Written by Zacks Equity Research — A month has gone by since the last earnings report for AT&T (T). Shares have lost about 4.5% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.
AT&T Beats on Q4 Earnings, Achieves All Targets for 2019
AT&T ticked all the boxes it set to achieve in 2019 and reported healthy fourth-quarter results with solid cash flow and adjusted earnings. The company expects to deliver significant progress in its three-year financial allocation plan through continuous improvement in margins and bottom-line growth driven by sustained investments and debt reduction.
Net Income
On a GAAP basis, AT&T reported net income of $2,394 million or 33 cents per share compared with $4,858 million or 66 cents per share in the year-ago quarter. The slump in GAAP earnings despite lower operating costs was primarily attributable to lower revenues, write-off on certain copper facilities and merger and integration-related expenses. For full year 2019, GAAP earnings declined to $13,903 million or $1.89 per share from $19,370 million or $2.85 per share primarily due to higher operating expenses.
Excluding non-recurring items, adjusted earnings for the quarter were 89 cents per share compared with 86 cents in the year-earlier quarter, and exceeded the Zacks Consensus Estimate by a penny. Adjusted earnings for 2019 improved to $3.57 per share from $3.52 in 2018.
Quarter Details
Quarterly GAAP operating revenues decreased 2.4% year over year to $46,821 million, largely due to lower revenues from legacy wireline services, WarnerMedia and domestic video, partially offset by growth in strategic and managed business services, domestic wireless services and IP broadband. The top line missed the Zacks Consensus Estimate of $46,900 million. For 2019, the company recorded total revenues of $181,193 million compared with $170,756 million in 2018, largely driven by a full year contribution from WarnerMedia.
Operating income for the quarter was $5,321 million compared with 6,160 million in the prior-year quarter owing to higher asset impairment charges, resulting in respective operating income margins of 11.4% and 12.8%. Adjusted operating income for the reported quarter was $9,188 million compared with 9,424 million in the year-earlier quarter, while adjusted operating income margins remained flat at 19.6%.
During the reported quarter, AT&T experienced a net increase in total wireless subscribers of 3.6 million to reach 165.9 million in service. Postpaid churn was 1.29% compared with 1.23% in the year-ago quarter owing to pricing pressures and tablet churn. Postpaid phone-only average revenue per user (ARPU) increased 0.4% year over year to $55.52.
Segmental Performance
Communications: Total segment operating revenues were $36,552 million, down 1.9% 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 1.8% year over year to $13,948 million owing to prepaid subscriber gains and postpaid phone ARPU growth, while equipment revenues were down 2.1% to $4,752 million due to lower upgrades. Revenues from the Entertainment Group were down 6.1% to $11,233 million due to decline in premium TV subscribers and legacy services, while that from Business Wireline decreased 1.7% to $6,589 million due to lower legacy voice and data services.
Segment operating income was $7,511 million compared with $7,607 million in the year-ago quarter for respective operating margin of 20.6% and 20.4%. Segment adjusted EBITDA was $12,101 million compared with $12,175 million in the year-ago quarter, for respective margins of 33.1% and 32.7%.
WarnerMedia: Total segment revenues were $8,924 million, down 3.3% year over year primarily driven by lower Warner Bros. revenues due to lower contribution from theatrical and television division, partially offset by gains at Home Box Office and Turner. Operating income was down 9.5% to $2,447 million for corresponding margin of 27.1%. Segment EBITDA was $2,576 million for a corresponding margin of 28.9%.
Latin America: Total operating revenues were $1,758 million, down 4.6% year over year, due to adverse foreign currency translation. EBITDA increased to $205 million from $38 million in the year-ago quarter for respective margins of 11.7% and 2.1%.
Xandr: Total revenues were $607 million, up 7.2% year over year due to growth in advertising business, while operating income improved 8.4% to $413 million for corresponding margin of 68%. EBITDA was $430 million for a corresponding margin of 70.8%.
Cash Flow & Liquidity
AT&T generated record $48,668 million of cash from operations in 2019 compared with $43,602 million in 2018. Free cash flow at quarter end was $8,151 million compared with $7,928 million in the year-ago period. As of Dec 31, 2019, AT&T had $12,130 million of cash and cash equivalents with long-term debt of $151,709 million compared with respective tallies of $5,204 million and $166,250 million in the prior-year period.
AT&T completed or announced about $9 billion worth of non-core asset sale during the quarter and $18 billion for full year 2019, which exceeded its goal of $6-$8 billion asset monetization for the year. The company reduced debt by $20.3 billion in 2019 to achieve end-of-year net debt to adjusted EBITDA target in the 2.5x range.
Guidance & Three-Year Capital Allocation Plan
Management reiterated its guidance for 2020 and continues to expect adjusted earnings in the range of $3.60 to $3.70 per share on revenue growth of 1-2%. Free cash flow is expected to be stable at $28 billion with non-core asset monetization of $5-$10 billion. Adjusted EBITDA margin is expected to remain steady compared with 2019 levels.
For the three-year period from 2020 to 2022, AT&T continues to expect consolidated revenue growth of 1-2% per year. Adjusted earnings are expected to be significantly up to $4.50 to $4.80 per share by 2022 with adjusted EBITDA margin of 35%. While adjusted EBITDA margin is expected to be stable in 2020, it is likely to grow in 2021 and 2022 driven by extensive companywide cost-reduction plan, WarnerMedia synergies, continued Mobility growth and AT&T Mexico EBITDA growth. Free Cash flow is anticipated to be within $30 billion to $32 billion in 2022 with net-debt-to-adjusted EBITDA of 2.0x to 2.25x as 100% debt related to the acquisition of Time Warner assets is likely to be repaid.
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