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Will Soft Communications Revenues Hurt AT&T (T) Q1 Earnings?

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AT&T Inc. (T - Free Report) is scheduled to report first-quarter 2021 results, before the opening bell, on Apr 22.  In the first quarter, the company is likely to have recorded slightly lower revenues year over year from the Communications segment owing to the adverse impacts of the coronavirus pandemic and continued infrastructure investments for 5G deployment across the country.

Factors at Play

The Communications segment has three business units — Mobility, Entertainment Group and Business Wireline.

In the first quarter, AT&T continued to expand its 5G network infrastructure and launched 5G+ service in select areas. The company’s 5G network currently covers more than 230 million users in 14,000 cities across the country and its 5G+ network is available in 38 cities. While 5G service offers broader coverage over sub-6 spectrum for people on the move, 5G+ offers coverage over mmWave spectrum for dense high-trafficked relatively smaller areas. During the quarter, AT&T extended its unlimited wireless plans with 5G services at attractive price points. This, in turn, is likely to have resulted in lower churn rate in the quarter. Such initiatives might get reflected in the upcoming results.  

During the to-be-reported quarter, AT&T collaborated with Fortinet to expand its portfolio of Managed Security Services that enable Secure Access Service Edge (SASE) for businesses. SASE combines software-defined wide area networking with essential security functions amid increased work-from-home options. The cybersecurity solution helps enterprises to enhance security, improve network performance and reduce costs. It also inked a partnership with Cisco to evolve its software-defined wide area networking capabilities and offer a teleworker solution for employees working from home. Such technology collaborations are likely to have translated into higher revenues for the Business Wireline division.

During the quarter, AT&T extended its FirstNet coverage in the country with the addition of purpose-built cell site and other network investments at various places. The FirstNet network presently covers more than 2.71 million square miles supporting in excess of 2 million connections nationwide. These facilities have enabled the company to expand public communication capabilities with dedicated broadband network for any emergency support. In addition, the company inked a new multi-year retransmission agreement with Cox Media Group to provide CMG-owned local broadcast stations across video platforms throughout the country. These efforts are likely to have been accretive to earnings in the first quarter.

However, continued infrastructure investments for extensive fiber connectivity and the deployment of a standards-based nationwide mobile 5G network are likely to have affected the bottom line. Notably, AT&T acquired 80MHz of mid-band spectrum in the C-Band auction during the quarter for a total consideration of $27.4 billion. Although these airwaves offer significant bandwidth with better propagation characteristics for optimum coverage in both rural and urban areas, the investment is likely to have strained the exchequer.

Q1 Developments

The company inked an agreement with private equity firm TPG to divest its U.S. video business to reduce its debt burden. AT&T is likely to receive $7.6 billion from the transaction, while retaining stake within the newly formed DIRECTV. In addition, the company expects a reduction of about $300 million in depreciation and amortization expenses in each quarter until the completion of the transaction.

Overall Expectations

The Zacks Consensus Estimate for revenues from Communications is pegged at $34,035 million, indicating a modest decline from $34,249 million reported in the year-ago quarter. Operating income is pegged at $7,781 million, implying a fall from $8,203 million reported in the prior-year quarter. The consensus mark for EBITDA from the segment stands at $12,137 million, suggesting a decline from $12,838 million.

The Zacks Consensus Estimate for total revenues of the company stands at $42,260 million, indicating a 1.2% decline from $42,779 million reported in the prior-year quarter. The consensus mark for earnings is currently pegged at 77 cents per share. It had reported 84 cents in the year-earlier quarter.

Earnings Whispers

Our proven model does not predict an earnings beat for AT&T for the first quarter. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This is not the case here.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -0.59%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

AT&T Inc. Price and EPS Surprise

AT&T Inc. Price and EPS Surprise

AT&T Inc. price-eps-surprise | AT&T Inc. Quote

Zacks Rank: AT&T has a Zacks Rank #3.

Stocks to Consider

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

NETGEAR, Inc. (NTGR - Free Report) is set to release quarterly numbers on Apr 21. It has an Earnings ESP of +1.52% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for Verizon Communications Inc. (VZ - Free Report) is +0.41% and it carries a Zacks Rank of 3. The company is set to report quarterly numbers on Apr 21.

The Earnings ESP for T-Mobile US Inc. (TMUS - Free Report) is +5.45% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on May 5.

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