A month has gone by since the last earnings report for AT&T (T - Free Report) . Shares have lost about 1.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is AT&T due for a breakout? 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 drivers.
AT&T's Beats on Q3 Earnings, Offers 3-Year Financial View
AT&T reported relatively tepid third-quarter 2019 results with year-over-year decline in GAAP earnings and revenues due to lower-than-anticipated performances from legacy wireline services and WarnerMedia businesses. The company has offered a three-year guidance and financial allocation plan, which is expected to drive significant improvement in margins and bottom-line growth with sustained investments and debt reduction.
On a GAAP basis, AT&T reported net income of $3,700 million or 50 cents per share compared with $4,718 million or 65 cents per share in the year-ago quarter. The slump in earnings despite lower operating costs was primarily attributable to lower revenues and merger and integration-related expenses.
Excluding non-recurring items, adjusted earnings for the quarter were 94 cents per share compared with 90 cents in the year-earlier quarter, and exceeded the Zacks Consensus Estimate by a penny.
Quarterly GAAP operating revenues decreased 2.5% year over year to $44,588 million, largely due to lower revenues from legacy wireline services, WarnerMedia and domestic video, partially offset by growth in strategic and managed business services, domestic wireless services and IP broadband. The top line missed the Zacks Consensus Estimate of $45,006 million.
Operating income for the quarter was $7,901 million compared with 7,269 million in the prior-year quarter owing to lower operating expenses, resulting in respective operating income margins of 17.7% and 15.9%. Adjusted operating income for the reported quarter was $9,901 million compared with 10,035 million in the year-earlier quarter for respective margins of 22.2% and 21.9%.
During the reported quarter, AT&T experienced a net increase in total wireless subscribers of 3.7 million to reach 162.3 million in service. Postpaid churn was 1.19% compared with 1.16% in the year-ago quarter owing to pricing pressures and tablet churn. Postpaid phone-only average revenue per user (ARPU) increased 0.6% year over year to $55.89.
Communications: Total segment operating revenues were $35,401 million, down 1.7% year over year with decline in Business Wireline and Entertainment Group owing to lower legacy voice and data services revenues, partially offset by higher wireless service revenues. Service revenues from the Mobility unit improved 0.7% year over year to $13,930 million owing to subscriber gains and postpaid phone ARPU growth, while equipment revenues were down 3.5% to $3,771 million due to lower upgrades. Revenues from the Entertainment Group were down 3.4% to $11,197 million, while that from Business Wireline decreased 2.7% to $6,503 million due to lower legacy voice and data services.
Segment operating income was $8,036 million compared with $8,150 million in the year-ago quarter for respective operating margin of 22.7% and 22.6%. Segment EBITDA was $12,634 million compared with $12,726 million in the year-ago quarter, for respective margins of 35.7% and 35.3%.
WarnerMedia: Total segment revenues were $7,846 million, down 4.4% year over year primarily driven by lower Warner Bros. revenues due to lower contribution from theatrical and television division, partially offset by gains at Home Box Office and Turner. Operating income was down 1.5% to $2,544 million for corresponding margin of 32.2%. Segment EBITDA was $2,697 million for a corresponding margin of 34.1%.
Latin America: Total operating revenues were $1,730 million, down 5.6% year over year, due to adverse foreign currency translation. EBITDA increased to $105 million from $87 million in the year-ago quarter for respective margins of 6.1% and 4.7%.
Xandr: Total revenues were $504 million, up 13.3% year over year due to AppNexus acquisition, while operating income declined 1.8% to $327 million due to higher acquisition and integration costs for corresponding margin of 64.9%. EBITDA was $342 million for a corresponding margin of 67.9%.
Cash Flow & Liquidity
AT&T generated $36,725 million of cash from operations for the first nine months of 2019 compared with $31,522 million in the prior-year period. Free cash flow at quarter end was $6,200 million compared with $6,473 million in the year-ago period. As of Sep 30, 2019, AT&T had $6,588 million of cash and cash equivalents with long-term debt of $153,568 million. AT&T sold $3.5 billion worth of non-core assets during the quarter. 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 $3.6 billion in the quarter and $12.7 billion year to date.
Guidance & Three-Year Capital Allocation Plan
Management has offered healthy guidance for 2020 and expects adjusted earnings in the range of $3.60 to $3.70 per share on revenue growth of 1-2%. Free cash flow is expected to be stable at $28 billion with non-core asset monetization of $5-$10 billion. Adjusted EBITDA margin is expected to remain steady compared with 2019 levels.
For the three-year period from 2020 to 2022, AT&T expects consolidated revenue growth of 1-2% per year. Adjusted earnings are expected to be significantly up to $4.50 to $4.80 per share by 2022 with adjusted EBITDA margin of 35%. While adjusted EBITDA margin is expected to be stable in 2020, it is likely to grow in 2021 and 2022 driven by extensive companywide cost-reduction plan, WarnerMedia synergies, continued Mobility growth and AT&T Mexico EBITDA growth. Free Cash flow is anticipated to be within $30 billion to $32 billion in 2022 with net-debt-to-adjusted EBITDA of 2.0x to 2.25x as 100% debt related to the acquisition of Time Warner assets is likely to be repaid.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
Currently, AT&T has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. 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 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.