Gerard Hallaren, CFA

303-954-4207
IM: Gerard 6656
hallareng@aviansecurities.com

iPhone & AT&T

Why be neutral on AT&T?

12/28/2010 A victim of its own success.
 How do you write a neutral ticket
2

1. If an investor has an AT&T position to get a

“wireless play” there are MANY better places.
2. Yield freaks will value the information and will
take your next call, maybe
3. The average wireless investor needs to know
what the behemoth is doing.

Avian Securities: Internal Use Only 12/08/21

 Investment opinions
3

AT&T is  Losing iPhone exclusivity will cause

losing
exclusivity for
AT&T’s ROE, OIBDA, and Free Cash
a product that Flow to decline.
represents
more than 20%  Any exclusivity loss alone is not likely to
of its revenue. threaten the dividend.
Subscriptions
take time to
 Verizon, Sprint, and T-Mobile win.
roll off.  Look for U-verse to slow wireline’s decline.

Avian Securities: Internal Use Only 12/08/21

AT&T is a carrier with two roughly equal sized
businesses.
4

Expect
Wireless to
become larger
than wireline.
Both carry
similar
OIBDA
margin, but
wireline has
better FCF
margin.

Avian Securities: Internal Use Only 12/08/21

 Wireline – Very briefly
5

 Fixed line business  U-verse is a FttN

declines steadily consumer service
 U-verse has done and
delivering Voice,
Television and Internet
we expect will do better
at attractive prices.
than most expect
 Overview
 Flat would be  Plans
outstanding
Avian Securities: Internal Use Only 12/08/21
 iPhone Caveat
6

 We do not know when

AT&T’s exclusivity will
expire.
 Consensus says late
January 2011.
 Thus far, every consensus
assessment has been
wrong.
Avian Securities: Internal Use Only 12/08/21
 Q3/2010 AT&T postpaid wireless
service revenue by device type
7

Since its
launch in late
June 2007,
the iPhone
has accounted
for more than
100% of
AT&T’s
postpaid
subscriber
growth.

Avian Securities: Internal Use Only 12/08/21

 iPhone Forecast
8

The beauty of
subscription
business Thousands
models.

Avian Securities: Internal Use Only 12/08/21

 Why the slow decline
9

2 year
contracts
create this
schedule
which, to us,
means a long
and slow
decline.

Avian Securities: Internal Use Only 12/08/21

 Other wireless investment issues
10

The iPhone  Still playing catch up on capital

isn’t AT&T’s
only wireless spending.
issue.  Odd technology migration HSPA, to
Sprint’s data
card business
HSPA7, to HSPA+, to 4G/LTE (behind
is bigger than VZ & S)
AT&T’s.
 No handsets for 7 or plus
Avian Securities: Internal Use Only 12/08/21
 Near Term Events/News
11

AT&T is a  Q4 results: 10:00 AM Jan. 27, 2011

widely
followed  Consensus: $31.47B - $0.55
company with
unusual  Our estimate $31.5 - $0.58
disclosure
practices. The  Capex up $1.0 to $2.0 B on wireless
underlying unit
numbers tend  Address iPhone materiality
to move the
stock more
than EPS.

Avian Securities: Internal Use Only 12/08/21

 Did you know . . .
12

Backing data The iPhone

and models
are available  is more than half of wireless revenue
upon request.
 more than 20% of overall AT&T revenue
Our position
is that AT&T On a DCF basis, individual iPhone
relies more
heavily on the customers are worth almost 2X the other
iPhone than
most believe. postpaid customers
Avian Securities: Internal Use Only 12/08/21
 Did you know . . .
13

 Since the iPhone’s launch, AT&T has added 17.1

Taking on the
million post paid customers.
iPhone was
pure genius.
 During that time AT&T added about 24 million
between 23 and 25 million iPhones
Sometimes  Of the 24 million iPhones in service, roughly 10.0
this work million of them became new customers when they
feels like we bought the iPhone
are punishing
 iPhone ARPU is and will remain above average for
a good deed. some time.
 iPhone churn has been below corporate average but
is beginning to trend up.
Avian Securities: Internal Use Only 12/08/21
 Wrap
14

FIRST OF  iPhone is bigger than most think

MANY.
 Q4 should be in-line to better
NEW
MARKET  Accelerating iPhone renewals
TO OPEN.
 Long time to roll over
 Dividend is OK for now

Avian Securities: Internal Use Only 12/08/21

15 Why be neutral on AT&T?
Questions?
Gerard Hallaren, CFA
Gerard6656 on IM
hallareng@aviansecurities.com
303-954-4207

Avian Securities: Internal Use Only 12/08/21