A $190 billion debt burden, $15 billion in annual dividend funds, a shrinking pay tv enterprise that’s now value a fraction of what the corporate paid for it, robust competitors within the core wi-fi enterprise: There’s little doubt AT&T Inc (T) faces some steep challenges in early 2021.
Investor skepticism shines by clearly within the inventory’s closely discounted valuation of barely 10 occasions anticipated subsequent 12 months earnings. And the bearishness extends to analysts as effectively. Bloomberg Intelligence reviews simply 8 purchase suggestions versus six sells and 17 holds.
Simply days earlier than the corporate introduced Q1 earnings final week, a Wall Avenue Journal piece featured the views of a outstanding bear below the headline “Is AT&T a Train Wreck?” Amongst his many criticisms have been alleged community under-investment, which he blamed on funding a “nonsensical” dividend.
The corporate’s Q1 numbers and up to date steerage, nonetheless, paint a far totally different image. That begins with earnings per share greater than 10% above consensus expectations. Income development swung from a This autumn decline of -2.4% to a Q1 enhance of two.7%. Free money stream after $5.7 billion in gross capital funding shot up 51% to $5.9 billion. That was sufficient to cowl the supposedly at-risk dividend with greater than $2 billion to spare.
The wi-fi enterprise added a internet of greater than 1,000,000 new clients. Postpaid churn fee dropped to only 0.76%, down from 0.86% within the 12 months in the past quarter. Tools income surged 45.2%, as gross sales continued to get better from the pandemic. And EBITDA margins grew by a proportion level to 57.1% of gross sales.
Enterprise wireline gross sales dropped by 3.5%, offset by 3.6% decrease bills. Shopper wireline income was principally flat at 0.4%, as declines in legacy voice and information companies have been largely offset by 235,000 new fiber broadband clients. The corporate has now added greater than 1,000,000 fiber customers over the previous 12 months and growth stays a precedence for capital spending.
Income from operations in Latin America sank by 13.6%, primarily due to forex losses and pandemic fallout in Brazil and Mexico. These models are more likely to stay below stress this 12 months. So is the previous DirecTV unit, which misplaced one other 620,000 premium video customers in Q1 for an annual decline fee of 14.6%. Administration not contains the video enterprise in outcomes, because it’s within the technique of spinning it off in a brand new enterprise with non-public capital agency TPG.
The drag from these companies, nonetheless, was dwarfed by the sudden reversal of fortune at Warner Media. After shrinking income -13.7% in 2020 together with a 9.5% This autumn drop, Q1 division income rose by 9.8% from the 12 months in the past interval.
The first driver was the success of AT&T’s streaming enterprise HBO Max. The corporate added 2.7 million new U.S. subscriptions throughout the quarter, reaching a complete of 44.2 million. That features 9.7 million HBO Max customers who don’t entry the service without spending a dime from their cable tv supplier. Internationally, buyer rely reached 64 million, effectively on the way in which to comfortably beating an end-2021 aim of 67 to 70 million. Administration has focused 120 to 150 million customers by 2025.
Warner Media’s general subscription income rose 12.6%. Content material gross sales elevated by 3.5% and promoting income rebounded by 18.5%, largely because of the return of NCAA March Insanity.
Wanting forward, HBO subscriptions are more likely to stay the first driver of Warner Media’s earnings momentum. However subsiding pandemic pressures ought to present power to promoting. And content material continues to get a elevate from profitable choices, most not too long ago the motion movie “Mortal Kombat,” which relies on the 1992 online game.
The corporate’s “Godzilla vs. Kong” film earlier this 12 months was a shock winner with first weekend gross sales of $32 million. That’s a really stable efficiency for Warner at a time the place general field workplace receipts are nonetheless working 80% under final 12 months. And common income per HBO Max person continues to increase, reaching practically thrice Disney’s ARPU in Q1.
The sooner Warner Media grows, the better will probably be for AT&T to achieve its 2021 free money stream goal of round $26 billion. That would depart roughly $11 billion after dividends, which administration has focused for debt discount.
Through the earnings name, the corporate reaffirmed its Analyst Day steerage for $22 billion of CAPEX this 12 months. That’s in step with the $20 to $21 billion archrival Verizon Communications (VZ) expects to spend and it’s roughly twice T-Cell’s (TMUS) plan.
Business main CAPEX refutes the cost AT&T has been below investing in community for the sake of its dividend. And the corporate additionally continues to showcase capacity to lift low-cost capital to fund development, wrapping up financing for a $23 billion C-band wi-fi spectrum fee inside weeks of its profitable public sale bids.
General refinancing efforts this 12 months have reduce its common weighted price of debt by 50 foundation factors to three.8% on the finish of Q1. That shaved $150 million off curiosity prices and prolonged weighted maturity to 16 years.
Judging from the tenor of questions throughout AT&T’s earnings name, bearish analysts are nonetheless fairly dug in. Some are skeptical in regards to the enterprise mannequin of marrying community with content material and consider the corporate is making an attempt to speculate large in too many areas directly. Some keep it’s lagging far behind T-Cell and Verizon deploying 5G. And plenty of doubt free money stream era is sustainable at ranges forecast by administration.
By answering these criticisms, Q1 outcomes offered a stable elevate for the inventory again to the neighborhood of its 52-week excessive. However solely extra robust outcomes like these will finally free AT&T from the burden of low expectations.
At the very least one key group of traders is optimistic: AT&T executives and different insiders have been heavy internet consumers of their firm’s inventory this 12 months. Our highest beneficial entry level continues to be $40.