AT&T: A Penny Ahead - Analyst Blog

AT&T Inc. (T), the largest U.S. telecom carrier, declared its fourth quarter and fiscal 2010 earnings before the opening bell. The company reported adjusted earnings of 55 cents per share in the fourth quarter, beating the Zacks Consensus Estimate by a penny. Adjusted earnings climbed 10% from 50 cents per share in the year-ago quarter.

Strong earnings were driven by revenue growth, record wireless subscriber additions, robust U-verse services sales and gains in IP-based and strategic business services revenues. Adjusted earnings excludes one-time charges of 26 cents from the previously disclosed pension accounting change, 9 cents related to severance costs and a 2 cent charge incurred on asset impairments.

Excluding one-time charges, adjusted earnings per share improved 10.6% to $2.29 in fiscal 2010 from $2.07 in 2009.

Revenue spiked 2.1% year over year to $31.36 billion, beating the Zacks Consensus Estimate of $31.46 billion. Fiscal 2010 revenue inched up 1.4% to $124.28 billion from the prior year's revenue of $122.51 billion.

Segment Results

Wireless: AT&T registered a net gain of 2.8 million wireless subscribers in the fourth quarter to reach 95.5 million total subscribers in service. Wireless subscribers grew 12.2% on a year-over-year basis, attributable to the rapid adoption of smartphones, strong prepaid subscribers and higher growth in connected devices. This represents an all-time high quarterly net addition in the company's history.

Retail post-paid additions totaled 400,000, retail prepaid additions were 307,000, connected device additions were 1.5 million and reseller additions were 595,000 in the reported quarter. The company continued its expansion in new wireless growth areas. AT&T added 442,000 iPad and Android-based tablets to its network.

Total Wireless revenue, including service and equipment, climbed 9.9% year over year to $15.18 billion primarily on the heels of strong integrated device sales. Wireless data revenue leaped 27.4% year over year to $1.1 billion, driven by multimedia messages, Internet access, access to applications and related services. AT&T reported fourth quarter post-paid integrated device activation of more than 7.4 million. The company activated 4.1 million iPhones during the reported quarter.

Total churn was low at record 1.32% compared with 1.42% in the year-ago quarter, while post-paid churn was 1.15%, flat year over year. Post-paid ARPU (average revenue per user) was $62.88, up 2.2% year over year, driven by healthy data growth.

Wireline: Total U-verse TV subscribers reached 3 million (up 44.6% from the year-ago quarter) at the end of fiscal 2010, with a net addition of 246,000 customers on continued high broadband and voice attach rates. This represents the best quarter of the year. AT&T U-verse revenues were $1.3 billion, up 73.4% from the year-ago quarter.

AT&T's total video subscribers, which includes the company's U-verse and bundled satellite customers, reached 4.9 million at the end of the reported quarter (representing 19.7% of households served). The company added net 210,000 subscribers in the fourth quarter to reach 17.75 million total broadband connections.

Wireline revenues dipped 3.2% year over year to $15.1 billion in the fourth quarter. Revenue from residential customers inched up 0.7% year over year to $5.3 billion driven by the strength in IP data services, while business revenue slid 4.5% year over year to $9.4 billion reflecting economic weakness in voice and legacy data products.

The strategic business services such as Ethernet, Virtual Private Networks, hosting and application services, recorded the largest increase of 17.1% year over year during the quarter.

However, total consumer connections plunged to 43.4 million from 45.3 million in the year-ago quarter, attributable to a drop in traditional voice access lines, partially offset by higher broadband, U-verse TV and VoIP (Voice over Internet Protocol) connections. AT&T U-verse Voice connections increased by 186,000 in the quarter.

Cash Flow

AT&T generated $9.6 billion cash from operations in the reported quarter compared with $9 billion in the year-ago quarter. The company's expenditure increased 15.8% in the fourth quarter to $6.6 billion from $5.7 billion in the year-ago quarter. Free cash flow (cash from operations minus capital expenditures) was $3.1 billion versus $3.3 billion in the year-ago quarter.

In full-year 2010, cash from operations increased to $35 billion from $34.4 billion in the prior year. Capital expenditure was $20.3 billion, up from the 2009 level of $17.3 billion. Free cash flow declined to $14.7 billion from $17.1 billion in 2009.

Guidance

For fiscal 2010, AT&T expects earnings per share, excluding changes in capitalized interest, to grow in the mid-single-digits with an expansion in consolidated, wireline and wireless operating margins.

The company also expects capital expenditures in the low-to-mid $19 billion range, as higher wireless spending will be offset by lower wireline capital expenditures and the elimination of capitalized interest in long-term evolution (LTE) spectrum.

Our Analysis

We expect wireless revenue to continue to grow with a low churn rate and wireline revenue to improve on enhanced services in AT&T U-verse and solid cost management. AT&T is well positioned for the opportunities in the coming years as it started deploying mobile broadband services, demand for which currently is in the early stages but is expected to improve going forward.

In addition, AT&T plans to roll out LTE based network in mid-2011, which will offer a peak speed of 100 Mbps and cover between 70 million and 75 million people by the end of the year. All these factors will lead to the company's solid growth in the long term. 

However, AT&T is well behind in offering LTE services relative to its peers Verizon Communication's (VZ), which launched its 4G services in 38 markets at the end of 2010. Sprint Nextel (S) currently covers 68 U.S. markets via Clearwire Corp.'s (CLWR) network.

Additionally, the competition will aggravate as Verizon debuts its Apple Inc.'s (AAPL) iPhone next month, which is a major threat to AT&T's strong revenue generator. The company will likely lose its exclusive hold on the iPhone enjoying since June 2007.

Added to these worries are woes of a slowdown in post-paid wireless business as well as the ongoing aggressive pricing and promotional war with Verizon, which might limit the upside potential of the stock.

Hence, we are currently maintaining our long-term Neutral recommendation on AT&T with the Zacks #3 Rank (Hold).

 
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