It has been about a month since the last earnings report for AT&T (T). Shares have lost about 0.7% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
AT&T Beats on Q2 Earnings, Revenues Miss on COVID-19 Woes
AT&T reported relatively healthy second-quarter 2020 results with adjusted earnings surpassing the Zacks Consensus Estimate and revenues missing the same as coronavirus pandemic hit top-line growth, fueling uncertainty within the organization and limiting future visibility. Despite the worldwide mayhem that led to short-term financial impacts, the company expects to continue investing in key areas and adjust its business according to the demand of the situation to fuel long-term growth, while maintaining a healthy dividend payment and actively pruning debt.
Net Income
On a GAAP basis, AT&T reported net income of $1,229 million or 17 cents per share compared with $3,713 million or 51 cents per share in the year-ago quarter. The decline in GAAP earnings was primarily attributable to lower revenues stemming from lower demand due to the virus outbreak.
Excluding non-recurring items, adjusted earnings were 83 cents per share compared with 89 cents in the year-earlier quarter. Adjusted earnings for the second quarter surpassed the Zacks Consensus Estimate by 5 cents.
Quarter Details
Quarterly GAAP operating revenues decreased 8.9% year over year to $40,950 million, largely due to lower revenues from legacy wireline services, lower advertising and content revenues from WarnerMedia, domestic video and adverse currency translation effects. Notably, AT&T had an estimated adverse impact of $2,810 million from coronavirus during the quarter. The top line missed the Zacks Consensus Estimate of $41,393 million.
Operating income for the quarter was $3,532 million compared with $7,233 million in the prior-year quarter owing to Vrio goodwill impairment and severance charges along with incremental costs due to the virus outbreak. This resulted in respective operating income margins of 8.6% and 16.7%. Adjusted operating income for the reported quarter was $8,972 million compared with $9,899 million in the year-earlier quarter, for respective adjusted operating income margins of 21.9% and 22%. Adjusted EBITDA declined to $14,112 million from $15,041 million.
During the reported quarter, AT&T experienced a net increase in total wireless subscribers of 2.2 million to reach 171.4 million in service. Postpaid churn was 1.05% compared with 1.07% in the year-ago quarter with improvement in phone churn partially offset by tablet churn. Postpaid phone-only average revenue per user (ARPU) decreased 1.9% year over year to $54.47 with lower international roaming revenues and waived fees.
Segmental Performance
Communications: Total segment operating revenues were $33,592 million, down 4.7% year over year with decline in all businesses. Service revenues from the Mobility unit declined 1.1% year over year to $13,669 million, while equipment revenues improved marginally to $3,480 million. Revenues from the Entertainment Group were down 11.4% to $10,069 million due to decline in premium TV subscribers and legacy services, while that from Business Wireline decreased 3.5% to $6,374 million due to lower legacy voice and data services.
Segment operating income was $8,112 million compared with $8,671 million in the year-ago quarter for respective operating margin of 24.1% and 24.6%. Segment EBITDA was $12,751 million compared with $13,255 million in the year-ago quarter, for respective margins of 38% and 37.6%.
WarnerMedia: From second-quarter 2020 onwards, AT&T has included Xandr business, which was a separate business segment until now, within WarnerMedia. Total segment revenues were $6,814 million, down 22.9% year over year with decline across all business units. While Turner revenues declined due to lower advertising revenues, that from HBO and Warner Bros. were down due to lower subscription revenues and lower contribution from theatrical and games, respectively.
Operating income was down 16.6% to $1,699 million, primarily due to higher programming and expenses related to the launch of HBO Max, for corresponding margin of 28.1%. Segment EBITDA was $2,080 million compared with $2,399 million in the prior-year quarter.
Latin America: Total operating revenues were $1,232 million, down 29.9% year over year, due to adverse foreign currency translation and challenging macroeconomic conditions arising from the coronavirus-induced turmoil. EBITDA decreased to $33 million from $63 million in the year-ago quarter for respective margins of 2.7% and 3.6%.
Cash Flow & Liquidity
AT&T generated $20,925 million of cash from operations for the first half of 2020 compared with $25,336 million in the year-ago period. Free cash flow at quarter end was $7,593 million compared with $8,812 million in the year-ago period.
As of Jun 30, 2020, AT&T had $16,941 million of cash and cash equivalents with long-term debt of $153,388 million. Net debt to adjusted EBITDA was about 2.6x.
Moving Forward
Management has refrained from giving any definite outlook for the third quarter as well as for full year 2020 due to the evolving nature of the contagious disease and its grave impact on the economy, as it is yet to fathom the full impact on its business with lack of visibility. 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 costs while supporting employees and customers with various financial packages.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
At this time, AT&T has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, AT&T has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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