Earnings Preview: AT&T - Analyst Blog

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The second-largest U.S. mobile service provider AT&T Inc. ( T ) is slated to release its first quarter 2012 earnings on April 24, before the opening bell. The current Zacks Consensus Estimate for the first quarter is 57 cents, representing a year-over-year increase of 0.37%.

Looking at surprises, AT&T had average negative surprise of 0.32% in the trailing four quarters. In the year-earlier quarter, the company did not surprise us by reporting in line earnings with our expectation.

At the fourth quarter 2011 conference call, AT&T provided guidance for fiscal 2012. The company projected consolidated revenue, including post-paid ARPU, to grow 2% year over year. AT&T also guided consolidated margin to expand further on increasing wireless margins and stable wireline margin. Accordingly, earnings per share would increase in the mid single-digit range, leading to further earnings acceleration in the years ahead.

Further, AT&T expected capital spending to be flat year over year at $20 billion and free cash flow in the range of $15-$16 billion. Moreover, the company intends to start the share buyback plan shortly as 300 million share repurchases are remaining under its share repurchase authorization.

Fourth Quarter Flashback

Lofty subsidies associated with Apple Inc. 's ( AAPL ) iPhone negatively impacted fourth quarter earnings, which lagged the Zacks Consensus Estimate and remained below the year-ago level. However, revenue managed to grow year over year, outpacing the Zacks Consensus Estimate on healthy mobile broadband sales, strong wireless network performance and improved wireline revenue trends.

Wireless revenue advanced on the back of strong data revenues and subscriber growth. Rapid adoption of smartphones including iPhone 4S, healthy prepaid and reseller subscriber count along with growth in tablets and connected devices such as automobile monitoring systems and security systems led to the growth in retail wireless subscribers. Quarterly post-paid additions were the highest in five years.

Despite the solid momentum for AT&T U-verse and strategic services, Wireline revenue dipped on weakness in voice and legacy data products.

Fiscal 2011 Flashback

AT&T exited the year with increasing top line but decreasing bottom line. Wireless business remained healthy while the Wireline business was a turnaround story. The company continues to enjoy its leadership in WiFi and boasts of the best Internet speeds in the industry. AT&T is the only US carrier that provides 4G network through both Long Term Evolution (LTE) and High-Speed Packet Access Plus (HSPA+) technologies.

The company enhanced its balance sheet by reducing debt. AT&T reduced its net debt by $3.2 million during 2011. This shows the company's ability to expand its business further.

Agreement of Analysts

Estimates reflect a negative bias for both the first quarter and fiscal 2012 over the last 30 days. For the first quarter, 6 analysts out of 24 made downward revisions while 3 moved in the opposite direction. For fiscal 2012, out of the 31 covering analysts, 6 revised their estimates downward while 3 revised it positively.

The analysts made downward revisions primarily based on iPhone subsidies, which will likely limit AT&T's margins and profits throughout the year. Additionally, the company is facing hurdles in managing the rising mobile data traffic resulting from the most popular iPhone and Google Inc. 's ( GOOG ) Andriod smartphones amid stiff competition and limited wireless spectrum licenses.

With the unsuccessful ending to the T-Mobile merger story last year, the company is in need of additional airwaves to expand its high-speed services. Already criticized for dropped calls and poor network coverage, AT&T will face more constraints in its capacity deployment compared to its largest rival, Verizon Communications Inc. ( VZ ), which will in turn hurt subscriber growth.

Further, AT&T is competing fiercely with the aggressive pricing plans of Verizon and Sprint Nextel Corp. ( S ). Moreover, smaller wireless carriers, such as Deutsche Telekom's T-Mobile, MetroPCS Communication ( PCS ) and Leap Wireless ( LEAP ) are also offering cost effective unlimited voice and data plans. This may negatively influence AT&T's high-end handset sales and challenge subscriber retention.

Moreover, AT&T is facing a potential strike threat in its wireline division in the East, Midwest, West and legacy should it fail to negotiate the new labor contract with them; the strike has not yet been called.

The analysts believe these negatives offset AT&T's strong subscriber count and average revenue per user, which is driven by increased penetration of smartphones and iPhones, in the U.S. market in particular.

Magnitude - Consensus Estimate Trend

The magnitude of revisions for the first quarter remained stable over the last 7 days at 57 cents, but decreased from 58 cents over the last 30 days.

Similarly, the Zacks Consensus Estimate for 2012 is $2.33, unchanged over the last 7 days but down by a penny over the last 30 days.

Neutral Recommendation

We expect this year to be a strong with continued growth in revenue, earnings per share and free cash flow as well as margin expansion. Strong adoption of iPhones and Android smartphone sales coupled with the LTE networks, expanding U-verse services, entrance into cloud computing and hotel WiFi businesses are expected to boost the company's future profitability.

However, persistent declines in traditional voice access lines, aggressive pricing plans by rivals, iPhone subsidies and intense competition from cable companies and other alternative services providers are risks to the stock.

We are currently maintaining our long-term Neutral recommendation on AT&T. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: AAPL , GOOG , LEAP , PCS , S

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