT&T loses its exclusivity–at which point AT&T will have two things going for it: a) it won’t be eating massive quarterly subsidy costs, and b) it’s data revenues will have practically doubled from all of those previous activations. At that point, maybe AT&T will pass the curse on to Verizon Wireless and the new ‘iPhone 4G’.