The Elephant in the Room Just Sat on AT&T's Earnings

AT&T's (NYS: T) fourth-quarter earnings statement is out, the first public accounting for the company since it officially threw in the towel in its quest to acquire T-Mobile. The most significant number in the statement is the $6.7 billion loss, or $1.12 per share, it took in the quarter, $4 billion of which stems directly from the penalty fee it paid to T-Mobile for the merger's failure. In the same quarter last year, the earnings per share equaled $0.18. Free cash flow for the period worked out to $2 billion.

If that penalty fee and other charges, such as changes in pension plan reporting, were not counted, non-GAAP adjusted earnings per share would be $0.42.

For the full year, revenues were up 2%, to $126.7 billion, over 2010's revenues, but operating expenses were up a significant 12.2%. Net income was $3.9 billion in 2011, down from last year's $19.9 billion. Earnings per share was $0.66 compared to last year's $3.35. The non-GAAP adjusted earnings brings that per share figure up to $2.20, compared to 2010's $2.29. Full year free cash flow equaled $14.4 billion, which puts the dividend to free cash flow payout ratio at 70%.

Some good news, some bad news
AT&T sold a record 7.6 million iPhones in the quarter, out of a total 9.4 million smartphones sold. Unfortunately, that contributed to a trimming of profit margins at AT&T -- just like Verizon (NYS: VZ) and Sprint Nextel (NYS: S) -- has to subsidize much of the iPhone's cost to entice customers into signing a two-year contract. Selling so many smartphones caused the company's wireless service margin for the quarter to drop to 28.7% from the previous quarter's 37.6%. However, the company did gain 717,000 new wireless contract customers.

AT&T also added 208,000 subscribers to its U-verse TV service, resulting in a 44% increase in U-verse revenues. The company also saw a second straight quarter of wireline business revenue growth. But its overall wireline revenue fell to $14.9 billion for the quarter, compared to $15.1 billion for the same period last year.

The key for 2012
In spite of the great gains AT&T has made in broadband wireless sales, if it can't get more wireless spectrum in the coming years, then its race to keep up with rival Verizon in LTE deployment will be severely handicapped. CEO Randall Stephenson said on the earnings conference call that without the spectrum it would have gotten in the T-Mobile deal, it can't cover the rural parts of the country.

Stephenson also continued his spat with the Federal Communications Commission, saying that the agency wants to handpick which companies get more spectrum. There are bills proposed in Congress that will set up an auction to sell off unused broadcast spectrum, but as the language now stands, the FCC can determine who can and cannot bid on it. Stephenson wants to make sure AT&T is on the winning side of that argument.

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At the time thisarticle was published Fool contributorDan Radovskyowns shares of AT&T. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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