AT&T Misses Q2 Earnings, Revenues on High Promo Costs

Zacks

Leading telecom company AT&T Inc. (T) reported second-quarter 2014 adjusted earnings per share of 62 cents, missing the Zacks Consensus Estimate by a penny. Results dropped 7.5% from the year-ago quarter’s adjusted figure of 67 cents per share. Significant pricing competition, new device financing plans and other promotional strategies weighed on earnings during the reported quarter.

Adjusted earnings for the quarter excluded the impact of 10 cents related to expense of the Leap Wireless transaction and gains from the sale of the company’s equity investment in America Movil S.A.B. de C.V. (AMX).  

Quarterly adjusted operating revenues increased 1.6% from the prior-year quarter to $32.6 billion, which figured below the Zacks Consensus Estimate of $33.2 billion.

Adjusted operating income declined 5% year over year to $5.8 billion, resulting in an adjusted operating margin of 17.7% against 19.1% in the year-ago quarter. Operating expenses rose 3.8% year over year to $27.0 billion in the second quarter.

Segment Results

Wireless revenues, including equipment sales, rose 3.7% year over year to $17.9 billion in the quarter, primarily on strong adoption of Mobile Share and AT&T Next plans. Wireless service revenues decreased 1.4% year over year to approximately $15.1 billion.

AT&T added 634,000 wireless customers in the reported quarter, bringing the total count to 116.6 million.

The company added 700,000 post-paid smartphone users and sold 1.6 million post paid smartphones. Smartphones contributed 92% of all postpaid phone sales. 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. At quarter end, nearly 80% of AT&T’s post-paid phone users owned smartphones. Moroever, almost 63% post-paid smartphone subscribers have 4G-based handsets.

Total churn was 1.47% compared with 1.36% in the prior-year quarter. Post paid churn was 0.86% versus 1.02% in the year-ago quarter.

Wireline revenues dipped 0.9% year over year to $14.6 billion. Although the company experienced growth in the U-verse TV and High Speed Internet segments, lower voice and legacy revenues impacted the overall revenue figure.

Revenues from residential customers increased 3.0% year over year to $5.7 billion, driven by robust activities in consumer IP data services. Business revenues slid 2.9% year over year to $8.7 billion, reflecting a drop in legacy service. Strategic business services such as Ethernet, Virtual Private Networks, hosting, IP conferencing and application services, increased 13.5% year over year.

AT&T's total U-verse subscribers, which include TV and high-speed Internet customers, touched 17.4 million at the end of the second quarter. Total U-verse TV subscribers reached 5.9 million (488,000 users freshly added in the quarter) and high-speed Internet users touched 11.5 million (634,000 newly added).

Liquidity

As of Jun 30, 2014, AT&T had $11.3 billion in cash and cash equivalents. The company had long-term debt (including current portion) of $84.1 billion, representing a net-debt-to-EBITDA ratio of 1.71%.

AT&T generated $8.1 billion of cash from operations in the quarter, while capital expenditure totaled $6.0 billion. Free cash flow for the second quarter was $2 billion. The company repurchased 37 million shares for $1.2 billion. Overall, the company has share repurchase authorization of 5 million shares for $159 million.

Guidance

For 2014, AT&T expects revenue growth of 5% and stable margin growth. Adjusted earnings per share growth rate is projected at the lower end of the mid-single digit range. Capital expenditure is expected to hover around $21 billion and free cash flow is estimated at $11 billion. 

Our Analysis

We believe the company’s encouraging outlook is triggered by healthy contribution from wireless services. AT&T’s wireless business, particularly in the post-paid segment, is benefiting from promotional strategies that the company had undertaken and remains evidenced by strong customer additions. Further, growing demand for U-verse and strategic services are also contributing to top-line growth at the company.

AT&T currently has a Zacks Rank #3 (Hold).

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