AT&T (T) Misses on Q1 Earnings & Revenues, Reiterates View

AT&T T reported mixed first-quarter 2018 results, with the top and the bottom lines missing the respective Zacks Consensus Estimate despite solid prepaid phone gains, record low first-quarter postpaid phone churn and continued DIRECTV NOW subscriber growth.

Net Income

On a GAAP basis, AT&T reported net income of $4,662 million or 75 cents per share compared with $3,469 million or 56 cents per share in the year-ago quarter. Excluding non-recurring items, adjusted earnings were 85 cents per share compared with 74 cents in the year-earlier quarter. Adjusted earnings, however, missed the Zacks Consensus Estimate of 87 cents.

AT&T Inc. Price, Consensus and EPS Surprise

 

AT&T Inc. Price, Consensus and EPS Surprise | AT&T Inc. Quote

Revenues

Consolidated revenues decreased 3.4% year over year to $38,038 million, primarily due to decline in legacy services, adverse impact of the transition of video from linear to over-the-top services and divesture of low-margin businesses. Revenues also missed the Zacks Consensus Estimate of $39,452 million.

Of the total, Services revenues were $33,646 million, down 7.7% year over year. Equipment revenues were $4,392 million, up 51%.

Segmental Performance

Business Solutions: Total revenues were $9,185 million, down 5.2% year over year due to adoption of new accounting standards that deal with revenue recognition. Of this, Wireless service revenues totaled $1,791 million, down 10.6% year over year owing to the impact of revenue recognition and customer shifts to unlimited data plans. Wireless Equipment revenues totaled $578 million compared with $288 million in the prior-year quarter. Strategic services revenues were $3,138 million, up 5.5% due to solid performance in VPNs, Ethernet, cloud, hosting, IP conferencing, voice over IP, dedicated internet, IP broadband and security services. Legacy voice and data services contributed $2,839 million, declining 20% as customers moved to upgraded products. Other service & equipment generated $839 million, down 4.4%.

Operating income was $2,085 million compared with $2,187 million in the year-ago quarter largely due to decline in legacy services, higher FirstNet expenses and higher wireless sales costs. Operating margin was 22.7% compared with 22.6% in the prior-year quarter. EBITDA was $3,547 million compared with $3,652 million in the year-ago quarter, for respective margins of 38.6% and 37.7%.

Entertainment Group: Total revenues grossed $11,577 million, down 8.1% year over year as performance of all businesses was relatively poor. Video entertainment revenues were $8,359 million, down 7.3% due to a decline in linear TV subscribers. High-Speed Internet revenues were $1,878 million, down 3.2% led by legacy DSL decline, simplified pricing and bundle discount. Legacy voice and data services contributed $819 million, down 20.6%. Equipment and Other service generated $521 million, down 14.4%.

Operating income was $1,326 million in the reported quarter compared with $1,576 million in the prior-year quarter, leading to respective margins of 11.5% and 12.5%. EBITDA was $2,638 million compared with $2,996 million in the year-ago quarter for respective margins of 22.8% and 23.8%. The year-over-year decrease in margins were primarily due to TV content-cost pressure, decline in legacy services, fewer linear subscribers and new video platform expenses

Consumer Mobility: Total revenues were $14,986 million, up 1.2% year over year, driven by higher postpaid equipment sales (up 44.1% to $3,374 million), partially offset by lower postpaid service revenues (down 6.8% to $11,612 million).

Operating income was $4,655 million, up 2.8% year over year for margins of 31.1% compared with 30.6% in the prior-year quarter. EBITDA was $6,462 million compared with $6,246 million in the year-ago quarter for respective margins of 43.1% and 42.2%. The year-over-year improvement in margins was largely due to higher volume and cost efficiencies.

International: Total revenues were $2,025 million, up 5% year over year, owing to solid performance in Mexico. Video entertainment revenues were $1,354 million, up 1% while Wireless service revenues were $404 million, down 14.9% due to a shutdown of a wholesale business in fourth-quarter 2017. Wireless equipment revenues were $267 million, up 136.3% driven by higher market penetration.

Operating loss in this segment was $111 million compared with a loss of $120 million in the year-ago quarter due to continued investment in customer acquisition and higher depreciation. EBITDA was $221 million compared with $170 million in the year-ago quarter for respective margins of 10.9% and 8.8%, largely driven by continued margin expansion in Latin America.

Cash Flow & Liquidity

AT&T generated $8,947 million of cash from operations in first-quarter 2018 compared with $8,965 million in the prior-year quarter. Free cash flow in the reported quarter was $2,829 million compared with $2,950 million in the year-ago quarter.

At quarter end, AT&T had $48,872 million of cash and cash equivalents with long-term debt of $133,724 million.

Guidance

AT&T reiterated its earlier guidance for 2018. The company continues to expect earnings of $3.50 per share (on an adjusted basis) with free cash flow of about $21 billion. Capital expenditures are expected at around $25 billion. The company expects to gain $23 billion of net reimbursements from the FirstNet Project, which includes $1 billion of incremental tax reform investments.

Zacks Rank & Stocks to Consider

AT&T currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector are SITO Mobile, Ltd. SITO and Cogent Communications Holdings, Inc. CCOI, both carrying a Zacks Rank #2 (Buy) and United States Cellular Corporation USM sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SITO Mobile has long-term earnings growth expectations of 25%.

Cogent Communications has long-term earnings growth expectations of 10%.

United States Cellular Corporation has long-term earnings growth expectations of 1%. It has a positive earnings surprise history with an average of 306.5% in the trailing four quarters, beating estimates in each.

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