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AT&T (T) Q1 Earnings Beat on Wireless Strength, HBO Max Traction

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AT&T Inc. (T - Free Report) reported strong first-quarter 2020 results with solid subscriber growth backed by a resilient business model and robust cash flow position driven by a diligent execution of operational plans. Riding on a healthy traction from HBO Max and fiber broadband businesses, both adjusted earnings and revenues beat the Zacks Consensus Estimate. The company expects to continue investing in key areas of 5G, fiber and HBO Max and adjust its business according to the evolving market scenario to fuel long-term growth, while maintaining a healthy dividend payment and actively pruning debt.   

Net Income

On a GAAP basis, AT&T reported net income of $7,500 million or $1.04 per share compared with $4,578 million or 63 cents per share in the year-ago quarter. The significant year-over-year improvement was primarily attributable to higher revenues and actuarial gain on pension benefit plan assets.

Excluding non-recurring items, adjusted earnings were 86 cents per share compared with 84 cents in the year-earlier quarter. Adjusted earnings for the first quarter beat the Zacks Consensus Estimate by 9 cents.

AT&T Inc. Price, Consensus and EPS Surprise AT&T Inc. Price, Consensus and EPS Surprise

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

Quarter Details

Quarterly GAAP operating revenues increased 2.7% year over year to $43,939 million, largely due to higher equipment sales within the Mobility business and growth in advertising and subscription-based revenues within WarnerMedia. The top-line growth was partially offset by lower revenues from Business Wireline services and adverse currency translation effects within the Latin America segment. In addition, first-quarter revenues were impacted by the divestures of wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands in fourth-quarter 2020. The top line, however, beat the consensus mark of $42,728 million.

Adjusted operating income for the quarter was $7,814 million compared with $9,188 million in the prior-year quarter owing to top-line contraction. This resulted in respective adjusted operating income margins of 17.1% and 19.6%. Adjusted EBITDA declined to $12,889 million from $14,365 million.

AT&T experienced a net increase in total wireless subscribers of 3.6 million to reach 186.1 million in service. The company witnessed solid subscriber momentum with more than 823,000 net additions in phones, wearable and non-tablet computing devices, including 595,000 postpaid phone additions as work-from-home trend continued to gain in popularity. Postpaid churn was 0.93% compared with 1.08% in the year-ago quarter with significant improvement in phone churn. Postpaid phone-only average revenue per user (ARPU) decreased 2.8% year over year to $54.10 on lower international roaming revenues and promotional discounts.

Segmental Performance

Communications: Due to the proposed sale of its Video business to private equity firm TPG, AT&T has redefined this segment into Mobility, Business Wireline and Consumer Wireline (formerly Broadband) business. Total segment operating revenues were up 5.2% to $28,178 million as decline in Business Wireline was offset by a healthy gain in the Mobility business. Service revenues from the Mobility unit were steady at $14,048 million as subscriber gains offset decline in international roaming revenues, while equipment revenues improved 45.2% year over year to $4,986 million driven by higher mix of high-priced smartphone sales and other postpaid devices. Revenues from Consumer Wireline business were down 0.4% to $3,098 million due to decline in legacy services. Revenues from Business Wireline were down 3.5% to $6,046 million driven by decline in legacy products as customers shifted to more advanced IP-based offerings.

Segment operating income was $7,365 million compared with $7,401 million in the year-ago quarter for respective operating margin of 26.1% and 27.6%. Adjusted EBITDA was $11,419 million compared with $11,444 million in the year-ago quarter.

WarnerMedia: Total segment revenues were $8,526 million, up 9.8% year over year with higher subscription, content and advertising revenues signifying partial recovery from the coronavirus-induced adversities exhibited in the prior-year quarter. Subscription revenues improved 12.6% to $3,830 million due to higher domestic HBO Max and HBO subscribers (up 11 million year over year). Advertising revenues were up 18.5% to $1,750 million due to resumption of live sporting events like the NCAA Division I Men's Basketball Championship Tournament. Content revenues increased 3.5% to $3,420 million owing to contribution from theatrical product sales.  Operating income was down 2% to $1,960 million, primarily due to higher investments, programming costs and expenses in HBO Max, for corresponding margin of 23%. Segment EBITDA was $2,123 million compared with $2,160 million in the prior-year quarter for respective margins of 24.9% and 27.8%.

Latin America: Total operating revenues were $1,374 million, down 13.6% year over year, due to adverse foreign currency translation and challenging macroeconomic conditions arising from the coronavirus-induced turmoil. EBITDA remained flat at $93 million for respective margins of 6.8% and 5.8%.

Notable Quarter Developments

In order to expand coverage and improve connectivity, AT&T acquired 80MHz of mid-band spectrum in the C-Band auction during the quarter for a total consideration of $27.4 billion. These airwaves offer significant bandwidth with better propagation characteristics for optimum coverage in both rural and urban areas.

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.

Cash Flow & Liquidity

AT&T generated $9,927 million of cash from operations for the first three months of 2021 compared with $8,866 million in the prior-year period. Free cash flow at quarter end was $5,894 million compared with $3,900 million in the year-ago period. As of Mar 31, 2021, AT&T had $11,342 million of cash and cash equivalents with long-term debt of $160,694 million. Net debt to adjusted EBITDA was about 3.1x.

Moving Forward

For full year 2021, management reiterated its earlier guidance and continues to expect free cash flow in the vicinity of $26 billion with a dividend payout in the high 50% bracket. Adjusted earnings are likely to remain stable compared with that of 2020 on revenue growth of around 1%. AT&T is evolving its distribution channels for changing customer demands and emphasizing on self-installation and software-based platforms to redefine its business plans for the virus outbreak. While optimizing operations, it is aiming to increase efficiencies to lower costs while focusing on 5G and fiber-based connectivity along with expanded reach of software-based entertainment platforms. At the same time, the company aims to reduce its debt burden by monetizing non-core assets.

Zacks Rank & Stocks to Consider

AT&T currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader industry are Cambium Networks Corporation (CMBM - Free Report) , Ooma, Inc. (OOMA - Free Report) and Corning Incorporated (GLW - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cambium has a long-term earnings growth expectation of 20%. It delivered a positive earnings surprise of 128%, on average, in the trailing four quarters.

Ooma delivered a positive earnings surprise of 163.7%, on average, in the trailing four quarters.

Corning has a long-term earnings growth expectation of 17.1%. It delivered a positive earnings surprise of 41.6%, on average, in the trailing four quarters.

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