A month has gone by since the last earnings report for AT&T (T). Shares have added about 0.9% 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 the most recent earnings report in order to get a better handle on the important drivers.
AT&T Q1 Earnings In Sync With Estimates, Revenues Miss
AT&T reported relatively modest first-quarter 2020 results as coronavirus pandemic hit top-line growth, fueling uncertainty within the organization and limiting future visibility. Despite the worldwide mayhem that led to short-term financial impacts, the company expects to continue investing in key areas and adjust its business according to the demand of the situation to fuel long-term growth, while maintaining a healthy dividend payment and actively reducing debt.
On a GAAP basis, AT&T reported net income of $4,578 million or 63 cents per share compared with $4,096 million or 56 cents per share in the year-ago quarter. The improvement in GAAP earnings despite lower revenues was primarily attributable to lower operating costs.
Excluding non-recurring items, adjusted earnings were 84 cents per share compared with 86 cents in the year-earlier quarter. The company recorded an adverse impact of 5 cent per share in the quarter for the coronavirus pandemic owing to costs associated with bad debt reserves, WarnerMedia production shutdown costs, lower advertising revenues and expenses related to retail store closures leading to lower wireless equipment sales. Adjusted earnings for the first quarter was in sync with the Zacks Consensus Estimate.
Quarterly GAAP operating revenues decreased 4.6% year over year to $42,779 million, largely due to lower revenues from legacy wireline services, WarnerMedia, domestic video and domestic wireless equipment, partially offset by growth in strategic and managed business services and domestic wireless services. The top line missed the Zacks Consensus Estimate of $44,213 million.
Operating income for the quarter was $7,486 million compared with $7,233 million in the prior-year quarter owing to lower operating costs driven by one-time spectrum gain, lower Entertainment Group and WarnerMedia costs along with cost efficiencies. This resulted in respective operating income margins of 17.5% and 16.1%. Adjusted operating income for the reported quarter was $9,066 million compared with $9,585 million in the year-earlier quarter, for respective adjusted operating income margins of 21.2% and 21.4%. Adjusted EBITDA declined to $14,232 million from $14,802 million.
During the reported quarter, AT&T experienced a net increase in total wireless subscribers of 3.3 million to reach 169.2 million in service. Postpaid churn was 1.08% compared with 1.16% in the year-ago quarter with improvement in phone churn partially offset by tablet churn. Postpaid phone-only average revenue per user (ARPU) increased 0.7% year over year to $55.68.
Communications: Total segment operating revenues were $34,249 million, down 2.6% year over year with decline in Business Wireline and Entertainment Group owing to lower legacy voice and data services revenues, partially offset by higher wireless service revenues. Service revenues from the Mobility unit improved 2.5% year over year to $13,968 million owing to prepaid subscriber gains and postpaid phone ARPU growth, while equipment revenues were down 8% to $3,434 million due to lower upgrades. Revenues from the Entertainment Group were down 7.2% to $10,515 million due to decline in premium TV subscribers and legacy services, while that from Business Wireline decreased 2.3% to $6,332 million due to lower legacy voice and data services.
Segment operating income was $8,203 million compared with $8,011 million in the year-ago quarter for respective operating margin of 24% and 22.8%. Segment EBITDA was $12,838 million compared with $12,569 million in the year-ago quarter, for respective margins of 37.5% and 35.7%.
WarnerMedia: Total segment revenues were $7,359 million, down 12.2% year over year primarily driven by lower Warner Bros. revenues due to lower contribution from theatrical and television division, and lower Turner advertising revenues. Operating income was down 24.3% to $1,699 million, primarily due to higher programming and expenses related to the upcoming launch of HBO Max, for corresponding margin of 23.1%. Segment EBITDA was $1,842 million compared with $2,386 million in the prior-year quarter.
Latin America: Total operating revenues were $1,590 million, down 4.6% year over year, due to adverse foreign currency translation. EBITDA decreased to $93 million from $127 million in the year-ago quarter for respective margins of 5.8% and 7.4%.
Xandr: Total revenues were $489 million, up 14.8% year over year due to growth in advertising business, while operating income improved 18.2% to $299 million for corresponding margin of 61.1%. EBITDA was $319 million for a corresponding margin of 65.2%.
Cash Flow & Liquidity
AT&T generated record $8,866 million of cash from operations in the quarter compared with $11,052 million in the year-ago period. Free cash flow at quarter end was $3,900 million compared with $5,870 million in the year-ago period. As of Mar 31, 2020, AT&T had $9,955 million of cash and cash equivalents with long-term debt of $147,202 million. Net debt to adjusted EBITDA was about 2.6x.
AT&T paid dividends of $3.7 billion during the quarter. The company repurchased 142 million shares during the quarter. However, AT&T decided to cancel its stock buyback program due to the severity of the coronavirus outbreak. The evolving nature of the contagious disease and its grave impact on the economy forced the company to reconsider the buyback plan, as it is yet to fathom the impact on its business with lack of visibility. Consequently, management has currently withdrawn its guidance.
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 supporting employees and customers with various financial packages.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
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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