The second-largest U.S. mobile service provider AT&T Inc. (T) reported first quarter 2011 results on April 20. Adjusted earnings of 57 cents per share were at par with the Zacks Consensus Estimate and a penny below the year-ago earnings.

First Quarter Review

In line profits can be traced back to the loss of AT&T’s exclusive hold on Apple Inc.’s (AAPL) iPhone during the quarter to its largest rival Verizon Communication (VZ). However, AT&T activated 3.6 million iPhones in the recently concluded quarter.

Total revenue improved from the year-ago quarter and surpassed the Zacks Consensus Estimate. Revenues from the wireless segment reached an all-time high, on the back of record net subscriber addition, connected device additions and higher smartphone sales. Wireline revenue, however, remained the dampener with declining traditional voice access lines.

AT&T added 2 million wireless subscribers in the first quarter. Wireless customers increased to 97.5 million, attributable to rapid adoption of smartphones, strong prepaid subscribers and growth in connected devices. However, total churn (customer switch) saw just a moderate increase.

On the wireline front, U-verse TV and bundled satellite subscribers remained healthy during the quarter on continued high-speed Internet attach rates. On the other hand, total consumer connections remains depressed due to a drop in traditional voice access lines, partially offset by higher U-verse TV, broadband, and VoIP (Voice over Internet Protocol) connections.

(Read our full coverage on this earnings report: AT&T Meets EPS, Beats Revenue)

Agreement of Analysts

The trend in the last 7 days suggests that the analysts are skewed more toward the negative side in estimate revisions for the upcoming quarter and fiscal year.

Over the last 7 days, 3 analysts out of 25 made downward revisions for the second quarter and none moved in the opposite direction. For fiscal 2011, 3 analysts out of 29 revised their estimates downward while one revised it upward.

Earnings growth throughout the year is expected to be depressed by the regulatory hurdles pertaining to AT&T/T-Mobile merger, announced in late March. The proposed merger is the largest in the wireless industry and subject to a long regulatory process. The deal will likely face a tough review by the Federal Communications Commission and the Department of Justice. In a cutthroat U.S. wireless industry, the analysts believe the price for wireless services will become more competitive post merger.

Further, Sprint Nextel Corp. (S) is trying to block the deal, as the mergerwill negatively affect its profitability. The merger would create a duopoly market for the U.S. wireless services making AT&T and Verizon Wireless the only two dominant players in the industry, controlling almost 80% of the country’s wireless post-paid market.

The analysts believe AT&T still faces integration problems related to its acquisition of Centennial and the wireless assets from Verizon. The integration of T-Mobile USA, a unit of Deutsche Telekom, might further impede its future growth prospects. Further, competitive pressure, a steep decline in its traditional fixed-line phone business, aggressive pricing plans by rivals and the loss of iPhone exclusivity in early February might negatively affect earnings for the year.

For fiscal 2012, 2 analysts out of 30 made upward revisions while only one moved in the opposite direction.

The analysts are positive for the upcoming year, as the proposed merger (expected to close in 12 months) will create America’s largest mobile phone company surpassing the largest wireless U.S. provider, Verizon. They believe the merger will further improve AT&T’s revenue and profits, adding more wireless subscribers on enhanced networks as well as and bolster its mobile broadband services, which are currently booming.

Upon completion, the merger will add 34 million customers to AT&T’s wireless subscriber base, bringing the total number of wireless customers to 130 million for the combined company. The combined company will likely generate increased wireless revenues of $80 billion, up from $58.5 billion reported in 2010. The deal will also boost the percentage of AT&T’s total revenue from wireless, wireline data and managed services to approximately 80%.

Magnitude –– Consensus Estimate Trend

Over the last 7 days, the Zacks Consensus Estimate remained static at 60 cents for the second quarter.

For fiscal 2011, the Zacks Consensus Estimate reduced a penny from $2.37.

Earning Surprises

With respect to earnings surprises, the company’s fairly good track record is expected to continue in the coming quarters. AT&T produced a positive average earnings surprise of 4.43% over the last four quarters, which suggests that it outpaced the Zacks Consensus Estimate by that amount over the last year.

Upgrading to Neutral

Although the AT&T/T-Mobile merger is a time-taking process and might alter the structure of the overall telecommunication industry, it would lead to extensive growth in subscribers, revenues as well as profits. Further, the company is expanding its wireless and wireline businesses, which would in turn fuel profitability going forward. We expect wireless revenue to continue growing with a low churn rate and network upgrades, and wireline revenue to improve on enhanced services in AT&T U-verse and solid cost management.

Consequently, we have upgraded our long-term recommendation to Neutral from Underperform with the Zacks #3 (Hold) Rank.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at:

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