AT&T 4Q Earnings: Smartphone Costs, T-Mobile Breakup Fee to Hurt Profit

AT&T, Inc. (NYSE: T), the largest telecommunications provider, is expected to report net income fell 20 percent to 44 cents a share, from 55 cents a year ago due to heavy costs associated with Apple's Phone and a large breakup fee resulting from its abortive bid to purchase T-Mobile USA.

Piper Jaffray analysts expects AT&T to have sold as many as 10 million smartphones in the fourth quarter; many of those smartphones were Apple's iPhone 4S. The high costs AT&T pays Apple, and other mobile phone developers, to subsidize smartphones will hurt Dallas-based AT&T's profit margins initially.

Smartphone sales have been significantly higher than expected, Piper Jaffray analyst Chris Larsen wrote in a research note. Given this level of sell-through, we are adjusting our model to account for the higher subsidy costs that are attached to smartphones.

Until 2011, AT&T was the only U.S. wireless carrier to sell the iPhone, which AT&T has noted helped boost subscriber growth in the past. But rival Verizon Wireless began carrying the iPhone in February, while Sprint Nextel (NYSE: S) began carrying the phone in October, leading to less turnover, or churn, among AT&T's rivals.

AT&T had approximately 101 million subscribers by the end of the third quarter. Verizon Communications (NYSE: VZ) reported Tuesday that it had 108.7 million subscribers.

AT&T's $4 billion charge to Deutsche Telekom, the parent company of T-Mobile, will be reflected on the fourth quarter earnings. AT&T announced in March it planned to buy T-Mobile USA for $39 billion. The deal collapsed in December following lawsuits by the U.S. Department of Justice and the Federal Communications Commission that it could lead to reduced competition in the wireless market.

The breakup fee included $3 billion in cash and $1 billion worth of wireless spectrum. This payment came despite the need for companies such as AT&T to obtain wireless spectrum to deal with the increased data demands of newer smartphones

The company acquired spectrum from San Diego-based Qualcomm (NASDAQ: QCOM) for $1.93 billion. There has also been a lot of speculation that AT&T could bid bid for Dish Network (NASDAQ: DISH) to obtain more spectrum.

Given the breakup of the T-Mobile acquisition and concerned related to capacity constraints due to data usage growth, we believe investors will be looking for more color on AT&T's current spectrum position, near and long-term strategy and potential opportunities that exist, Larsen wrote.

AT&T investors will also be looking toward continued growth through its U-Verse television service, which competes with companies such as Dish and DirecTV (NASDAQ: DTV). There were nearly 3.6 million U-Verse subscribers by the end of the third quarter.

Shares of AT&T closed Tues dayat $30.09, down 1.02 percent.