AT&T posts worst drop in years as analysts weigh another hard cash-flow road ahead
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AT&T stock (NYSE:T) was down 10.8% and headed for its worst single day in years Thursday, after first-quarter earnings where it was largely solid across several metrics, but saw subscriber growth slow a bit, and spooked dividend-focused investors who hoped for significantly higher free cash flow.
Revenues were close to Street expectations, ticking up slightly year-over-year, and non-GAAP earnings per share topped consensus by a penny, though the company's adjusted earnings before interest, taxes, depreciation and amortization largely fell short of consensus.
The carrier met expectations with 424,000 postpaid phone net subscriber additions, but that figure was down substantially from quarters in 2022.
AT&T "continued to grow wireless service revenues, EBITDA and postpaid phone [average revenue per user], all while maintaining historically low churn," CEO John Stankey said on an earnings conference call. "Checking the box for each of these success metrics paints a clear picture of what sustainable, profitable wireless growth looks like."
The fiber business marked 272,000 net adds, and Stankey touted 13 straight quarters over 200,000 net adds.
The earnings overall were "largely below expectations," KeyBanc analyst Brandon Nispel suggested, with downbeat revenue and EBITDA mitigated somewhat by "modestly better" postpaid phone net adds, even if churn ticked up to 0.81%.
Free cash flow, meanwhile, came in at just $1B while analysts had expected $2.6B, thanks to higher capital expenditures than expected.
But as with last year, AT&T stuck to guidance that it could hit $16B-plus on the measure in 2023 -- suggesting it once again is counting on cash flow loaded to the back half of the year.
That is once again due to timing issues, Stankey suggested: "One, it's the highest quarter of device payments. Recall, Q4 holiday sales is the heaviest volume for devices; we pay for those in Q1. You saw our capital spend is elevated relative to the annual guidance that we gave. And Q1 is the quarter we pay incentive comp ... When you factor all those things in, along with our expectations that we will continue to grow EBITDA, we feel really good about delivering $16B or better."
Credit Suisse's Doug Mitchelson noted that given an $800M contribution from DirecTV posted in investing activities, AT&T ex-DirecTV was "essentially FCF-breakeven" in the first quarter.
Spreads on AT&T's investment-grade bonds also widened off the quarterly report, with the yield on its 5.54% note due February 2026 widening by 11 basis points to 117 above benchmark, and the spread on the 2.25% due December 2046 widening by 9 bps.
As for net debt: "We expected to transition back to more historical cost of debt. That is certainly under way, with the added dose of tighter credit availability to some segments of the economy," Stankey said. More than 95% of AT&T's debt is now fixed at an average rate of 4.1%, he said.
AT&T also stayed confident in hitting 2023 wireless service revenue growth of 4% or more, broadband revenue growth of 5% or more, and adjusted EBITDA growth of 3% or more.
Telecoms offering wireless service were among Communication Services sector laggards in sympathy with AT&T Thursday: T-Mobile (TMUS) -2%; Verizon (VZ) -4.1%; Charter Communications (CHTR) -2.8%; Comcast (CMCSA) -1.7%.
For more detail, check Seeking Alpha's transcript of AT&T's conference call.
Seeking Alpha analyst and Investing Groups leader Quad 7 Capital said that despite efforts to cut debt at AT&T (T), the debt still rose sequentially and "remains a huge risk."