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It has been about a month since the last earnings report for AT&T (T). Shares have lost about 3.7% 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 its most recent earnings report in order to get a better handle on the important catalysts.
AT&T Beats Q4 Earnings Estimates Despite Lower Revenues
AT&T reported mixed fourth-quarter 2021 results as healthy wireless traction was partially offset by lower contribution from divested businesses and lower demand for legacy voice and data services. The company recorded modest subscriber growth backed by a resilient business model and robust cash flow position driven by a diligent execution of operational plans. AT&T expects to continue investing in key areas of 5G, fiber and HBO Max 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 $4,992 million or 69 cents per share against net loss of $13,938 million or loss of $1.95 per share in the year-ago quarter. The significant year-over-year improvement despite lower revenues was primarily attributable to lower operating expenses owing to the impact of divested businesses. In full-year 2021, AT&T recorded net income of $19,874 million or $2.76 per share against net loss of $5,369 million or loss of 75 cents per share in 2020, primarily driven by lower expenses.
Excluding non-recurring items, adjusted earnings were 78 cents per share compared with 75 cents in the year-earlier quarter. Adjusted earnings for the fourth quarter beat the Zacks Consensus Estimate by a couple of cents.
Quarterly GAAP operating revenues decreased 10.4% year over year to $40,958 million, largely due to the divestment of the U.S. video business and Vrio, partially offset by higher equipment sales within the Mobility business and growth in revenues within WarnerMedia. The top-line growth was also impacted by lower revenues from Business Wireline services. The top line, however, beat the consensus mark of $40,422 million. In full-year 2021, AT&T recorded operating revenues of $168,864 million compared with $171,760 million in 2020.
Adjusted operating income for the quarter was $6,649 million compared with $7,814 million in the prior-year quarter. This resulted in respective adjusted operating income margins of 16.2% and 17.1%. Adjusted EBITDA declined to $11,301 million from $12,889 million.
AT&T experienced a net increase in total wireless subscribers of 5.3 million to reach 201.8 million in service. The company witnessed solid subscriber momentum with more than 1,285,000 post-paid net additions and 24,000 prepaid phone net additions as work-from-home trend continued to gain in popularity. Postpaid churn was 1.02% compared with 0.94% in the year-ago quarter. Postpaid phone-only average revenue per user (ARPU) decreased 0.7% year over year to $54.06 due to promotional discounts.
Communications: Total segment operating revenues were up 2.4% to $30,206 million as decline in Business Wireline (down 5.6% to $5,901 million) was offset by a healthy gain in the Mobility business (up 5.1% to $21,146 million) and Consumer Wireline (up 1.4% to $3,159 million). Service revenues from the Mobility unit improved 4.6% to $14,669 million driven by solid subscriber gains, while equipment revenues improved 6.2% year over year to $6,477 million driven by higher mix of high-priced smartphone sales and other postpaid devices. Revenues from Consumer Wireline business were up due to gain in fiber broadband. Revenues from Business Wireline were down due to decline in legacy products as customers shifted to more advanced IP-based offerings.
Segment operating income was $6,451 million compared with $6,360 million in the year-ago quarter for respective operating margin of 25.3% each. Adjusted EBITDA was $10,607 million compared with $10,422 million in the year-ago quarter.
WarnerMedia: Total segment revenues were $9,873 million, up 15.4% year over year with higher subscription and content revenues signifying partial recovery from the coronavirus-induced adversities exhibited in the prior-year quarter, partially offset by lower advertising revenues. Subscription revenues improved 5.4% to $3,817 million due to higher HBO Max and HBO subscribers (up 13.1 million year over year). Advertising revenues were down 12.9% to $1,645 million due to lower political ads. Content revenues increased 45% to $4,411 million owing to contribution from theatrical product sales and TV licensing. Operating income was down 37.9% to $1,579 million, as higher investments, programming costs and expenses in HBO Max were partially offset by higher revenues and cost-saving initiatives, for corresponding margin of 16%. Adjusted EBITDA was $1,744 million compared with $2,719 million in the prior-year quarter for respective margins of 17.7% and 31.8%. Global HBO and HBO Max subscribers were up to 73.8 million at the end of the quarter, while domestic subscriber ARPU was $11.15.
Latin America: Total operating revenues were $1,063 million, down 29% year over year, due to the divesture of Vrio. EBITDA declined to $74 million from $95 million in the year-ago quarter for respective margins of 7% and 6.3%.
Notable Quarter Developments
AT&T’s game-changing deal with Discovery, Inc.for the divesture of its WarnerMedia business got a big boost in the fourth quarter, with the European Commission granting unconditional antitrust clearance for the transaction. AT&T expects the merger to be completed by mid-2022. The transaction aims to spin off the carrier’s media assets and merge them with the complementary assets of Discovery. The transaction is expected to enable the carrier to trim its huge debt burden and focus on core businesses. The separation of the media assets is likely to offer the company an opportunity to better align its communications business with a focused total return capital allocation strategy.
AT&T has also decided to sell its advertising and analytics division, Xandr, to Microsoft Corporation for an undisclosed amount. Xandr’s advanced technology complements Microsoft’s advertising offerings and will help accelerate the delivery of digital advertising and retail media solutions for the open web. The deal combines Microsoft’s audience intelligence and advertising customer base with Xandr’s platform.
Cash Flow & Liquidity
AT&T generated $41,957 million of cash from operations in 2021 compared with $43,130 million in the prior-year period. Free cash flow at quarter end was $8,746 million compared with $7,690 million in the year-ago period, bringing the respective tallies for 2021 and 2020 to $26,753 million and $27,455 million. As of Dec 31, 2021, AT&T had $21,169 million of cash and cash equivalents with long-term debt of $152,724 million compared with respective tallies of $9,740 million and $153,775 million in the prior-year period. Net debt to adjusted EBITDA was about 3.17x.
For full year 2022, AT&T expects adjusted earnings to be in the range of $3.10 to $3.15 per share. Revenue is likely to grow by low single digits. The company expects free cash flow in the vicinity of $23 billion. 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 operating costs, while focusing on 5G and fiber-based connectivity along with expanded reach of software-based entertainment platforms. The company is also aiming to reduce its debt burden by monetizing non-core assets.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
At this time, AT&T has a subpar Growth Score of D, 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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