Red Ink and Bad Blood For This Telecom Giant

The most obvious takeaways from the release of AT&T's (NYS: T) fourth-quarter earnings are that the $4.2 billion penalty it had to pay T-Mobile for failing to complete their merger was extremely painful, and that AT&T chairman, CEO, and president Randall Stephenson has a very dim view of the Federal Communications Commission when it comes to its ability to allocate wireless spectrum in a fair manner.

That penalty didn't do the bottom line any favors. The $6.7 billion loss the carrier took in the fourth quarter equaled a $1.12 loss per share, of which that payment to T-Mobile accounted for $0.44 per share. Removing that and other special charges, such as pension-related reevaluation, would have turned that loss into a non-GAAP adjusted return of $0.18 per share. But even that does not compare well with last year's fourth-quarter adjusted non-GAAP earnings of $3.35 per share.

Mad as hell
Several times in the past two months AT&T and its CEO have lit into the FCC for what the company has called unfair behavior towards it. After the FCC released a staff report after Thanksgiving that laid out in detail why it wasn't buying any of AT&T's merger arguments, AT&T lashed back and released a statement that said "We believe that the utter absence of balance is clear, and demonstrates that the document lacks all credibility."

More recently, fearing that the FCC would limit AT&T's - and, for that matter, Verizon's (NYS: VZ) -- ability to bid on some broadcast spectrum licenses that Congress is considering putting up for auction, AT&T said, according to the New York Post, "We simply are asking why the FCC wants the Congress to strip language from a bill that says the FCC can't exclude qualified bidders."

Why? Well, for the same reasons the agency opposed the AT&T/T-Mobile merger in the first place; because it could give the country's two largest carriers, AT&T and Verizon, an even greater competitive advantage over the smaller national carriers, such as Sprint Nextel (NYS: S) and T-Mobile, now that the latter is out from under AT&T's shadow. The second-tier regional wireless carriers, too, like Leap Wireless (NAS: LEAP) , MetroPCS (NYS: PCS) , and United States Cellular also want a reasonable chance of adding to their spectrum resources.

So, in AT&T's earnings conference call, Stephenson didn't waste any time bringing up his company's need for additional spectrum and the FCC's role -- as he sees it -- in blocking the way for more spectrum being made available: "The number one issue for us as we move forward and for the industry, I believe, continues to be spectrum," he said. "The industry continues to see just explosive mobile broadband growth ... but I think we all understand this growth cannot continue without more spectrum being cleared and brought to market and despite all the speeches from the FCC, we are all still waiting."

Smartphones and dumb margins
There was more to AT&T's fourth quarter than red ink and vitriol, however; it was also able to clutch defeat from the jaws of victory. It did this by selling 9.4 million smartphones during the quarter, an industry record and a number that included 7.6 million iPhones. But as with many smartphones, and especially the iPhone, a large chunk of their cost must be borne by the wireless carriers to lure subscribers into two-year contracts. For AT&T, those phone subsidies brought the company's wireless service profit margin down to 28.7% from the previous quarter's 37.6%.

This is why a third strong smartphone ecosystem, such as the Microsoft Windows Phone OS that is underpinning the new Nokia Lumia smartphones, would be welcomed by the carriers. AT&T did pick up a net add of 717,000 postpaid subscribers, a 79% increase from the same period last year. That number, though, was a far cry from Verizon's 1.2 million postpaid adds during the quarter.

Wireline, the U-verse, and everything
There were mixed results in AT&T's wireline world. The company added 208,000 subscribers to its U-verse TV service, bringing the total up to 3.8 million. That increased U-verse revenues by 44%. But, like all fixed-line telephony providers, it has been losing voice customers who switch totally over to mobile phone service. So, in spite of the U-verse success, overall wireline revenue fell to $14.9 billion, compared to $15.1 billion for the fourth quarter of 2010.

And, finally...
AT&T did manage to post $2 billion in free cash flow for the period, bringing full year free cash flow to $13.5 billion, enough for the company to increase its dividend for the 28th consecutive year.

But the big takeaway here, as CEO Stephenson might put it, is that the three most important things that AT&T must consider for success in 2012 and beyond are ... spectrum, spectrum, and spectrum.

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At the time thisarticle was published Fool contributorDan Radovskyowns shares of AT&T. (Hey, he's in it for the dividend.) 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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