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AT&T Looks Stronger than Verizon On 2Q Earnings

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For these leading telecom companies, 5G is a big opportunity to add customers and grow the business. However, the cost of building out the infrastructure and decline in the legacy business impact profitability. A closer analysis of results versus analyst estimates also shows that businesses appear to be pushing out upgrades.   

AT&T (T - Free Report)

AT&T reported strong results, with earnings of 65 cents beating the Zacks Consensus Estimate by 8.3% on revenue that beat by 1.1%.

The revenue beat was mostly driven by the Communications Mobility segment (69% revenue share), which grew 5.2% year over year to top analyst estimates by 1.1%. Both services and equipment within Mobility came in better than expected, with services managing a slightly stronger surprise.

Communications Consumer Wireline grew 1.1%, coming in just short of analyst estimates. Around 75% of this business comes from Broadband services, where revenue growth was strong at 5.6% and topped analyst estimates by a sliver. Legacy voice and data services revenue declined 11.7% (a 4.3% miss) and other service and equipment revenue declined 9.2% (more or less in line).

Communications Business Wireline was the big disappointment, down 7.6% from last year, missing analyst estimates by 2.2%. Both services and equipment revenue declined and both disappointed versus analyst expectations.

The Latin America segment, which provides wireless services in Mexico, grew 17.4% to beat analyst estimates by 13.3%. Services revenue jumped 19.5% (10.4% ahead of analyst estimates) and equipment revenue 13.7% (17.3% ahead).

Total Communications operating income came in 1.3% short of estimates. Mobility was again 1.1% ahead of estimates, Consumer Wireline 3.6% ahead and Business Wireline 19.8% short.

Total Latin America continued to generate losses that were however down 36.4% from last year. The last quarter’s performance missed estimates by 2.4%.  

Churn was lower than expected both in phones and overall. Net adds in Mobility were 440% stronger than estimated. Average Revenue per User (ARPU) remains strong.

For the current quarter, analysts are projecting a slight increase in Communications revenue, driven by Business revenue, as Mobility softens and Consumer remains flattish. Latin America is also expected to soften. Operating income is expected to be flattish in Mobility, drop 26.8% in Consumer and grow 21.8% in Business. Latin America loss is expected to increase 16.0%. Churn is expected to increase and net adds expected to decline.

Verizon Communications (VZ - Free Report)

The company’s reported earnings missed the Zacks Consensus Estimate by 2.2% on revenue that was about in line.

Wireless equipmentrevenue, which contributed around 20% of total quarterly revenue, beat analyst estimates by 9.4%.

Services revenue and other, which accounted for 80% of total revenue, missed by 1.1%.  

Total Wireless revenuebeat analyst estimates by 1.8%. This was a function of the 9.4% beat in equipment (24.8% of total wireless revenue), the less than a percentage point miss in service revenue (68.5% of total wireless revenue) and the 1.3% miss in Wireless Other, which accounted for the balance.

Revenue is also sliced in terms of Consumer (76% of revenue) and Business (23%). Around 1% is attributed to other sources. In the last quarter, the Consumer side beat by around 1% while the Business side missed by around 0.9%.

Service is the largest head under Consumer, which accounted for 71% of its revenue and missed estimates by 0.7% in the last-concluded quarter. Wireless equipment, which accounted for 22.3%, beat estimates by 11.8%. Other Consumer revenue missed by 5.9%. Wireline-Fios revenue missed by 1.0%.

The SMB segment under Business (40.5% of Business revenue share) beat by 1.9%. Global Enterprise (31.5% share) missed by 4.1%. Public Sector and Other (19.7%) missed by 4.5%. Wholesale (the rest) missed by 0.8%. Wireline-Fios revenue missed by 0.5%.

Clearly, wireless equipment and the SMB segment within Business were the only areas to surprise positively.

Operating incomefrom Consumer and Business missed analyst estimates by 9.2% and 10.5%, respectively. Notably, EBITDA misses were by much smaller margins of a respective 5.5% and 1.8%.

Wireless churn inched up in the last quarter and was higher than expected. The trend is expected to continue this quarter. Consumer churn was also higher than expected, although estimates for the current quarter are lower. Business churn was also higher than expected and current quarter estimates are lower.

For the current quarter, analysts are forecasting a wireless equipment sales decline of 6.4%. Consumer is expected to be flattish and Business expected to grow 1.5%.

Both AT&T and Verizon carry a Zacks Rank #3 (Hold). The only Buy-ranked stocks in the industry are United States Cellular (USM - Free Report) , which has a Zacks Rank #1 (Strong Buy) and TMobile US (TMUS - Free Report) , which has a Zacks Rank #2 (Buy).

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