AT&T Beats on Q4 Earnings & Revs

Zacks

Leading telecom Company, AT&T Inc. (T) reported fourth-quarter 2013 adjusted earnings per share of 53 cents, comfortably beating the Zacks Consensus Estimate of 50 cents. Results also improved 20.5% from the year-ago quarter’s adjusted figure of 44 cents per share. The improvement was attributable to strong growth in U-verse and strategic business along with solid smartphone sales and record low postpaid churn.

Adjusted earnings for the quarter excluded the impacts of 89 cents related to non-cash actuarial gains on benefit plansand charges of 11 cents related to other significant items.

Quarterly adjusted operating revenues increased 1.8% from the prior-year quarter to $33.2 billion, which figured slightly ahead of the Zacks Consensus Estimate of $33.06 billion. Growth came on the back of efficient network operations and an expanding broadband segment.

For 2013, the company reported adjusted earnings of $2.50 per share (up 8.2% year over year) upon adjusted operating revenues of $128.8 billion (up 1.9% year over year).

Adjusted operating income rose 22.4% year over year to $5.2 billion, resulting in an adjusted operating margin of 15.5% against 12.9% in the year-ago quarter. Adjusted operating income for the quarter excluded the impact of $7.6 billion gains in 2013 related to pension and post-employment benefit plans. Adjusted operating income for 2013 grew 0.7% year over year to $23.2 billion, resulting in an operating margin of 18%, down 20 basis points year over year.  

Adjusted operating expenses dipped 1.4% year over year to $28 billion in the fourth quarter. For 2013, operating expenses were $98.3 billion, down 14.1% year over year.

Segment Results

Wireless revenues, including equipment sales, rose 4.5% year over year to $18.4 billion in the quarter, primarily on the higher number of smartphones sold and strong demand for 4G services. Wireless data revenues climbed 16.8% year over year to approximately $5.7 billion, driven by increased Internet access, multimedia and text messages.

AT&T added 809,000 wireless customers in the reported quarter, bringing the total count to 110.4 million. This rise in numbers was owing to continued adoption of smartphones, including Apple Inc.’s (AAPL) iPhones and Google Inc.’s (GOOG) Android-based phones.

The company added 299,000 post-paid smartphone users and sold 7.9 million smartphones of which 93% were for post-paid subscriptions. At quarter end, nearly 77% of AT&T’s post-paid phone users owned smartphones. Almost 77% post-paid smartphone subscribers have 4G-based handsets.

Total churn was 1.43% compared with 1.42% in the prior-year quarter. Post paid churn was 1.11% versus 1.19% in the year-ago quarter. Post-paid ARPU (average revenue per user) grew 2.1% year over year driven by healthy data growth.

Wireline revenues dipped 1.4% year over year to $14.7 billion. Although the company experienced growth in U-verse TV and High Speed Internet segments, lower voice and legacy revenues impacted the overall revenue figure.

Revenues from residential customers increased 2.9% year over year to $5.6 billion, driven by robust activities in consumer IP data services. Business revenues slid 3.4% year over year to $8.8 billion, reflecting a drop in legacy service. Strategic business services such as Ethernet, Virtual Private Networks, hosting, IP conferencing and application services, increased 17.4% year over year.

AT&T's total U-verse subscribers, which include TV and high-speed Internet customers, touched 10.7 million at the end of the fourth quarter. Total U-verse TV subscribers reached 5.5 million (194,000 users added) and high-speed Internet users touched 10.4 million (630,000 subscribers added).

Liquidity

As of Dec 31, 2013, AT&T had $3.3 billion in cash and cash equivalents. The company had long-term debt (including current portion) of $69.2 billion, representing a net-debt-to-EBITDA ratio of 1.73%.

AT&T generated $7.9 billion of cash from operations in the quarter, while capital expenditure totaled $5.5 billion. Free cash flow for the fourth quarter was $2.5 billion. The company repurchased 54 million shares for $1.9 billion. Overall share repurchase in 2013 totaled 366 million worth $13 billion.

Outlook

For 2014,AT&T expects revenue growth of 2%-3% driven by wireless demand and wireline consumer revenues. Growth in adjusted earnings per share is estimated in the mid-single digit range excluding the impact of share buybacks. Further, the company projects capital expenditure of $21 billion and free cash flow of $11 billion range in 2014.

Going forward, the company expects margin growth to remain stable with improvements in wireless margin offsetting the negative impact of wireline margin pressure. 

Another Major Telecom Stock

Another U.S. mobile service giant Verizon Communications Inc. (VZ) reported fourth-quarter 2013 earnings of 66 cents per share, surpassing the Zacks Consensus Estimate by a penny. The results improved 73.7% from adjusted earnings of 38 cents a year ago.

Our Take

AT&T currently holds a Zacks Rank #3 (Hold). AT&T is favorably poised to reap benefits from the long-term industry catalysts. We expect AT&T to generate more profits from its planned investment program and new data plan offers.

However, the company is facing increased competition from aggressive promotional activities by Sprint Corporation and T-Mobile US, Inc. On the financial front, pension obligations and promotional costs associated with Project Velocity IP pose significant headwinds in the company’s growth track.  

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