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AT&T Inc. (T - Analyst Report) reported first-quarter 2014 adjusted earnings per share of 71 cents, beating the Zacks Consensus Estimate by a penny. Earnings improved 10.9% from the year-ago quarter’s adjusted figure of 64 cents per share. The improvement was attributable to strong wireless subscriber growth and instalment plan – AT&T Next.

Adjusted earnings for the quarter excluded the impact of 1 cent per share related to expenses on the Leap Wireless transaction.

Quarterly adjusted operating revenues increased 3.6% from the prior-year quarter to $32.5 billion, which figured slightly ahead of the Zacks Consensus Estimate of $32.4 billion.

Operating income rose 5.7% year over year to $6.3 billion, resulting in adjusted operating margin of 19.3% against 18.9% in the year-ago quarter. Operating expense increased 3.1% year over year to $26.2 billion in the first quarter.

Segment Results

Wireless revenues, including equipment sales, rose 7% year over year to $17.9 billion in the quarter, primarily on strong adoption of Mobile Share and AT&T Next plans. Wireless service revenues climbed 2.2% year over year to approximately $15.4 billion.

AT&T added 1,062,000 wireless customers in the reported quarter, bringing the total count to 116 million.

The company added 1.1 million post-paid smartphone users and sold 5.8 million smartphones of which 92% were for post-paid subscriptions. This rise in numbers was owing to continued adoption of smartphones, including Apple Inc.’s (AAPL - Analyst Report) iPhones and Google Inc.’s Android-based phones. At quarter end, nearly 78% of AT&T’s post-paid phone users owned smartphones. Almost 57% post-paid smartphone subscribers have 4G-based handsets.

Total churn was 1.39% compared with 1.38% in the prior-year quarter. Post-paid churn was 1.07% versus 1.04% in the year-ago quarter. Post-paid ARPU (average revenue per user) grew 0.4% year over year.

Wireline revenues dipped 0.4% year over year to $14.6 billion. Although the company experienced growth in U-verse TV and High Speed Internet segments, lower voice and legacy revenues impacted the overall revenue figure.

Revenues from residential customers increased 4.3% year over year to $5.7 billion, driven by robust activities in consumer IP data services. Business revenues slid 2.7% year over year to $8.7 billion, reflecting a drop in legacy service. Strategic business services such as Ethernet, Virtual Private Networks, hosting, IP conferencing and application services, increased 16.1% year over year.

AT&T's total U-verse subscribers, which include TV and high-speed Internet customers, touched 11.3 million at the end of the first quarter. Total U-verse TV subscribers reached 5.7 million (201,000 users added) and high-speed Internet users touched 11.0 million (634,000 subscribers added).

Liquidity

As of Mar 31, 2014, AT&T had $3.6 billion in cash and cash equivalents. The company had long-term debt (including current portion) of $71.6 billion, representing a net-debt-to-EBITDA ratio of 1.74%.

AT&T generated $8.8 billion of cash from operations in the quarter, while capital expenditure totaled $5.8 billion. Free cash flow for the first quarter was $3 billion. The company repurchased 37 million shares for $1.2 billion. Overall, the company has share repurchase authorisation of 425 million shares including new repurchase program of 300 million shares.

Guidance

For 2014, management revised its guidance, which also incorporates the impact of Leap Wireless operations. The company expects revenue growth of 4% or higher and stable margin growth.Adjusted earnings per share growth is estimated at the mid single-digit range. Capital expenditure is expected at around $21 billion and free cash flow is estimated at $11 billion. 

Our Analysis

We believe this company’s encouraging outlook is triggered by contributions from wireless services. AT&T’s wireless business, in particular the post-paid segment, is benefiting from promotional strategies that it had undertaken as evident from strong customer additions. Further, growing demand for U-verse and strategic services are also contributing to the top-line growth of the company.

AT&T, currently has a Zacks Rank #2 (Buy).

Another Major Telecom Stock

Verizon Communications Inc. (VZ - Analyst Report) is expected to report this week. The company’s Zacks Consensus Estimate for the first quarter earnings is pegged at 86 cents, representing year-over-year growth of 25.88%.

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