AT&T's new device financing plan weighs on revenue

By Marina Lopes

WASHINGTON (Reuters) - AT&T Inc's quarterly revenue rose a weaker than expected 1.6 percent as cheaper service plans offered to customers who forgo subsidized cellular phones cut into margins.

Faced with mounting pressure from competitors, AT&T has unbundled service and device charges, and slashed its family data plan and shared value plan prices as it tries to attract customers in a nearly saturated market.

"What we saw happen throughout the second quarter were very aggressive promotions by our competitors but all the while our churn decreased," Ralph de la Vega, chief executive of AT&T mobility, told Reuters.

"We are confident that what we saw in Q2 was part of the transition we had to make to go from service to equipment revenue in NEXT," he said, referring to a pricing plan that allows customers to pay directly for their devices in exchange for lower service pricing.

The plan has resulted in a lower average revenue per user, but higher equipment revenue, as customers take on the majority of the burden of paying for their devices.

Wireless service revenue decreased 1.4 percent in the second quarter, while equipment revenue grew 44.8 percent.

AT&T expects two-thirds of its customers to be on the plan by the end of the year.

"AT&T has quite aggressively moved its existing base of customers in contract to the new plan. It is a fairly predictable shift and over time it should be a positive one for AT&T, but it has an unpleasant short-term impact on results, said Jan Dawson, chief analyst at Jackdaw Research."

Chief Financial Officer John Stephens said on a conference call with analysts that Brazil's antitrust regulator has approved the company's $48.5 billion bid for DirecTV, which has a significant foothold in Latin America.

The deal has been reviewed by state regulators but is under review by the U.S. Department of Justice and Federal Communications Commission.

The company maintained its free cash flow guidance of around $11 billion for 2014, exceeding the $9.6 billion it needs to meet its dividend target, which some investors have worried could be unsustainable.

The No. 2 U.S. mobile provider said on Wednesday that excluding items it earned 62 cents per share, one penny less than Wall Street expectations, according to Thomson Reuters I/B/E/S.

In late trade, AT&T shares fell 1.1 percent to $35.47 after closing at $35.88 on the New York Stock Exchange.

AT&T earned $3.6 billion, or 68 cents per share, compared with $3.8 billion, or 71 cents per share, in the year-ago quarter.

Revenue rose to $32.6 billion from $32.1 billion in the year-ago quarter.

AT&T added 1,026,000 contract subscribers in the quarter, beating Wall Street expectations of 841,000 customers.

(Reporting by Marina Lopes; Editing by Richard Chang, Bernard Orr)