A month has gone by since the last earnings report for AT&T (T). Shares have added about 0.1% in that time frame, underperforming 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 catalysts.
AT&T Marginally Misses on Q3 Earnings, Revenues Beat
AT&T reported relatively healthy third-quarter 2020 results with solid subscriber growth backed by a resilient business model and robust cash flow position driven by a diligent execution of operational plans. While adjusted earnings marginally missed the Zacks Consensus Estimate, revenues beat the same despite coronavirus hitting top-line growth. The company expects to continue investing in key areas and adjust its business according to the evolving market scenario to fuel long-term growth, while maintaining a healthy dividend payment and actively pruning debt.
On a GAAP basis, AT&T reported net income of $2,762 million or 39 cents per share compared with $3,700 million or 50 cents per share in the year-ago quarter. The decline in GAAP earnings was primarily attributable to lower revenues stemming from lower demand due to the virus outbreak.
Excluding non-recurring items, adjusted earnings were 76 cents per share compared with 94 cents in the year-earlier quarter. Adjusted earnings for the third quarter missed the Zacks Consensus Estimate by a penny.
Quarterly GAAP operating revenues decreased 5% year over year to $42,340 million, largely due to lower revenues from legacy wireline services, lower advertising and content revenues from WarnerMedia, domestic video and adverse currency translation effects. Notably, AT&T had an estimated adverse impact of $2,525 million from coronavirus during the quarter. The top line beat the consensus mark of $41,557 million.
Operating income for the quarter was $6,132 million compared with $7,901 million in the prior-year quarter owing to top-line contraction. This resulted in respective operating income margins of 14.5% and 17.7%. Adjusted operating income for the reported quarter was $8,204 million compared with $9,901 million in the year-earlier quarter, for respective adjusted operating income margins of 19.4% and 22.2%. Adjusted EBITDA declined to $13,313 million from $15,079 million.
Despite the coronavirus-induced adversities, AT&T experienced a net increase in total wireless subscribers of 5.5 million to reach 176.7 million in service. The company witnessed solid subscriber momentum with more than 1 million net additions in phones, wearable and non-tablet computing devices, including 645,000 postpaid phone additions as work-from-home trend increased. Postpaid churn was 0.85% compared with 1.19% in the year-ago quarter with significant improvement in phone churn. Postpaid phone-only average revenue per user (ARPU) decreased 2.1% year over year to $54.70 with lower international roaming revenues and waived fees.
Communications: Total segment operating revenues were $34,287 million, down 3.1% year over year with decline in Entertainment Group and Business Wireline, partially offset by gain in the Mobility business (up 1.1% to $17,894 million). Service revenues from the Mobility unit declined marginally to $13,883 million, while equipment revenues improved 6.4% year over year to $4,011 million. Revenues from the Entertainment Group were down 10.2% to $10,053 million due to decline in premium TV subscribers and legacy services, while that from Business Wireline decreased 2.5% to $6,340 million due to lower legacy voice and data services.
Segment operating income was $7,648 million compared with $8,036 million in the year-ago quarter for respective operating margin of 22.3% and 22.7%. Segment EBITDA was $12,275 million compared with $12,634 million in the year-ago quarter, for respective margins of 35.8% and 35.7%.
WarnerMedia: Total segment revenues were $7,514 million, down 10% year over year with decline across Warner Bros. and Home Box Office, partially offset by an increase at Turner. While Turner revenues improved due to higher advertising and content revenues, that from HBO and Warner Bros. were down due to lower licensing revenues (despite higher adoption of HBO Max) and lower contribution from theatrical and games, respectively. Operating income was down 38.3% to $1,770 million, primarily due to higher investments, programming costs and expenses in HBO Max, for corresponding margin of 23.4%. Segment EBITDA was $1,930 million compared with $3,021 million in the prior-year quarter for respective margins of 25.7% and 36.2%.
Latin America: Total operating revenues were $1,396 million, down 19.3% year over year, due to adverse foreign currency translation and challenging macroeconomic conditions arising from the coronavirus-induced turmoil. EBITDA decreased to $59 million from $105 million in the year-ago quarter for respective margins of 4.2% and 6.1%.
Cash Flow & Liquidity
AT&T generated $33,048 million of cash from operations for the first nine months of 2020 compared with $36,725 million in the year-ago period. Free cash flow at quarter end was $8,272 million compared with $6,200 million in the year-ago period. As of Sep 30, 2020, AT&T had $9,758 million of cash and cash equivalents with long-term debt of $152,980 million. Net debt to adjusted EBITDA was about 2.7x.
For full year 2020, management expects free cash flow in the vicinity of $26 billion with a dividend payout in the high 50% bracket. AT&T is evolving its distribution channels for changing customer demands and emphasizing on self-installation and software-based platforms to redefine its business plans for the virus outbreak. While optimizing operations, it is aiming to increase efficiencies to lower costs while focusing on 5G and fiber-based connectivity along with expanded reach of software-based entertainment platforms. At the same time, the company aims to reduce its debt burden by monetizing non-core assets.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
Currently, AT&T has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.
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