A month has gone by since the last earnings report for AT&T (T - Free Report) . Shares have added about 4.7% 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 its most recent earnings report in order to get a better handle on the important drivers.
AT&T's Q2 Earnings in Line, Revenues Miss Estimates
AT&T reported relatively mixed second-quarter 2019 results as higher operating expenses led to year-over-year decline in earnings, despite healthy top-line growth driven by solid domestic wireless business and incremental contribution from WarnerMedia assets. The company expects to significantly reduce its debt burden in the second half of the year to achieve its year-end deleveraging goals, while focusing on the availability of nationwide commercial 5G coverage by early next year.
On a GAAP basis, AT&T reported net income of $3,713 million or 51 cents per share compared with $5,132 million or 81 cents per share in the year-ago quarter. The slump in earnings despite higher revenues was primarily attributable to higher operating costs and merger and integration-related expenses.
Excluding non-recurring items, adjusted earnings for the quarter were 89 cents per share compared with 91 cents in the year-earlier quarter, and were in line with the Zacks Consensus Estimate.
Quarterly GAAP operating revenues increased 15.3% year over year to $44,957 million, primarily due to the accretive Time Warner acquisition and solid performances by domestic wireless services and advertising unit Xandr. The top line, however, marginally missed the Zacks Consensus Estimate of $44,963 million.
Operating income for the quarter was $7,500 million compared with 6,466 million in the prior-year quarter largely driven by WarnerMedia assets, resulting in respective operating income margins of 16.7% and 16.6%. Adjusted operating income for the reported quarter (excluding the amortization, merger- and integration-related expenses and other items) was $9,899 million compared with 8,216 million in the year-earlier quarter for respective margins of 22% and 21.1%.
During the reported quarter, AT&T experienced a net increase in total wireless subscribers of 3.9 million to reach 159.7 million in service. Postpaid churn was 1.08% compared with 1.02% in the year-ago quarter owing to pricing pressures and tablet churn. The company had 5.8 million branded net adds, both postpaid and prepaid. Postpaid phone-only average revenue per user (ARPU) increased 2.2% year over year to $55.68.
Communications: Total segment operating revenues were $35,508 million, up 0.3% year over year with decline in Business Wireline owing to lower legacy voice and data services revenues. Service revenues from the Mobility unit improved 2.4% year over year to $14,006 million owing to subscriber gains and postpaid phone ARPU growth, while equipment revenues were down 2.6% to $3,506 million due to lower upgrades. Revenues from the Entertainment Group were down 1% to $11,368 million, while that from Business Wireline decreased 0.3% to $6,628 million due to lower legacy voice and data services.
Segment operating income was $8,737 million compared with $8,414 million in the year-ago quarter largely due to continued focus on cost initiatives. Operating margin was 24.6% compared with 23.8% in the prior-year quarter. Segment EBITDA was $13,357 million compared with $13,052 million in the year-ago quarter, for respective margins of 37.6% and 36.9%.
WarnerMedia: Total segment revenues were $8,350 million with solid performance from all business units. Operating income improved to $1,970 million owing to strong gains from Turner and Home Box Office units for corresponding margin of 23.6%. Segment EBITDA was $2,061 million for a corresponding margin of 24.7%.
Latin America: Total operating revenues were $1,757 million, down 9.9% year over year, due to adverse foreign currency translation. EBITDA decreased to $63 million from $148 million in the year-ago quarter for respective margins of 3.6% and 7.6%, primarily due to foreign exchange headwinds.
Xandr: Total revenues were $485 million, up 23.7% year over year due to AppNexus acquisition, while operating income declined 2.4% to $325 million due to higher acquisition and integration costs for corresponding margin of 67%. EBITDA was $338 million for a corresponding margin of 69.7%.
Cash Flow & Liquidity
AT&T generated $25,336 million of cash from operations for the first six months of 2019 compared with $19,176 million in the prior-year period. Free cash flow at quarter end increased to $8,812 million from $5,121 million in the year-ago period. As of Jun 30, 2019, AT&T had $8,423 million of cash and cash equivalents with long-term debt of $157,937 million. The company is on track to achieve end-of-year net debt to adjusted EBITDA in the 2.5x range and has reduced debt by about $18 billion since the close of its merger with WarnerMedia.
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. 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 currently expects free cash flow in 2019 to be in the range of $28 billion with low single digit adjusted earnings per share growth and dividend payout ratio in the 50% range.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, AT&T has an average Growth Score of C, 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 quintile 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 has been net zero. Notably, AT&T has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.