AT&T Inc. (T) reported disappointing financial results for the third quarter of 2014. Both the top and the bottom lines failed to meet the respective Zacks Consensus Estimate. Significant pricing competition, new device financing plans and other promotional strategies weighed on earnings during the reported quarter. AT&T currently carries a Zacks Rank #3 (Hold).
Quarterly net income came in at $3,002 million or 58 cents per share compared with $3,814 million or 72 cents per share in the year-ago quarter. Adjusted earnings per share of 63 cents were a penny shy of the Zacks Consensus Estimate. The lower-than-expected financial results were primarily due to higher cost of services and sales and increased interest expenses.
Quarterly total revenue increased 2.5% year over year to $32,957 million but lagged the Zacks Consensus Estimate of $33,253 million. Notably, AT&T has completed the sale of its equity investment in America Movil S.A.B. de C.V. (AMX).
Total operating expenses in the reported quarter was $27,555 million, up 6.1% year over year. Operating income decreased 12.7% year over year to $5,402 million. Operating margin came in at 16.4% against 19.2% in the prior-year quarter.
Cash Flow & Liquidity
During the first nine months of 2014, AT&T generated $25,593 million of cash from operations compared with $26,879 million in the year-ago period. Free cash flow in the reported quarter was $8,586 million compared with $11,101 million in the prior-year period.
At the end of the third quarter of 2014, AT&T had $2,458 million of cash and cash equivalents and $75,625 million of debt outstanding compared with $3,339 million of cash and cash equivalents and $74,788 million of debt outstanding at the end of 2013. Debt-to-capitalization ratio was 0.43 at the end of the reported, remaining same as the end of 2013.
Wireless Segment
Total revenue for the segment came in at $18,337 million, up 4.9% year over year. Service revenues were down 0.2% to $15,423 million. Equipment revenues were $2,914 million, up 44.3%. Operating expense increased 7.5% to $13,820 million. However, operating income dropped 2.3% to $4,517 million. Quarterly operating margin came in at 24.6% against 26.4% in the year-ago quarter. Segment EBITDA decreased 0.3% to $6,482 million. EBITDA margin was 42%, remaining flat year over year.
At the end of third-quarter 2014, A&T had 118.65 million total wireless subscribers and connections, up 8.4% year over year. Out of this, Postpaid subscriber count was 75.105 million, up 4.3%, Prepaid subscriber count was 11.179 million, up a whopping 50.6%. Resellers were 13.884 million, down 1.5% and Connected Devices were 18.482 million, up 16.1%.
During the reported quarter, the company added 0.785 million Postpaid customers (up an astounding 116.3% year over year) and lost 0.14 million Prepaid customers (down a massive 172.9% year over year). The company also gained 0.087 million resellers in the repoted quarter. Strong sale of Apple Inc.’s (AAPL) iPhone and increased adoption of Google Inc.’s (GOOGL) Android-based smartphones also increased the subscriber numbers.
Quarterly Postpaid churn rate was 0.99% compared with 1.07% in the year-ago quarter whereas total churn rate was 1.36% against 1.31% in the year-ago quarter. Phone-only Postpaid ARPU (average revenue per user) decreased 8% year over year and Phone-only Postpaid ARPU with AT&T Next monthly billings decreased 3.4% year over year.
Wireline Segment
Total revenue for the segment was $14,615 million, down 0.4% year over year. Service revenues were down 0.2% to $14,368 million. Equipment revenues were $247 million, down 7.5%. Operating expense increased 1.6% to $13,332 million. Operating income also fell 17.2% to $1,283 million. Quarterly operating margin came in at 8.8% against 10.6% in the year-ago quarter.
At the end of third-quarter 2014, AT&T had 26.22 million voice connections, down 10.5% year over year. In the reported quarter, the company lost 0.738 million voice connections, up 20.8%. At the end of the third-quarter 2014, AT&T had 16.486 million high-speed broadband connections, up 0.4% year over year.
In the reported quarter, the company gained 0.038 million broadband connections compared with a loss of 0.026 million broadband connections in the prior-year quarter. Similarly, at the third-quarter end, AT&T had 6.067 million video connections, up 15.2%. In the reported quarter, the company gained 0.216 million video connections, down 18.5%.
Guidance
For fiscal 2014, AT&T expects revenue growth of 3%-4% year-over-year and stable margin growth. Capital expenditure is expected to hover around $21 billion while the free cash flow is estimated at $11 billion.
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