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Market Update

AT&T Boosts Wireless Profitability

AT&T's wireless unit didn't bounce back quite as sharply as rival Verizon Wireless during the first quarter, but it still posted solid results relative to our expectations

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 AT&T's (T) wireless unit didn't bounce back quite as sharply as rival  Verizon Wireless (VZ) (VOD)  during the first quarter, but it still posted solid results relative to our expectations. The fixed-line business also showed nice improvement in revenue trends during the quarter. Overall, AT&T is doing a bit better than we expected thus far in 2012, but we don't anticipate making a significant change to our fair value estimate.

Wireless profitability was the major focal point in AT&T's first-quarter results. While AT&T didn't deliver record results like Verizon Wireless, the firm still produced sharply higher wireless margins following the pressure seen last quarter in the wake of the release of the latest iPhone. The wireless operating margin, excluding depreciation and amortization, hit 41.6% of revenue, up nearly 13 percentage points versus the fourth quarter. AT&T remains far more beholden to the iPhone than its rivals--it sold 35% more units than Verizon Wireless during the quarter--and the latest iteration has continued to sell very well. AT&T sold roughly as many smartphones as a year ago, but the mix of devices shifted toward the  Apple (AAPL) device. Despite the high subsidy on the iPhone, AT&T still improved wireless margins 2.5 percentage points versus a year ago as the firm gained the benefit of customers added over the past 12 months.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.