AT&T Inc. T reported mixed third-quarter 2021 results as healthy wireless traction was partially offset by lower contribution from divested businesses and lower demand for legacy voice and data services. The company recorded modest subscriber growth backed by a resilient business model and robust cash flow position driven by a diligent execution of operational plans. AT&T expects to continue investing in key areas of 5G, fiber and HBO Max and adjust its business according to the evolving market scenario 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 $5,868 million or 82 cents per share compared with $2,762 million or 39 cents per share in the year-ago quarter. The significant year-over-year improvement despite lower revenues was primarily attributable to lower operating expenses owing to the impact of divested businesses.

Excluding non-recurring items, adjusted earnings were 87 cents per share compared with 76 cents in the year-earlier quarter. Adjusted earnings for the third quarter beat the Zacks Consensus Estimate by 9 cents.

AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. price-consensus-eps-surprise-chart | AT&T Inc. Quote

Quarter Details

Quarterly GAAP operating revenues decreased 5.7% year over year to $39,922 million, largely due to the divestment of the U.S. video business and other businesses, partially offset by higher equipment sales within the Mobility business and growth in subscription-based revenues within WarnerMedia. The top-line growth was also impacted by lower revenues from Business Wireline services. The top line missed the consensus mark of $40,542 million.

Adjusted operating income for the quarter was $8,412 million compared with $8,204 million in the prior-year quarter owing to lower operating expenses. This resulted in respective adjusted operating income margins of 21.1% and 19.4%. Adjusted EBITDA declined to $13,019 million from $13,313 million.

AT&T experienced a net increase in total wireless subscribers of 4.9 million to reach 196.5 million in service. The company witnessed solid subscriber momentum with more than 1,218,000 post-paid net additions and 249,000 prepaid phone net additions as work-from-home trend continued to gain in popularity. Postpaid churn was 0.92% compared with 0.85% in the year-ago quarter. Postpaid phone-only average revenue per user (ARPU) decreased 0.6% year over year to $54.37 due to promotional discounts.

Segmental Performance

Communications: Total segment operating revenues were up 3.8% to $28,218 million as decline in Business Wireline was offset by a healthy gain in the Mobility business (up 7% to $19,138 million). Service revenues from the Mobility unit improved 4.6% to $14,527 million driven by solid subscriber gains, while equipment revenues improved 15% year over year to $4,611 million driven by higher mix of high-priced smartphone sales and other postpaid devices. Revenues from Consumer Wireline business were up 3.4% to $3,142 million due to gain in fiber broadband. Revenues from Business Wireline were down 5.2% to $5,938 million driven by decline in legacy products as customers shifted to more advanced IP-based offerings.

Segment operating income was $7,123 million compared with $7,064 million in the year-ago quarter for respective operating margin of 25.2% and 26%. Adjusted EBITDA was $11,237 million compared with $11,132 million in the year-ago quarter.

WarnerMedia: Total segment revenues were $8,442 million, up 14.2% year over year with higher subscription and content revenues signifying partial recovery from the coronavirus-induced adversities exhibited in the prior-year quarter, partially offset by lower advertising revenues. Subscription revenues improved 14.7% to $3,988 million due to higher HBO Max and HBO subscribers (up 12.5 million year over year). Advertising revenues were down 12.4% to $1,401 million due to lower political ads. Content revenues increased 31.7% to $3,053 million owing to contribution from theatrical product sales. Operating income was up 15.2% to $2,008 million, as higher investments, programming costs and expenses in HBO Max were more than offset by higher revenues and lower sports programming costs, for corresponding margin of 23.8%. Adjusted EBITDA was $2,171 million compared with $1,912 million in the prior-year quarter for respective margins of 25.7% and 25.9%. Sequential fall in domestic HBO and HBO Max subscribers (down to 45.2 million from 47 million) due to phasing out of subscriptions through Amazon Prime Video Channels of, Inc. AMZN were more than offset by growth in international subscribers (up to 24.2 million from 20.5 million).

Latin America: Total operating revenues were $1,480 million, up 6% year over year, due to growth in the Mexico wireless operations. EBITDA improved to $123 million from $59 million in the year-ago quarter for respective margins of 8.3% and 4.2%.

Notable Quarter Developments

During the quarter, AT&T inked a definitive agreement to sell its Vrio Corp. business unit to Grupo Werthein for an undisclosed amount. Based in Argentina, Grupo Werthein is a private holding company that has been doing business in Latin America and globally for more than a century. The transaction will allow AT&T to sharpen its focus on investing in connectivity for customers. The telecom giant is committed to Latin America through its wireless business in Mexico and services for companies operating in the region.

Cash Flow & Liquidity

AT&T generated $30,703 million of cash from operations for the first nine months of 2021 compared with $33,048 million in the prior-year period. Free cash flow at quarter end was $5,162 million compared with $8,272 million in the year-ago period, bringing the respective tallies for the first nine months of 2021 and 2020 to $18,007 million and $19,765 million. As of Sep 30, 2021, AT&T had $21,270 million of cash and cash equivalents with long-term debt of $155,406 million. Net debt to adjusted EBITDA was about 3.17x.

Outlook Reiterated

For full year 2021, management reiterated its earlier guidance based on healthy quarterly performance. AT&T continues to expect adjusted earnings to grow in low- to mid-single digit. Revenue is likely to grow by 2-3%. The company expects free cash flow in the vicinity of $27 billion with a dividend payout in the high 50% bracket. 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 operating costs, while focusing on 5G and fiber-based connectivity along with expanded reach of software-based entertainment platforms. The company is also aiming to reduce its debt burden by monetizing non-core assets. AT&T expects to rake in 70 million to 73 million HBO Max subscribers by the end of 2021. The company aims to introduce HBO Max in six European markets in October, following it up with additional launches in 14 other countries in Europe in 2022.

Zacks Rank & Stocks to Consider

AT&T currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader industry are Ooma, Inc. OOMA, sporting a Zacks Rank #1 (Strong Buy), and SeaChange International, Inc. SEAC, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ooma delivered an earnings surprise of 55.2%, on average, in the trailing four quarters.

SeaChange has a long-term earnings growth expectation of 10%. It delivered an earnings surprise of 28.9%, on average, in the trailing four quarters.

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