AT&T Q4 Earnings Land: A Very Murky Outlook Spooks Investors

Summary:

• AT&T Inc. reported mixed earnings, causing shares to drop by 4% at the time of this writing, but was it all bad?
• AT&T Q4 revenues exceeded expectations, with a revenue of $32.02 billion.
• Subscriber adds were strong, with 526,000 postpaid phone net adds and 273,000 fiber net adds in AT&T’s Q4, with some prepaid losses.
• Did you see the AT&T cash flow?
• The AT&T 2024 EPS guide took pension hits, a nagging cost, but look at the cash flow guide.

Here we go again. The panic inducing naysayers are at it again, folks, as AT&T Inc. (NYSE:T) has just reported Q4 earnings. The sky is falling here, it would seem, with shares “dumping” off about 4% at the time of this writing. Maybe it is a tough session. The numbers were mixed, but they were not a disaster.

If we had to pick out one thing, it was indeed the light guide, and pricey pension costs continuing to weigh. Some may hone in on the debt, but it is no different than what we saw with Verizon Communications Inc. (VZ) in their Q4 report as debt ticked up from last quarter. Earlier this month, we outlined what we were looking for in Q3. Remember, this is in an income name, so it is all about cash flow. The dividend is covered, and secure.

We are holding here. Let us discuss the just-reported earnings and compare the results to our projections.

AT&T Q4 revenues

We were looking for $31.4-$31.7 billion in revenues in the Q4 release. This was because any boost from the new iPhone will have benefited Q4, and the holiday promotions were strong. Well, revenue came in at $32.02 billion. This was a great start, beating out expectations and surpassing analyst consensus by $560 million.

Subscriber adds

Back in Q3, we saw total phone net adds (postpaid and prepaid) that were 494,000, Postpaid subscriber net adds were 550,000, with phone net adds of 468,000, ahead of our estimate. Prepaid subscriber net adds were 56,000, with phone net adds of 26,000, which was below our estimate by 4,000, but essentially in line. We are looking for 0.600-0.650 million adds in Q4. For fiber net adds, we were looking for 0.250 million in Q4.

Well, we saw 526,000 postpaid phone net adds in Q4 but saw 132,000 prepaid losses, likely due to strong promotional competition. Still, there were more than 1.7 million adds for the full-year 2023 with historically low churn levels and continued strong ARPU growth, which is positive. The fiber adds were a beat. AT&T reported 273,000 fiber net adds in Q4, beating our 0.25 million estimates. AT&T also saw 1.1 million net adds for full-year 2023, 16 straight quarters with more than 200,000 net adds, and it was the sixth straight year with 1 million+ fiber net adds. Yes, sure seems the sky is falling, doesn’t it?

Business was a weak point, however. Business wireline revenues were $5.1 billion, down 10.3% year-over-year due to lower demand for legacy voice and data services and product simplification, partly offset by growth in connectivity services. We were looking for a single-digit decline.

Overall, the fiber adds surpassed as did postpaid net adds, but the prepaid and business lines were weaker than expected. Consumer ARPU was up 1.4%, ahead of being up 1% like we expected, helping drive revenue.

CEO commentary

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

We accomplished exactly what we said we would in 2023, delivering sustainable growth and consistent business performance, resulting in full-year free cash flow of $16.8 billion, ahead of our raised guidance. As we advance our lead in converged connectivity, we will continue to scale our best-in-class 5G and fiber networks to meet customers’ growing demand for seamless, ubiquitous broadband, and drive durable growth for shareholders.

Operating expenses and earnings

We were assuming operational expenses that were similar to Q3, and we expected earnings of $0.56-$0.60 per share. First, operating expenses were higher than expected, though down from last year at $26.8 billion versus $52.4 billion in the year-ago quarter. Operating expenses last year had goodwill impairment charges, but there were benefits of continued transformation efforts, including lower personnel costs in 2023. Adjusted operating income was $5.8 billion compared to $5.7 billion in the comparable 2022 period, a touch below our expectations. As such, EPS came in below the low end of our expectations at $0.54 per share.

Still all about cash flow

Cash flow was pretty strong in Q4. It was not as dazzling as we expected, but strong and more than enough to cover the dividend. For Q4, we saw great dividend coverage as likely. We stated

Assuming cash from operating activities of $10.5-$11.0 billion, capex of $4.0-4.5 billion, and unknown estimates for additional financing, we are targeting free cash flow of $5.9-$6.3 billion.

So, how was that call? Well if actual cash flow is king, then this was a great quarter. Cash from operating activities was higher than expected on better than expected revenues and hit $11.4 billion. CAPEX was $4.6 billion, also a touch above range, and when including $1.0 billion cash paid for vendor financing (which is always a wild card), capital investment was $5.6 billion. Because the top line was stronger than expected and expenses were well managed, it trickled down to cash flow. AT&T generated free cash of $6.4 billion during the quarter, up substantially compared to the year-ago quarter. With $2.1 billion in dividends paid, the ratio was 33%. Folks, the dividend is likely not getting cut, so forget about it.

The debt

We also said we would watch the massive debt burden. Like Verizon, debt was up in the quarter. It was still down $3 billion from a year ago, but $20 billion in debt has been reduced in the last few years by the company. Total debt was $137.3 billion at the end of the fourth quarter, and net debt was $128.9 billion. The company expects to achieve leverage in the form of net debt-to-EBITDA to hit the 2.5x range in the first half of 2025. That is a plus

Outlook

So, why are shares down? The quarter was mixed, but the sky is not falling. However, the guidance was a bit weaker than we expected for earnings, but cash flow was strong. We stated previously “a free cash flow guide of at least $17 billion-plus should be interpreted bullishly.” Well, they see wireless service revenue growth in the 3% range. That is in line with our expectations. On the cash flow side, they see capital investment in the $21-$22 billion range and free cash flow in the $17-$18 billion range. This means that the dividend is well covered. But, the EPS guide took a hit from ongoing pension costs, interest, and open radio access depreciation costs. They see EPS of $2.15 to $2.25, accounting for $0.17 of aforementioned costs.

Overall, the quarter was mixed, as was the outlook, but it is all about that cash flow. This is an income stock. We think T shares can trade higher toward $20, but make no mistake, this is a buy for income. Park it and collect the payout.

Your voice matters

What did you think? Is this a zombie stock? Do you still question the dividend. Do you prefer VZ stock? Do you employ options? Do you trade around the core position? Are you a buy and hold forever investor? Do you see more downside ahead? Would you rather watch paint dry than own this stock? Let the community know below.

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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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