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AT&T (T) Q2 Earnings Beat on Wireless Strength, Guidance Up

AT&T Inc. T reported strong second-quarter 2021 results with solid subscriber growth backed by a resilient business model and robust cash flow position driven by a diligent execution of operational plans. Riding on a healthy traction from HBO Max and fiber broadband businesses, both adjusted earnings and revenues beat the Zacks Consensus Estimate. The company 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. With solid quarterly results, AT&T revised its earlier guidance for 2021 to better reflect the improving market conditions.

Net Income

On a GAAP basis, AT&T reported net income of $1,514 million or 21 cents per share compared with $1,229 million or 17 cents per share in the year-ago quarter. The significant year-over-year improvement was primarily attributable to higher revenues owing to subscriber growth across wireless, fiber and streaming businesses.

Excluding non-recurring items, adjusted earnings were 89 cents per share compared with 83 cents in the year-earlier quarter. Adjusted earnings for the second quarter beat the Zacks Consensus Estimate by 11 cents.

AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. price-consensus-eps-surprise-chart | AT&T Inc. Quote

Quarter Details

Quarterly GAAP operating revenues increased 7.6% year over year to $44,045 million, largely due to higher equipment sales within the Mobility business and growth in advertising and subscription-based revenues within WarnerMedia. The top-line growth was partially offset by lower revenues from Business Wireline services and divestures of wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands in fourth-quarter 2020. The top line, however, beat the consensus mark of $42,649 million.

Adjusted operating income for the quarter was $8,893 million compared with $8,972 million in the prior-year quarter owing to higher operating expenses. This resulted in respective adjusted operating income margins of 20.2% and 21.9%. Adjusted EBITDA declined to $13,585 million from $14,112 million.

AT&T experienced a net increase in total wireless subscribers of 5.5 million to reach 191.6 million in service. The company witnessed solid subscriber momentum with more than 1,156,000 post-paid net additions and 174,000 prepaid phone net additions as work-from-home trend continued to gain in popularity. Postpaid churn was 0.87% compared with 1.05% in the year-ago quarter with significant improvement in phone churn. Postpaid phone-only average revenue per user (ARPU) decreased 0.4% year over year to $54.24 due to promotional discounts.

Segmental Performance

Communications: Total segment operating revenues were up 6.1% to $28,128 million as decline in Business Wireline was offset by a healthy gain in the Mobility business (up 10.4% to $18,936 million). Service revenues from the Mobility unit improved 5% to $14,346 million driven by solid subscriber gains, while equipment revenues improved 31.9% year over year to $4,590 million driven by higher mix of high-priced smartphone sales and other postpaid devices. Revenues from Consumer Wireline business were up 2.9% to $3,140 million due to gain in fiber broadband. Revenues from Business Wireline were down 4% to $6,052 million driven by decline in legacy products as customers shifted to more advanced IP-based offerings.

Segment operating income was $7,340 million compared with $7,488 million in the year-ago quarter for respective operating margin of 26.1% and 28.3%. Adjusted EBITDA was $11,425 million compared with $11,531 million in the year-ago quarter.

WarnerMedia: Total segment revenues were $8,791 million, up 30.7% year over year with higher subscription, content and advertising revenues signifying partial recovery from the coronavirus-induced adversities exhibited in the prior-year quarter. Subscription revenues improved 21.3% to $3,961 million due to higher domestic HBO Max and HBO subscribers (up 10.7 million year over year). Advertising revenues were up 48.5% to $1,739 million due to resumption of live sporting events like the NBA. Content revenues increased 34.9% to $3,091 million owing to contribution from theatrical product sales. Operating income was down 11.3% to $1,692 million, primarily due to higher investments, programming costs and expenses in HBO Max, for corresponding margin of 19.2%. Adjusted EBITDA was $1,857 million compared with $2,072 million in the prior-year quarter for respective margins of 21.1% and 30.8%.

Latin America: Total operating revenues were $1,437 million, up 16.6% year over year, due to growth in the Mexico wireless operations and favorable foreign exchange impact. EBITDA improved to $110 million from $33 million in the year-ago quarter for respective margins of 7.7% and 2.7%.

Notable Quarter Developments

During the quarter, AT&T inked a definitive agreement with Discovery, Inc. DISCA to spin off its media assets and merge them with the complementary assets of the latter to form a standalone global entertainment company amid continuous cord-cutting in U.S. households. AT&T will receive $43 billion in a combination of cash and debt securities and will own 71% of the new entity. The transaction, likely to be completed in mid-2022, is expected to enable the carrier to trim its huge debt burden and focus on core businesses. The cash resources are likely to be utilized to augment its network infrastructure throughout the country and expand its fiber footprint.

The separation of the media assets are likely to offer the company an opportunity to better align its communications business with a focused total return capital allocation strategy. Moreover, a focused entertainment company is likely to be better placed to capitalize on the booming direct-to-consumer (DTC) streaming services market and unlock value from media assets. This, in turn, could help it to reinvest in the new entity for more content and digital innovation in order to scale the global DTC business. The transaction is expected to generate cost synergies of $3 billion per year resulting from technology, marketing and platform savings with consolidation of DTC capabilities and elimination of duplicate initiatives.

Cash Flow & Liquidity

AT&T generated $20,837 million of cash from operations for the first six months of 2021 compared with $20,925 million in the prior-year period. Free cash flow at quarter end was $6,951 million compared with $7,593 million in the year-ago period, bringing the respective tallies for the first half of 2021 and 2020 to $12,845 million and $11,493 million. As of Jun 30, 2021, AT&T had $11,869 million of cash and cash equivalents with long-term debt of $155,767 million. Net debt to adjusted EBITDA was about 3.15x.

Outlook Revised

For full year 2021, management revised its earlier guidance based on improving market conditions and solid quarterly performance. AT&T currently expects adjusted earnings to grow in low- to mid-single digit, up from earlier projections of flat to 1% year-over-year growth. Revenue is likely to grow by 2-3%. The company expects free cash flow in the vicinity of $27 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 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.

Zacks Rank & Stocks to Consider

AT&T currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader industry are SeaChange International, Inc. SEAC and TESSCO Technologies Incorporated TESS, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SeaChange has a long-term earnings growth expectation of 10%. It delivered an earnings surprise of 12.2%, on average, in the trailing four quarters.

TESSCO delivered an earnings surprise of 2.5%, on average, in the trailing four quarters.

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