AT&T Inc. T reported strong fourth-quarter 2018 results driven by solid domestic wireless business and accretive WarnerMedia contribution. The company expects to continue this healthy growth momentum in 2019, while focusing on reducing its huge debt burden.
Net Income
On a GAAP basis, AT&T reported net income of $4,858 million or 66 cents per share compared with $19,037 million or $3.08 per share in the year-ago quarter. The sharp decline despite top-line growth was primarily attributable to favorable impact from U.S. corporate tax reform in the year-earlier quarter.
Adjusted earnings for the quarter increased to 86 cents per share from 78 cents in the year-earlier quarter, and beat the Zacks Consensus Estimate by a penny.
AT&T Inc. Price, Consensus and EPS Surprise
AT&T Inc. Price, Consensus and EPS Surprise | AT&T Inc. Quote
For full year 2018, AT&T reported net income of $19,370 million or $2.85 per share compared with $29,450 million or $4.76 per share in 2017. Adjusted earnings for 2018 improved to $3.52 per share from $3.05 in the prior year.
Quarter Details
Quarterly consolidated revenues increased 15.2% year over year to $47,993 million, primarily due to the accretive Time Warner acquisition. The top line, however, missed the Zacks Consensus Estimate of $48,427 million. For full year 2018, AT&T recorded revenues of $170,756 million compared with $160,546 million in 2017.
Operating income for the quarter was $6,160 million compared with 1,281 million in the prior-year quarter primarily due to the Time Warner acquisition, resulting in respective operating income margins of 12.8% and 3.1%. During the reported quarter, AT&T experienced a net increase in total wireless subscribers of 3.8 million to reach 171.3 million in service. Postpaid churn was 1.24% compared with 1.11% in the year-ago quarter owing to limited promotional activity.
The company had 147,000 branded net adds, both postpaid and prepaid, including 467,000 branded smartphones. Postpaid phone-only average revenue per user decreased 4.1% year over year to $55.35.
Segmental Performance
Communications: Total segment revenues were $37,458 million, down 4.2% year over year with decline in the Mobility business, Entertainment Group and Business Wireline. Despite higher equipment revenues from increased postpaid smartphone sales, the Mobility unit was plagued by lower service revenues. Revenues from the Entertainment Group were impacted by the new accounting standards of revenue recognition, declines in linear TV subscribers and legacy services. Decline in legacy products further led to lower revenues in the Business Wireline.
Segment operating income was $7,639 million compared with $6,864 million in the year-ago quarter largely due to continued focus on cost initiatives. Operating margin was 20.4% compared with 17.6% in the prior-year quarter. EBITDA was $12,244 million compared with $11,466 million in the year-ago quarter, for respective margins of 32.7% and 29.3%.
WarnerMedia: Total segment revenues were $9,232 million with solid performance from all business units. Operating income improved to $2,703 million owing to strong gains from Turner and Home Box Office units for corresponding margin of 28.4%. EBITDA was $2,762 million for a corresponding margin of 29.9%.
Latin America: Total revenues were $1,843 million, down 16.8% year over year, due to adverse foreign currency translation. EBITDA decreased to $38 million from $279 million in the year-ago quarter for respective margins of 2.1% and 12.6%, primarily due to foreign exchange.
Xandr: Total revenues were $566 million, up 48.6% year over year, while operating income improved 15.8% to $381 million for corresponding margin of 67.3%. EBITDA was $386 million for a corresponding margin of 68.2%.
Cash Flow & Liquidity
AT&T generated $43,602 million of cash from operations for full year 2018 compared with $38,010 million in the prior-year period. Free cash flow at year-end 2018 increased 36% year over year to $22.4 billion. As of Dec 31, 2018, AT&T had $5,204 million of cash and cash equivalents with long-term debt of $166,250 million compared with respective tallies of $50,498 million and $125,972 million in the prior-year period.
Outlook
AT&T offered guidance for 2019 and expects adjusted EPS to grow at low single digit. Free cash flow is expected to be in the vicinity of $26 billion with net debt to adjusted EBITDA in the 2.5x range. Gross capital investment is likely to be approximately $23 billion.
Moving Forward
With solid performance from the Wireless business and incremental contribution from WarnerMedia assets, AT&T is poised to continue its healthy growth momentum. The company also remains focused on managing its debt portfolio and is well on track to achieve its set target of 2.5x debt-to-EBITDA range by year-end 2019. AT&T is ramping up its FirstNet program and revamping lineup of video products, pricing and promotion initiatives. At the same time, the company remains well poised to benefit from the impending 5G boom. We remain impressed with the inherent growth potential of this stock.
Zacks Rank & Stocks to Consider
AT&T currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader industry include United States Cellular Corporation USM, ATN International, Inc. ATNI and Sprint Corporation S, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
United States Cellular Corporation delivered an average positive earnings surprise of 340.4% in the trailing four quarters, beating estimates in each.
ATN International has delivered an average positive earnings surprise of 146.1% in the trailing four quarters, beating estimates thrice.
Sprint has a long-term earnings growth expectation of 19.6%. It delivered an average positive earnings surprise of 320.8% in the trailing four quarters, beating estimates on each occasion.
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