AT&T Ends 2012 on a Mixed Note

Zacks

Leading communications firm AT&T Inc (T) reported fourth-quarter 2012 adjusted earnings per share of 44 cents that missed the Zacks Consensus Estimate of 47 cents. Comparing year over year, the results improved 10% from adjusted earnings of 40 cents.

Quarterly revenues remained at almost the same level with the prior-year quarter at $32.58 billion, but surpassed the Zacks Consensus Estimate of $32.15 billion. Excluding the impact of the sale of the Advertising Solutions unit and effects of hurricane Sandy, revenues increased 2.8% year over year.

For full-year 2012, AT&T posted earnings of $2.31 per share (missing our projection by 2.5% but increasing 8.5% year over year), on revenues of $127.4 billion (up 0.6% from the last year).

In the fourth quarter, adjusted operating income decreased 0.7% year over year to $4.2 billion, while adjusted operating expenses crept up 3.3% year over year to $28.4 billion.

Segment Results

Wireless revenues, including service and equipment, rose 5.7% year over year to $17.6 billion in the quarter, primarily on the higher number of smartphone sold as well as branded computing device sales and lower churn. Wireless data revenues leaped 14.7% year over year to approximately $6.8 billion, driven by Internet access, multimedia and text messages.

AT&T added 1.1 million wireless customers in the reported quarter, totaling 107.0 million. Strong additions were attributable to the continued adoption of smartphones, including Apple Inc.’s (AAPL) iPhones and Google Inc’s (GOOG) Android-based phones. Increased sales of tablets and robust Mobile Premise services also aided the growth.

Retail post-paid additions were 780,000 – reflecting the best figure in the last 12 quarters. Connected device additions were 246,000 and reseller additions were 234,000 in the reported quarter. However, the company lost about 166,000 prepaid customers as a result of a drop in GoPhone along with session-based tablets.

AT&T’s branded computing subscribers (including tablets, aircards, MiFi devices, tethering plans and other data-only devices) shot up 26%, bringing the total to 6.4 million.

During the quarter, the company touched a record sale of 10.2 million smartphones that comprised 86% of post-paid device sales and 89% of post-paid phone sales. Almost 55% postpaid smartphone subscribers have 4G-based devices. Notably, 16% of the iPhone customers were new to AT&T that provided new connections to 8.6 million phones.

Total churn for the quarter was 1.19% compared to 1.21% in the prior-year quarter. Post-paid ARPU (average revenue per user) grew 1.9% year over year to a record $64.98, driven by healthy data growth.

Wireline revenues dipped 0.5% year over year to $14.9 billion. Strong data revenues driven by improving consumer and business strategic services revenue trends partly compensated for lower voice and legacy revenues.

Revenues from residential customers increased 3.0% year over year (maximum growth in more than four years) to $5.5 billion, driven by robust AT&T U-verse services. Business revenues slid 2.1% year over year to $9.1 billion, reflecting the impacts of a sluggish economy. Strategic business services such as Ethernet, Virtual Private Networks, hosting, IP conferencing and application services, spiked 10.6% year over year.

AT&T's total video subscribers, which include U-verse TV and bundled satellite customers, touched 8.0 million at the end of the fourth quarter. Total U-verse TV subscribers reached 4.5 million with the net addition of 192,000 customers on continued high-speed Internet attach rates.

Financials

At the end of 2012, AT&T had $4.87 billion in cash and cash equivalents. The company had long-term debt (including current portion) of $69.8 billion, representing debt-to-capitalization ratio of 43.0%.

AT&T generated $39.2 billion of cash from operations in 2012. The company’s capital expenditure amounted to $19.5 billion. During 2012, the company repurchased 371 million shares for $12.8 billion in the reported quarter.

Outlook

For 2013, AT&T expects to witness revenue growth of more than 2%, aided by contributions from wireless services and wireline consumer business. Earnings per share will improve to upper single digits and above, while capital expenditure is expected to be around $21 billion.

Another Major Telecom Stock

The largest U.S. mobile service provider Verizon Communications Inc. (VZ) reported fourth quarter 2012 results on Jan 22, with adjusted earnings of 45 cents per share coming below the Zacks Consensus Estimate of 54 cents. The results also lagged the year-ago figure of 52 cents.

Our Take

AT&T currently holds a Zacks Rank #3 (Hold). We see strong growth prospects for the company driven by subscriber accretion, higher smartphones adoption, LTE mobile broadband network, iPhone sales and U-verse expansion. However, persistent access line losses, competitive pressures and heavy iPhone subsidies might drag near-term margins and earnings.
 

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