AT&T Inc. (T) has announced fourth-quarter 2009 results, with reported earnings per share of 51 cents matching the Zacks Consensus Estimate. AT&T had a 6% positive earnings surprise in each of the first three quarters of 2009. The fourth-quarter earnings represent an increase from 41 cents reported a year ago. The company’s shares increased 28 cents (or 1.09%) to $25.90 in pre-market trading.
Net income (attributable to AT&T) for the quarter surged 25.6% year over year to $3 billion, boosted by strong wireless subscriber gains and cost-cutting measures. Net income for full-year 2009 was $12.5 billion (or $2.12 a share), down 2.6% from 2008.
The current Zacks Consensus Estimate for 2010 EPS is $2.24 (representing 5.6% year-over-year growth) with estimates clearly trending downwards. Out of a total of 33 analysts currently covering the stock, 4 have cut their estimates over the last 7 days.
The largest US telecom carrier reported consolidated revenue of $30.9 billion for the quarter, also in line with the Zacks Consensus Estimate. Revenue declined 0.7% year over year, primarily due to lower wireline voice and print advertising revenue, which offset growth in wireless and wireline data services. Revenue for full-year 2009 was $123 billion, down 0.8%.
Result by Key Segments
Wireless
AT&T registered a staggering net gain of 2.7 million wireless subscribers in the quarter to reach 85.1 million total subscribers in service, up 10.5% year over year, driven by strong iPhone activations. This represents the second largest quarterly net addition in the company’s history. Retail postpaid additions for the quarter totaled 910,000 million (34% of total net additions). Ma Bell’s archrival Verizon (VZ) registered 2.2 million net additions in the fourth quarter.
The momentum for iPhone continues with strong new activations of 3.1 million (more than a third represented by new customers), representing the second-highest quarterly activations. Postpaid 3G wireless devices also registered solid quarterly net additions with 4 million new activations.
Total wireless revenue for the quarter increased 7.6% to $13.8 billion. Wireless data revenue increased by 26.3% year over year to $3.9 billion, driven by strong handset sales and associated data access, e-mail and messaging services. Total churn (customer switch) remains low at 1.44%, compared to 1.64% a year ago. Postpaid churn of 1.19% reflects a year over year improvement from 1.20%. Postpaid ARPU (average revenue per user) was $61.13, up 2.6% year over year, driven by healthy data growth.
Wireline
Consistent gains from U-verse video services continue to help AT&T counter increasing competition in the traditional wireline business. Total U-verse TV subscribers reached 2.1 million with a net addition of 248,000 customers (up sequentially). U-verse TV footprint passed 23 million homes at the end of 2009. U-verse broadband gained 267,000 customers in the quarter, taking the total broadband customer base to 17.3 million.
AT&T remains challenged by the precipitous decline in its traditional fixed-line business. Wireline voice access lines continue to decline as reflected by a sequential decrease of approximately 1.4 million lines in the fourth quarter to 49.4 million. Total wireline sales declined 5.3% to $16.2 billion as wireline voice revenue fell 13.5% year over year to $7.8 billion. The ongoing substitution of landline calls with wireless services coupled with cable competition in overlapping markets largely contributed to this decline.
Dividend & Cash Flow
AT&T generated a record $34.4 billion cash from operations in 2009 compared to $33.7 billion in 2008. Free cash flow (cash from operations minus capital expenditures) for the year was $17.1 billion, up 28.4% year over year. The company declared a fourth-quarter dividend of 42 cents per share, representing an increase from 41 cents a year-ago.
Outlook
AT&T unveiled its 2010 outlook with expectations of achieving stable revenue and stable-to-improved earnings and operating margins. The company expects strong free cash flow in 2010 despite an incremental investment in the wireless business. Total capital expenditures for the year have been projected in the range of $18 billion to $19 billion, representing an increase from $17.3 billion in 2009. The company aims to achieve a wireless OIBDA service margin in the low-40% range in 2010 with a long-term target in the mid-40% range.
AT&T is pursuing a number of strategies, including aggressive promotion of bundled services (voice, video and Internet) to protect its markets from cable operators and other alternative services. The company acquired regional telecom operator Centennial Communications in November 2009. The acquisition has expanded AT&T’s wireless coverage to include the rural areas of the Midwest and Southeast regions of the US as well as Puerto Rico and the US Virgin Islands.
Following Verizon’s recent move, AT&T slashed the tariffs of its unlimited voice services. While this price discount may drag near-term earnings to some extent, the move is expected to boost operating results in the long run.
AT&T is increasingly under pressure from Verizon’s aggressive anti-iPhone marketing campaigns. Moreover, to strongly challenge iPhone, Verizon recently unveiled Motorola’s (MOT) Droid smartphones that are based on Google’s (GOOG) Android platform. AT&T may lose iPhone exclusivity in 2010 and there is mounting speculation about Verizon selling the device.
However, AT&T has been selected by Apple (AAPL) as the preferred carrier for the new tablet PC “iPad,” introduced on January 27, 2010. The carrier will offer the device with data plans of $14.99 per month (for 250 megabytes of data) or $29.99 for unlimited usage.
We are encouraged by AT&T’s ongoing efforts to upgrade its wireless network and acquisition initiatives to expand customer base and coverage zones as the US subscriber population reaches maturity. However, we maintain a cautious approach due to the weakening demand of wireline services and the ongoing aggressive price and promotional war. We currently have a Neutral recommendation on AT&T, which is supported by a Zacks #3 Rank (Hold).
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