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AT&T (T) Q2 Earnings Beat as Wireless Subscribers Increase

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U.S telecom bellwether, AT&T, Inc. (T - Free Report) reported financial numbers for the second quarter of 2015. The company’s earnings surpassed the Zacks Consensus Estimate while revenues almost came in line with the same. The company’s better-than-expected earnings were driven by 2.1 million wireless subscriber additions. Following the result, the company’s shares gained 2.3% yesterday in the after-hour trading session.   

AT&T’s adjusted earnings per share moved up 11.3% year over year to 69 cents, beating the Zacks Consensus Estimate of 63 cents. However, the company reported net income of $3.1 billion or earnings per share of 58 cents in comparison with net income of $3.6 billion or 68 cents in the year-ago quarter.

Quarterly total revenue increased 1.4% year over year to $33,015 million, almost in line with the Zacks Consensus Estimate of $33,085 million.

Total operating expenses in the reported quarter were $27,303 million, up 1.3% year over year. Meanwhile, operating income stood at $5,712 million compared with operating income of $5,616 million in the year-ago quarter.

Cash Flow & Liquidity

In the first half of 2015, AT&T generated $15,898 million of cash from operations compared with $16,869 million in the first six months of 2014. Free cash flow in the first half of 2015 was $7,231 million compared with $5,102 million in the first half of 2014.

At the end of the second quarter, AT&T had $20,956 million of cash and cash equivalents and $105,067 million of long-term debt compared with $8,603 million of cash and cash equivalents and $76,011 million of long-term debt at the end of fourth quarter of 2014. Debt-to-capitalization ratio increased to 0.54 in the second quarter from 0.50 in the previous quarter.

Wireless Segment

Total revenue at the segment stood at $18,304 million, up 2.1% year over year. Service revenues were down 0.2% to $15,115 million. Equipment revenues were $3,189 million, up 14.6%. Operating expenses increased 0.2% to $13,624 million. However, operating income was up 8.2% to $4,680 million. Quarterly operating income margin came in at 25.6% against 24.1% in the year-ago quarter.

At the end of second-quarter 2015, AT&T had 123.902 million wireless subscribers and connections, up 6.2% year over year. Postpaid subscriber count stood at 76.541 million, up 3%. Prepaid subscribers totaled 10.438 million, up 3.5%. Resellers were 13.506 million, down 1.8% and Connected Devices were 23.417 million, up 26.8%. This year-over-year rise can be attributed to continued adoption of smartphones, which include Apple Inc.’s (AAPL - Free Report) iPhones and Google Inc.’s. (GOOG - Free Report) Android-based phones.

In the second quarter of 2015, the company added 0.410 million postpaid customers (down 60% year over year). Prepaid customers added were 0.331 million in the second quarter of 2015 compared to loss of 0.286 customers in the year-ago quarter. The company however lost 0.095 million resellers in the reported quarter.

Quarterly postpaid churn rate stood at 1.01% compared with 0.86% in the year-ago quarter whereas total churn rate was 1.31% as against 1.47% in the year-earlier quarter. Phone-only Postpaid ARPU (average revenue per user) increased 6.1% year over year and Phone-only Postpaid ARPU with AT&T Next monthly billings increased 3.3% year over year.

Wireline Segment

Total revenue at the segment was $14,214 million, down 2.9% year over year. Also, Service revenues were down 3% to $13,981 million. On the other hand, Equipment revenues grossed $233 million, up 1.7%. Operating expenses decreased 2.8% to $12,850 million. Meanwhile, operating income also declined 4.1% to $1,364 million. Quarterly operating income margin stood at 9.6% compared with 9.7% in the second quarter of 2014.

At the end of second-quarter 2015, AT&T had 23.497 million voice connections, down 12.8% year over year. In the reported quarter, the company lost 1.281 million voice connections compared with a loss of 1.531 million voice connections in the year-ago quarter. AT&T reported 15.961 million high-speed broadband connections in the quarter, down 3% year over year. The company also lost 0.067 million broadband connections as against a gain of 0.023 million connections in the prior-year quarter. Video connections totaled 5.971 million, up 2.1%. The company gained 0.028 million video connections in the said quarter.

Recent Developments

AT&T is now just a few steps away from scaling up to the highest position in the U.S. pay-TV market following the green signal for the DIRECTV takeover by Federal Communications Commission (FCC) chairman Tom Wheeler. Yesterday, Reuters reported that the deal has received approval from minimum of three out of the five FCC commissioners. Meanwhile, the Department of Justice (DOJ) concluded its review and has confirmed that the deal does not pose any competitive threat. The company also said that the deal can get final approval anytime.  

In May 2014, AT&T had inked a definitive agreement to buy U.S. satellite TV operator DIRECTV for $48.5 billion in a cash and stock deal.

Bottom Line

DIRECTV is the largest satellite TV operator in the U.S. while AT&T boasts a strong fiber-based video network. The deal is expected to boost AT&T’s earnings through enhanced video offerings and reduced programming costs.

The DIRECTV takeover will boost AT&T’s video customer base by an estimated 20.3 million from its current 5.971 million. It will also take AT&T’s pay-TV customer count to 26 million. Further, the deal will help AT&T provide bundled services inclusive of video, mobile and broadband.

AT&T currently has a Zacks Rank #3 (Hold).

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