AT&T (T) customers complain about dropped calls, glacial web-surfing speeds and shoddy coverage. Wall Street, on the other hand, loves the way the phone giant runs its network.

For an explanation of that disconnect, let's take a look at AT&T's third-quarter earnings, announced earlier today. The telecom's results topped Wall Street profit forecasts and delivered revenues in line with estimates. Shares gained about 2% in midday trading to around $26.40.

Here's where the numbers start to tell the story: AT&T activated a record 3.2 million iPhone customers over the quarter. But despite the huge ramp-up in these famously data-hungry devices, AT&T's capital spending actually dropped 24 percent to $4 billion from the same period a year ago. Partially as a result, free cash flow surged to $13.9 billion for the first three quarters of the year from $7.9 billion during the same period a year ago.

"If there was a surprise in the quarter, then, it was that the tsunami of capital spending to support all that data usage never came," Craig Moffett, an analyst at Sanford C. Bernstein wrote in a research report following the results.

In other words, the same tightfisted ways that drive some customers nuts have made AT&T a hit with investors. Shares of AT&T have outpaced rival Verizon Communications (VZ) by about a staggering 25% over the last five years. And Verizon is widely credited for having a more broadly available and more robust network, to most customers' delight.

It seems that AT&T's iPhone approach is shrewd when it comes to the bottom line. Sure, the company pays heavy subsidies to Apple (AAPL) for the devices. But AT&T gets to piggyback off the popularity of the iPhone while skimping on some of the massive costs that would come with putting up additional radio towers and building out a bigger network.

Nor is AT&T's thrift limited to wireless services. Reeling from landline losses, both Verizon and AT&T have responded by rolling out pay-TV services in addition to phone and broadband connections. Verizon will spend a total of $23 billion dollars on its FiOS service, which strings fiber optics to a customer's home.

But AT&T is spending only $7 billion on its U-verse service, which takes fiber to the neighborhood level but then pushes the massive amounts of data over the company's traditional copper lines. The service has been slammed for glitches by customers, but investors are so far cheering AT&T's much more limited approach.

When it comes to AT&T, investors may be better off buying the company's stock than its services.


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keelytm

This is a pretty interesting conundrum. They don't offer the best service, but they are trouncing their competition financially. Do either Verizon or AT&T use anything like a predictive dialer ( http://3clogic.com/ ) ? That could certainly help change the game when they are contacting customers.

January 11 2012 at 3:33 PM Report abuse rate up rate down Reply