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Why AT&T is In the Red after Beating Expectations

AT&T
AT&T

AT&T reported a record number of iPhone activations— 5.2 million — blowing past Wall Street estimates. This is one of the last quarters when AT&T will have exclusive access to Apple's iPhone, so all these new subscribers locking themselves in for a 2-year contract is a positive.

Earnings were right in line with projections — 55 cents per share excluding one-time items — while revenue bested expectations, growing 2.8% over last year to $31.58 billion.

So why is AT&T trading fractionally lower?

It's partly because of the long-anticipated loss of AT&T's exclusive with the iPhone. But it's also because of wireless service margins, which fell to 37.6 percent from 40.3 percent a year ago. This drop can be attributed to the fees AT&T pays Apple to keep the price of the iPhone down. And in the fourth quarter the company will feel more pressure on these margins because of expenses to integrate its recently-acquired Alltel customers.

To assuage these concerns AT&T's Chief Financial Officer Rick Lindner said he expects the company's wireless margins to rebound in the fourth quarter.

Even with the additional Alltel-related costs, he said on the earnings call that margins are still on track to continue. And while the company's business revenues declined 3.9 percent in the quarter, the company says this business is stabilizing.

In the wireline business, Lindner says service margins should fall, but that will be a result of seasonal trends. CEO Ralph De La Vega says that transitioning the wireline business from being about voice customers, to its U-verse TV service is going "very well," and that they expect those businesses to get more efficient.

De La Vega expressed confidence about growth in both iPhone and Droid customers, waxing on about the fast pace of innovation in the space. He's certainly far more confident than many Wall Street analysts, who expect AT&T to rapidly lose ground to Verizon as soon as it starts selling the iPhone. The question for investors is whether the impact of that long-awaited change is already priced into both stocks.

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