Earnings Preview: AT&T

Zacks Investment Research
updated | Zacks.com

AT&T (NYSE:T) is slated to release its second-quarter 2010 results on July 22, 2010, before market opens. The current Zacks Consensus Estimate for the second quarter is 57 cents, representing a 5.43% annualized growth.
 
AT&T had an average of 6% positive earnings surprise in 3 of the last 4 quarters. Hence, we will not be surprised if the carrier beats expectations in the second quarter on the back of a strong wireless growth momentum.  
 
On its first quarter conference call, AT&T stated that it envisages stable revenue and stable-to-improved earnings and operating margins for full-year 2010. The forecast takes into account the dilutive impact of roughly 5 cents to 6 cents associated with the carrier’s impending acquisition of specific wireless assets from Verizon Communications Inc. (NYSE:VZ). However, AT&T does not expect pension retiree benefit costs to drag the bottom line in fiscal 2010.
 
Moreover, AT&T is growing its focus on returning maximum value to its shareholders through attractive dividend payout and share repurchase initiatives.  
 
First-Quarter Flashback
 
AT&T reported first-quarter adjusted earnings per share of 59 cents surpassing the Zacks Consensus Estimate of 55 cents and the year-ago quarter’s earnings of 53 cents per share. Net income dropped 20.8% year over year, on account of hefty healthcare-related charges.
 
Consolidated revenue of $30.6 billion was below the Zacks Consensus Estimate. However, revenues increased year over year, primarily due to continued growth momentum in its wireless business.
 
In the wireless business, AT&T registered a net gain of 1.9 million wireless subscribers (the largest first-quarter net addition in the company’s history) driven by increased smartphone penetration (especially iPhone) and healthy adoption of connected devices. The carrier registered the lowest ever churn of 1.30%, while average revenue per user (ARPU) remained healthy, driven by solid data growth.
 
On the wireline side, growth momentum for U-verse video and broadband service continued, helping AT&T to partly offset the precipitous decline in its legacy fixed-line voice business.
 
Agreement of Analysts
 
Estimates for the second quarter are trending downwards since the first-quarter results, showing a clear directional agreement. Out of a total of 29 analysts currently covering the stock, 8 reduced their estimates over the last 30 days and 4 made upward revisions. However, over the last one week, one analyst raised the estimate upward while one moved in the opposite direction.
 
Estimates for fiscal 2010 have also been negative, with 9 out of the total 32 analysts reducing their forecasts in the last 30 days and only 1 analyst making a positive revision. Over the last one week, 1 analyst revised the estimate downward with no upward revision. The current Zacks Consensus Estimate for fiscal 2010 is $2.26, reflecting a substantial growth of 7.05% year over year.  
 
The negative revision is largely due to declining wireline revenues in the second quarter. AT&T is challenged by aggressive pricing plans of direct competitors such as Verizon as well as Sprint Nextel (NYSE:S), which is aggressively rolling out a $50 per month unlimited voice and data plan. Despite the strong growth momentum in delivering iPhones, we believe high marketing costs associated with the product (especially due to the heavy subsidy associated with iPhone 3G/3GS) is affecting earnings.
 
Magnitude — Consensus Estimate Trend
 
The magnitude of revisions for the second quarter has been static over the last 7 days at 57 cents, but decreased from 58 cents over the last 30 days. Similarly, for fiscal 2010, the Zacks Consensus Estimate has been flat over the last 7 days at $2.26, but decreased from $2.27 over the last 30 days.
 
Our Analysis
 
We remain encouraged by AT&T’s ongoing efforts to upgrade its wireless network and acquisition initiatives in order to expand customer base and coverage zones as the U.S. subscriber population reaches maturity. We also expect that the iPhone, which has been the lifeblood for AT&T’s wireless business, will continue to perform in line with expectations. The iPhone, which continues to boost data revenues and margins, has a greater contribution to ARPU than the regular handsets.
 
Following a similar move by its rival Verizon, AT&T has slashed the tariffs of its unlimited voice services. While this price discount may drag the near-term earnings to some extent, the move is expected to boost operating results in the long run.
 
Although we believe operational synergies will be realized in future, we maintain a cautious approach due to persistent erosion in wireline voice customer base, signs of slowdown in postpaid wireless business as well as the ongoing aggressive price and promotional war with Verizon.
 
We are currently maintaining our Neutral recommendation on AT&T with the Zacks #3 Rank (Hold).

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