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Tickers in this Article: T, GOOG, AAPL, VZ
The second-largest U.S. mobile service provider AT&T Inc. T) is slated to release its second quarter 2012 earnings on July 24, before the opening bell. The current Zacks Consensus Estimate for the second quarter is 63 cents, representing a year-over-year increase of 4.47%.

Looking at surprises, AT&T had average positive surprise of 1.54% in the trailing four quarters. In the year-earlier quarter, the company had surprised us by reporting 1.69% upside from our expectation.

At the first quarter 2012 conference call, AT&T reaffirmed its guidance for fiscal 2012. The company projected post-paid wireless ARPU to grow 2% year over year. AT&T also guided consolidated margin expansion on increasing wireless and stable wireline margins. Accordingly, earnings per share would increase in the mid single-digit range, leading to further earnings acceleration in the years ahead.  

Further, AT&T expects capital spending to be flat year over year at $20 billion and free cash flow in the range of $15-$16 billion.

First Quarter Flashback

AT&T made a strong start to the year, with mid single-digit growth in operating income and earnings. Adjusted earnings outpaced both the Zacks Consensus Estimate and the year-ago earnings by 3 cents.

Lower sales of Apple Inc.'s (AAPL) iPhone during the quarter helped it to cut expenses that resulted in increased profits but hurt subscriber growth to some extent. Further, the outperformance was attributable to the healthy wireless and wireline businesses that led to improved revenue.

Wireless revenue advanced on the back of strong data revenues and subscriber growth. The rapid adoption of smartphones including Google Inc.'s (GOOG) Androids along with growth in tablets and connected devices such as automobile monitoring systems and security systems led to increased retail wireless subscribers. Additionally, branded subscriber growth saw the best ever first quarter in the company's history.

Despite the solid momentum for AT&T's U-verse and strategic services, wireline revenue fell on weakness in voice and legacy data products.

Agreement of Analysts

Estimates reflect a negative bias for both the second quarter and fiscal 2012 over the last 30 days. For the second quarter, 7 analysts out of 25 made downward revisions while 1 moved in the opposite direction. For fiscal 2012, out of the 30 covering analysts, 13 revised their estimates downward while 1 revised it positively.

The analysts are cautious given the lingering global economic woes and limited wireless spectrum. Since mobile data traffic is growing by leaps and bounds, AT&T is unable to manage the growing demands. In fact, the growing popularity of iPhone and Android smartphones as well as increased online mobile video streaming, cloud computing and video conferencing services are creating the need of additional airwaves.

Already criticized for dropped calls and poor network coverage, AT&T is facing more constraints in its capacity deployment compared to its largest rival, Verizon Communications Inc. (VZ), which is hurting subscriber growth. Further, wireline business continued to struggle with persistent access line losses. As mobile business has slowed down due to market saturation, AT&T is looking at new avenues for growth.

On the other hand, the company continues to enjoy its leadership in WiFi and boasts of the best Internet speeds in the industry. AT&T is the only U.S. carrier that provides 4G network through both LTE and High-Speed Packet Access Plus (HSPA+) technologies. However, the company is trailing Verizon in LTE service deployment.

Magnitude - Consensus Estimate Trend

The magnitude of revisions for the second quarter remained stable over the last 7 and 30 days at 63 cents.

The Zacks Consensus Estimate for fiscal 2012 is $2.37, unchanged over the last 7 days but down by a penny over the last 30 days.

Neutral Recommendation

We believe strong adoption of iPhones and Android smartphones, expansion of LTE networks and U-verse services, as well as the entry into cloud computing and hotel WiFi businesses are expected to boost the company's future profitability.

However, persistent declines in traditional voice access lines, aggressive pricing plans by rivals, iPhone subsidies and intense competition from cable companies and other alternative service providers are risks to the stock.

We are currently maintaining our long-term Neutral recommendation on AT&T. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).

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