It has been about a month since the last earnings report for AT&T (T - Free Report) . Shares have added about 5.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is AT&T due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
AT&Marginally Beats on Q1 Earnings, Misses on Revenues
AT&T reported strong first-quarter 2019 results driven by solid domestic wireless business and incremental contribution from WarnerMedia assets. The company expects to continue this healthy growth momentum in 2019, while focusing on reducing its huge debt burden.
On a GAAP basis, AT&T reported net income of $4,096 million or 56 cents per share compared with $4,662 million or 75 cents per share in the year-ago quarter. The year-over-year decline in earnings despite healthy top-line growth was primarily attributable to higher operating costs and merger and integration-related expenses.
Excluding non-recurring items, adjusted earnings for the quarter were 86 cents per share compared with 85 cents in the year-earlier quarter, and beat the Zacks Consensus Estimate by a penny.
Quarterly consolidated revenues increased 17.8% year over year to $44,827 million, primarily due to the accretive Time Warner acquisition and solid performances by domestic wireless services and advertising unit Xandr. The top line, however, missed the Zacks Consensus Estimate of $45,093 million.
Operating income for the quarter was $7,233 million compared with 6,201 million in the prior-year quarter largely driven by WarnerMedia assets, resulting in respective operating income margins of 16.1% and 16.3%. Adjusted operating income for the reported quarter (excluding the amortization, merger- and integration-related expenses and other items) was $9,585 million compared with 7,510 million in the year-earlier quarter for respective margins of 21.4% and 19.7%.
During the reported quarter, AT&T experienced a net increase in total wireless subscribers of 2.7 million to reach 155.7 million in service. Postpaid churn was 1.17% compared with 1.06% in the year-ago quarter owing to pricing pressures and tablet churn. The company had 165,000 branded net adds, both postpaid and prepaid. Postpaid phone-only average revenue per user (ARPU) increased 3.7% year over year to $55.36.
Communications: Total segment revenues were $35,393 million, down 0.4% year over year with decline in Business Wireline owing to lower legacy voice and data services revenues. Service revenues from the Mobility unit improved 2.9% year over year to $13,792 million owing to subscriber gains and postpaid phone ARPU growth, while equipment revenues were down 4.5% to $3,775 million due to record-low upgrades. Revenues from the Entertainment Group remained relatively stable.
Segment operating income was $8,052 million compared with $8,027 million in the year-ago quarter largely due to continued focus on cost initiatives. Operating margin was 22.8% compared with 22.6% in the prior-year quarter. EBITDA was $12,645 million compared with $12,604 million in the year-ago quarter, for respective margins of 35.7% and 35.5%.
WarnerMedia: Total segment revenues were $8,379 million with solid performance from all business units. Operating income improved to $2,243 million owing to strong gains from Turner and Home Box Office units for corresponding margin of 26.8%. EBITDA was $2,386 million for a corresponding margin of 28.5%.
Latin America: Total revenues were $1,718 million, down 15.2% year over year, due to adverse foreign currency translation. EBITDA decreased to $127 million from $221 million in the year-ago quarter for respective margins of 7.4% and 10.9%, primarily due to foreign exchange.
Xandr: Total revenues were $426 million, up 26.4% year over year due to AppNexus acquisition, while operating income declined 11.5% to $253 million due to higher acquisition and integration costs for corresponding margin of 59.4%. EBITDA was $266 million for a corresponding margin of 62.4%.
Cash Flow & Liquidity
AT&T generated $11,052 million of cash from operations in the reported quarter compared with $8,947 million in the prior-year period. Free cash flow at quarter end increased to $5,870 million from $2,829 million in the year-ago period. As of Mar 31, 2019, AT&T had $6,516 million of cash and cash equivalents with long-term debt of $163,942 million.
With solid performance from the Wireless business and incremental contribution from WarnerMedia assets, AT&T is poised to continue its healthy growth momentum. The company also remains focused on managing its debt portfolio and is well on track to achieve its set target of 2.5x debt-to-EBITDA range by year-end 2019. AT&T is ramping up its FirstNet program and revamping lineup of video products, pricing and promotion initiatives. At the same time, the company remains well poised to benefit from the impending 5G boom, deploying mobile 5G services in select regions in 19 cities across the United States.
AT&T has also revamped its video content lineup at competitive prices. The strategic move is likely to increase its subscriber base and augment overall revenues as lower video packages are offset by higher digital ad revenues. The company has restructured its WarnerMedia business to focus more on video streaming service and fine-tuned its operating model with the evolving needs of customers. As part of the overhaul process of the newly minted WarnerMedia unit, AT&T has consolidated all its affiliates and sales groups under a unified platform, with its units organized under entertainment networks, live programming, content production and affiliate and advertising sales. AT&T has also reorganized the management structure within WarnerMedia. We remain impressed with the inherent growth potential of this stock.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, AT&T has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, AT&T has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.