Analysts Corner: AT&T Strong

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By Jody McCoy

“Strong” was the word used most to describe AT&T’s second quarter earnings. The company hosted their quarterly conference call Friday, and of course, our analysts were busy:

Jennifer Fritzsche of Wells Fargo: AT&T reported Q2 results characterized by a significant beat on wireless margin and in-line wireline margin. AT&T continues to move its wireless base to Next – yet a long runway remains (Next only 37% of base), while wireline results were better than feared. [Thursday], it was announced the FCC has approved the DirecTV merger.The next focus should be discussion around this integration and its own over-the-top video strategy. We look forward to attending the Dallas analyst day (date still TBA). We continue to view this deal favorably – and believe the $2.5 billion in annual cost synergies are achievable, and maybe even conservative. Our new FY2015E revenue and EPS are $132.9 billion and $2.58 vs. $133.3 billion and $2.56 prior, and FY2016E are $133.0 billion and $2.58 vs. $135.2 billion and $2.59 prior, respectively. We note our estimates exclude contributions from DTV and its Mexico acquisitions. We expect to change our forecast following AT&T’s analyst day. Read more analysts’ views here.
John Hodulik of UBS: AT&T shares pulled back in the weeks leading up to earnings, largely based on worries over wireless fundamentals. We think the 2Q results made it clear that this fear was unwarranted. Instead, the underlying AT&T assets should generate greater than expected earnings this year; we’ve increased our 2015 estimate to $2.70 per share from $2.59 previously. With the DirecTV deal likely to close soon, we believe this puts AT&T in a good position to meet our pro forma estimates of $2.90 for 2016 and $3.20 for 2017. The 2Q beat was driven by better margins in wireless (48.5% vs. UBSe 44.3%) as the company benefited from decommissioning the Leap network, greater stability in ARPU (average revenue per user) and efficiency gains from Project Agile. Additionally, AT&T should see continued improvement in the Next take-rate in 3Q and 4Q, supporting margins. 2Q service revenues may have been a bigger surprise, declining just 0.2% vs. our -2.1% estimate. Strong uptake of larger data buckets and growth in prepaid should both support the top line in 2H, wireless margins are likely to settle around ~47%.

Jonathan Chaplin of New Street Research: Financial results were strong, with service revenue, EBITDA, and EPS well ahead of estimates. Management cut standalone capex guidance and increased FCF(free cash flow) guidance. On a less positive note, postpaid customer losses were worse than expected (although we would rather see AT&T cede share than price down). After talking through the trends with the company we ended up not changing our 2H15 and 2016 estimates by much. As such there was no material change to our thesis; target remains $32 (6% downside). The strong financial results this quarter caught us by surprise; however, we were also surprised how little our long-term forecast changed after talking through the trends with the company. We have some more work to do in the coming days to determine if management is just downplaying genuinely improving trends (although we doubt it).

Jonathan Schildkraut of Evercore ISI: AT&T released 2Q15 earnings, delivering strong financial performance with EBITDA of $11.1 billion and EPS of $0.69, 3.9% and 6.2% ahead of our above consensus estimates. Revenues of $33.0 billion were 0.6% below expectations primarily on the back of lower than forecast, and less important, wireless equipment sales. Importantly, we now believe AT&T’s aggressive shift to equipment installation plans (EIP) (37% of smartphone base) and Mobile Share Value (MSV) pricing (an additional 27% of the base) which resulted in significant headwinds in 2014 is beginning to yield benefits. That is, we believe services revs have likely bottomed while reported and cash results are approaching (or have reached) convergence. Finally, we note these financial improvements come in front of what we expect to be a financially accretive combination with DTV (though we remain cautious on that transaction’s strategic value).

Colby Synesael of Cowen and Company: AT&T reported solid results as average revenue per user (ARPU) and cost initiatives drove solid free cash flow (FCF) putting past dividend coverage issues officially to rest. The carrier may be losing phone subs, but its strategy to selectively retain high-quality customers is paying off, delivering upside ARPU and the primary driver for the solid print. Meanwhile we await the DirecTV analyst day as the next catalyst for the stock. Reiterated 2015 guidance of Y/Y consolidated revenue growth, both wireless and wireline expanding margins, EPS growth in the low-single digit range, and capex in the $18 billion range (which includes Mexico capex spend). The company increased its FCF guidance to “$12 billion range or better” from flat Y/Y ($9.9B in 2014). The company stated it will provide more clarity at the DTV merger analyst day to be held “very soon.”

Amir Rozwadowski of Barclays: Ahead of the impending close of the elongated DirecTV approval process, we emerged broadly encouraged by the operating metrics demonstrated by AT&T during its 2Q results given successful churn management, improving margins and rising cash flow. While the company’s implied capex moderation is likely to keep questions of the sustainability of its spending levels on the table, the set up for improving cash generation and expanded earnings power post the close of the DirecTV transaction remain steady. We retain our Overweight rating and edge up our price target to $40. While AT&T’s results illustrate that the carrier is certainly not immune to competition, its tightened operations bolsters its earnings and cash generation prospects ahead of the DTV contributions. Should AT&T be successful in stabilizing its wireless service revenue, it would only further improve its financial prospects which served as the key underlying driver of our recent upgrade to an Overweight.

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