AT&T Inc reported a net loss of cellphone subscribers in the first quarter as it lost market share to bigger rival Verizon Wireless, sending its shares down about 2 percent.
As a result AT&T's revenue missed Wall Street expectations as its subscriber growth was driven by tablet computer users who pay lower monthly fees than phone users.
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Since most U.S. consumers already have smartphones, the No. 2 U.S. mobile service provider and its rivals are rushing to put wireless connections in everything from tablet computers and consumer electronics to medical devices and home security systems.
But while customers with devices like tablets are less costly to attract than smartphone users, which require hefty subsidies, tablet customers bring in less revenue, raising analyst concerns about AT&T's prospects for top-line growth.
"It's going to take so many connected devices to make up for losing a phone subscriber," said Nomura analyst Michael McCormack, adding that slowing phone customer growth is also a concern for smaller rivals such as Sprint Nextel and T-Mobile USA, a unit of Deutsche Telekom.
AT&T maintained its target for 2013 overall revenue growth of 2 percent and said it still expects net additions of phone customers for the full year due to a boost in sales in launch quarters for popular phones like Apple Inc's iPhone.
But Susan Johnson, senior vice president for investor relations, said other devices would be increasingly important.
"It's not just about smartphones any more," Johnson told Reuters in an interview on Tuesday after the company's quarterly conference call during which analysts peppered executives with questions about the net loss of phone customers.
AT&T said it added 296,000 subscribers in the quarter, ahead of Wall Street expectations for just over 195,000, according to six analysts contacted by Reuters. But this included a net addition of 365,000 subscribers using tablet computers, implying a net loss of 69,000 higher-value phone subscribers.
In comparison its bigger rival Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc, said last week that it added 677,000 subscribers in the first quarter.
Sprint, the No.3 U.S. mobile service provider, is scheduled to report its quarterly earnings on Wednesday.
Nomura's McCormack said AT&T's 0.9 percent growth in average monthly revenue per user (ARPU) missed his expectation for 1.9 percent growth.
"The concern's going to be how we should be thinking about ARPU going forward," the analyst said.
AT&T's revenue fell to $31.36 billion from $31.82 billion in the year-ago quarter, before the company sold its telephone directory business. Analysts, on average, had expected revenue of $31.74 billion, according to Thomson Reuters I/B/E/S.
While AT&T's wireless profitability was better than analysts expected, McCormack said that a 29.5 percent profit margin for its wireline business missed his expectation for 30.4 percent.
AT&T Chief Financial Officer John Stephens told analysts on the conference call that the wireline business was hurt by weak demand from business and customers who are slowing spending due to concerns about the economy.
"The economy continues to be the issue," Stephens said.
AT&T's overall profit rose to $3.7 billion, or 67 cents per share, from $3.58 billion, or 60 cents per share, in the year-ago quarter.
It reported a wireless service margin of 43.2 percent based on earnings before interest, taxes, depreciation and amortization, up from 42.3 percent in the year-ago quarter and beating the six analysts' expectations for 42.3 percent.
On the plus side AT&T cut its capital spending target for 2014 and 2015 to $20 billion each year from its previous expectation for $22 billion as a network upgrade it is working on will cost less than it had previously expected.
The company kept its capital spending budget for 2013 in the $21 billion range.
It ended the quarter with 8.7 million U-verse high-speed Internet and television subscribers. It added 731,000 U-verse Internet subscribers, which was a record for the company, and 232,000 U-verse TV subscribers - its strongest growth rate in nine quarters.
AT&T shares fell about 2 percent to $38.24 in after-hours trade from their $39 close in the regular New York Stock Exchange session.
(Reporting by Sinead Carew; Editing by Jim Marshall, Tim Dobbyn and Phil Berlowitz)