|Barrons -- AT&T’s Earnings Hit the Stock. Focus on the 3-Year Plan ................................|
Jan. 29, 2020
AT&T’s Earnings Hit the Stock. Focus on the 3-Year Plan.
By Nicholas Jasinski
AT&T ended 2019 on a mixed note, with slight misses on revenue and steep subscriber losses at DirecTV, but having met debt-reduction goals and reiterated its 2020 outlook. The greater challenge lies ahead, as the telecom and media conglomerate aims to meet ambitious targets it has set for itself over the next three years.
Investors were uninspired by the results, sending AT&T stock (ticker: T) down 2.6% Wednesday morning. The S&P 500 was up 0.4%.
Before the market opened, AT&T reported 89 cents in adjusted earnings per share for the fourth quarter, a penny ahead of analyst expectations and up from 86 cents a year earlier. Revenue came in at $46.8 billion, about equal to analysts’ forecast and down from $48.0 billion in the year-earlier quarter. AT&T’s adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, fell to $14.4 billion, from $15 billion last year. Wall Street consensus had been for $14.7 billion in adjusted Ebitda.
Investments in HBO Max -- a forthcoming direct-to-consumer streaming service from AT&T’s WarnerMedia division -- weighed on AT&T’s results because of $1.2 billion in foregone content-licensing revenue. HBO Max will debut this spring, entering a crowded market at a premium price of $14.99 a month.
AT&T’s weakest division remained DirecTV. The company’s Entertainment Group had 945,000 TV-subscriber cancellations in the fourth quarter, versus analysts’ forecast for a 739,000 loss but better than a nearly 1.2 million drop a quarter earlier. That brought AT&T’s total cord-cutters to more than 4 million in 2019 -- or about 17% of its subscriber base.
That translated to a drop in revenue from 2018. But because many of the departing customers were on promotional plans that weren’t profitable for AT&T to begin with, the company managed to hold Entertainment Group Ebitda steady from 2018 to 2019one of its stated goals for the year.
Another target of AT&T management for 2019 was to reduce its leverage to 2.5 net debt to Ebitda or below. It ended the year with $151 billion in net debt -- much of it acquired to fund the purchase of Time Warner -- and a ratio of 2.547. About $18 billion in asset sales last year helped fund much of the debt reduction.
AT&T’s wireless-phone business is the strongest and most important part of its portfolio, and it outperformed on the subscriber front in the fourth quarter. The company added 229,000 postpaid wireless phone customers in the fourth quarter, while it gained a net 135,000 overall postpaid subscribers -- meaning those who pay a monthly bill. Analysts had been looking for 129,000 new postpaid phones and a loss of 13,000 overall postpaid subscribers. AT&T added just 8,000 prepaid customers, however, versus Wall Street consensus for 83,000 net new prepaid accounts.
Total wireless-service revenue increased 1.8% year over year, but both sales and Ebitda came in slightly below consensus expectations.
AT&T’s remaining business -- wireline, Latin America and WarnerMedia segments were about flat in the fourth quarter versus a year earlier -- with the HBO Max investment weighing on the media division.
Overall, AT&T generated $29 billion in free cash flow in 2019, up 30%. It paid out about half of that in the form of dividends, and bought back about 56 million shares.
“Coming into 2019, we laid out a detailed plan for the year,” AT&T CEO Randall Stephenson said on the company’s earnings call Wednesday morning. “That plan was a series of specific steps necessary to exit 2019 on a path of sustained growth…We met or exceeded every single one of those objectives, and the road map is set for the next three years.”
Management reaffirmed its 2020 guidance for revenue growth of 1% to 2% and adjusted earnings per share of $3.60 to $3.70. That would be a 1% to 4% increase over 2019’s $3.57. Chief Operating Officer John Stankey said on the earnings call that AT&T had 50 million people covered by 5G already, and expects to have a nationwide network by the second quarter. That is using largely mid-band spectrum, which propagates further from its antenna but has slower data speeds than higher frequencies. AT&T has mmWave 5G live in 35 cities, and plans to add more in 2020.
Chief Financial Officer John Stephens said AT&T had bought back 85 million shares in the first quarter and planned to repurchase 20 million more this quarter. It has a target to retire 250 million shares in 2020.
Activist hedge fund Elliott Management disclosed a large stake in AT&T last fall and advocated to the company’s board for several changes to its operations, capital allocation and acquisition strategies. In response, AT&T announced a three-year plan that included new targets for earnings, shareholder returns, cost reduction, and profit margins. It also committed to not making any major acquisitions and to leadership tweaks down the road.
“Today’s report offers little to assuage concerns about the company’s competitive position in most of its businesses,” Bernstein analyst Peter Supino wrote Wednesday morning. “With Elliott Management having quickly influenced the company’s financial and governance plans, the ‘paid to wait’ case for AT&T is interesting.”
The Elliott involvement boosted AT&T’s shares in the fall. They have returned 36% including dividends over the past year through Tuesday’s close. That is ahead of peers and the S&P 500, which had returned 24%. T-Mobile US (TMUS) and Verizon Communications (VZ) had returned 17% and 16%, respectively. AT&T stock sports a 5.4% dividend yield.
Write to Nicholas Jasinski at firstname.lastname@example.org
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