AT&T Drops Heavily Anticipated Results

Summary:

• AT&T Inc.’s Q3 revenue missed expectations, but strong cash flow and subscriber growth, especially in fiber and postpaid, were positive highlights.
• Operating expenses were lower than expected, leading to an EPS beat at $0.60 per share, surpassing our $0.57-$0.59 estimate.
• Despite a revenue shortfall, free cash flow was robust, covering dividends comfortably, with a payout ratio of just 41.2%.
• Management’s focus on debt reduction is promising, aiming for a net debt-to-EBITDA leverage of 2.5x by early 2025.
• What type of investor are you?

With the bountiful yield offered and more opportunity for capital appreciation, we closed a winning trade in AT&T Inc. (NYSE:T) earlier this year, and have been letting that profit run. Earlier this month, we outlined our expectations for Q3 earnings. In this column, with AT&T having just reported those earnings this morning, we review the performance relative to our expectations.

AT&T Q3 earnings top-line revenue results come up just short

We were looking for $30.40 billion to $30.80 billion in revenues in Q3. This would have been a less than 1% increase from last year at our midpoint in this range. However, revenues came up short of our expectations and short of the Street’s view as well. Revenue in Q3 hit $30.2 billion. This missed analyst consensus by $250 million and missed our more bullish midpoint by $400 million. That was a negative start to the report and carried down many of the lines, but there were positives. For example, we saw some positive news in subscriber post-paid adds.

AT&T Q3 earnings subscriber adds

We previously laid out our expectations for wireless postpaid growth and net fiber adds. Back in Q2, prepaid adds were 35,000. For Q3, we were looking for 10,000-15,000 adds. Postpaid phone net adds were 419,000 in Q2, and we thought this number tracked for 400,000 in Q3, while we expected a lower than average postpaid churn, at just 0.75%. Furthermore, we were looking for 220,000 fiber net adds, which would be the 19th straight quarter with more than 200,000 net fiber adds.

In Q3, we saw Mobility revenues were up 4.0% from Q3 2023, driven by service revenue growth of 4.0% stemming from both subscriber and postpaid ARPU growth. This was offset by lower equipment revenues on lower sales volume. We were happy to see that the postpaid phone net adds were 403,000, ahead of our target. The market likes this. And we thought churn would be very low. The postpaid churn was just 0.78%, a strong performance, and industry leading, and close to our estimates.

The fiber adds were a slight beat. AT&T reported 226,000 fiber net adds in Q3, beating our 220,000 estimate. This marks 19 straight quarters with more than 200,000 net fiber adds.

Now, it is not all positive. As noted in our earnings preview column, Business revenues have been very volatile. And they have been trending lower. Business Wireline revenues were down 11.8% year-over-year, primarily due to lower demand for legacy voice and data services as well as product simplification. But this was offset some by growth in connectivity services. Results also reflect AT&T’s cybersecurity business moving into a new joint venture as well as sales of intellectual property sales. So, revenues missed, and it was because of these declines in Business revenues. However, consumer trends are strong, as are fiber connections.

CEO John Stankey’s commentary for AT&T Q3 earnings report

In the release, John Stankey, AT&T CEO, stated:

Despite severe weather and a work stoppage in the Southeast, this is our 19th straight quarter of adding more than 200,000 new AT&T Fiber customers. We continue to grow our largest business, Mobility, the right way with what we expect will be industry-leading postpaid phone churn for the 13th time in 15 quarters. We are investing at the top of the industry, reducing debt and growing free cash flow year to date. These solid results give us confidence in reiterating our full-year consolidated financial guidance

This commentary hones in on the strength of fiber, as well as the low churn. Moreover, cash flow and debt were mentioned, which are the two vital metrics we monitor.

AT&T Q3 operating expenses and earnings

We were looking for operational expenses in the $23.8 to $24.3 billion range. Well, operating expenses were $23.7 billion, but that does not include a $4.4 billion goodwill charge. Factoring that in, operating expenses were $28.1 billion, but the $23.7 billion number is more important. Operating income was $2.1 billion versus $5.8 billion in the year-ago quarter as reported. When adjusting for certain items, included the charge we just mentioned, adjusted operating income was $6.5 billion, similar to a year ago. Further, we expected earnings of $0.57-$0.59 per share. EPS came above our expectations at $0.60 per share, a nice beat stemming from lower operating expenses.

Cash flow is king

With the revenue miss we had concerns, but cash flow was quite strong in Q3. This set a strong tone for the back half of the year. Cash flow was strong and more than enough to cover the dividend. Cash from operating activities was $10.2 billion, right about at the midpoint of the range we suggested we would see. CAPEX was $5.3 billion, in line with our expectations. There was also a $0.2 billion cash paid for vendor financing. This all combined for free cash flow that more than covered the dividend. AT&T generated free cash flow of $5.1 billion in the quarter, right at the midpoint of our estimates. With $2.1 billion in dividends paid, the dividend payout ratio was just 41.2%. This means the dividend is more than safe. But what about the enormous debt burden?

AT&T’s debt burden

Each quarter we update on the massive debt burden. Debt reduction is a goal for the company. Total debt was $129.0 billion at the end of Q3, and net debt was $125.8 billion. The company continues to reduce the debt burden. Now, the great news is that management reiterated that it expects net debt-to-EBITDA to hit the 2.5x leverage range in the first half of 2025, the lowest it has been in years. This is a positive.

Forward view

The quarter had mixed points. Lower “equipment sales” reported translates to “lower phone” sales. But Q4 is big for iPhone sales, so the Q4 print will be key. Cash flow remains strong. With capital investment in the $21-$22 billion range, and cash from operating activities pushing $40 billion, free cash flow will be in the $17-$18 billion range for the year. This means that the dividend is well covered, which is a big reason to own AT&T Inc. stock. EPS is seen at $2.15 to $2.25. That is a dip from 2023 due to ongoing pension costs. However, management expects a return to EPS growth in 2025, which is positive. We continue to think you hold on to this dividend paying stock that is working on improving its fiscal state.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of T either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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