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Will Top-Line Contraction Undermine AT&T's (T) Q2 Earnings?

AT&T Inc. T is scheduled to report second-quarter 2020 results, before the opening bell, on Jul 23. In the last reported quarter, adjusted earnings matched the Zacks Consensus Estimate. In the second quarter, the company is likely to have recorded lower revenues year over year due to the adverse impacts from the coronavirus pandemic, foreign currency headwinds and continued infrastructure investments for 5G deployment across the country.

Factors at Play

In the second quarter, AT&T expanded its 5G network infrastructure in various markets to take the tally to 355 markets across the country, serving 179 million people. The company introduced Dynamic Spectrum Sharing in sections of its network, coupled with 5G-enabled devices that help it share the same channel with both 4G and 5G users simultaneously, thereby creating a seamless experience for customers. These initiatives are likely to be reflected in the upcoming results.

During the to-be-reported quarter, AT&T expanded its collaboration with RingCentral to leverage its technology for online voice and video team meetings by incorporating it in its cloud-based platform — Office@Hand. This flexible cloud-based solution, which enables employees to work virtually with advanced cost-effective communication platform, is likely to improve workforce productivity amid coronavirus-induced turmoil. Such technology collaborations are likely to have translated into higher revenues for the Business Wireline division.

At the same time, AT&T launched HBO Max to create other avenues to monetize content while increasing ARPU (average revenue per user) through higher customer adoption. With its commercial debut, HBO Max will offer about 10,000 hours of premium content, leveraging an extensive collection of exclusive original programs and the most sought-after shows from WarnerMedia’s vast portfolio of beloved brands and libraries. This is likely to have been accretive to earnings in the second quarter.

However, adverse foreign currency translations, evolving market conditions in the aftermath of the deadly virus outbreak and continued investments in HBO Max for new content production, foregone licensing revenues and platform costs are likely to have led to soft margins.

The Zacks Consensus Estimate for total revenues of the company stands at $41,385 million, indicating a 7.9% decline from $44,957 million reported in the prior-year quarter. The consensus mark for earnings is currently pegged at 78 cents per share. It had reported 89 cents in the year-earlier quarter.

Key Developments in Q2

During the quarter, AT&T closed the sale of a secondary offering to improve its liquidity position and reduce the burgeoning debt burden through prepayment of upcoming debt maturities. The strategic move is likely to de-risk its capital structure as the company prepares to navigate through the challenging macroeconomic environment. The company also secured a $5.5-billion term loan at competitive rates with 12 banks for additional financial flexibility.

In order to raise cash, AT&T has been mulling the divestment of its gaming business, dubbed the Warner Bros. Interactive Entertainment, for as much as $4 billion to improve its cash position. It has also shuttered its DirecTV operations in Venezuela due to the fallout of a geopolitical tussle between the United States and the Latin American country.

The company is offering free data plans for certain school-issued tablets for 60 days. AT&T waived wireless voice and data overage fees for all customers and expanded eligibility for its low-income Internet program, while offering new program participants two free months of service. It also created a $10-million fund to support distance learning. These corporate social initiatives are further likely to have drained the exchequer.  

Earnings Whispers

Our proven model predicts an earnings beat for AT&T for the second quarter. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This is perfectly the case here.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +2.01%, with the former being pegged at 80 cents and the latter at 78 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

ATT Inc. Price and EPS Surprise

 

ATT Inc. Price and EPS Surprise

ATT Inc. price-eps-surprise | ATT Inc. Quote

Zacks Rank: AT&T has a Zacks Rank #3.

Other Stocks to Consider

Here are some other companies you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this season:

Verizon Communications Inc. VZ is set to release quarterly numbers on Jul 24. It has an Earnings ESP of +0.17% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for NETGEAR, Inc. NTGR is +6.67% and it carries a Zacks Rank of 3. The company is set to report quarterly numbers on Jul 22.

The Earnings ESP for Twitter, Inc. TWTR is +118.97% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 23.

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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.

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