AT&T (T) is slated to release its first quarter 2010 results on Wednesday, Apr 21, 2010. Ma Bell has not released any financial forecast for the quarter. The current Zacks Consensus Estimate for the first-quarter is 54 cents, representing a 2.25% annualized growth.
AT&T recorded positive earnings surprise in 3 of last 4 quarters. So, we will not be surprised if the carrier beats expectations in the upcoming quarter on the back of a strong wireless growth momentum.
In its fourth-quarter conference call, AT&T stated that it envisages stable revenue and stable-to-improved earnings and operating margins for full year 2010. The forecast takes into account the dilutive impact of roughly 5 cents to 6 cents associated with the carrier’s impending acquisition of specific wireless assets from Verizon (VZ). However, AT&T does not expect pension retiree benefit costs to drag the bottom-line in 2010.
Moreover, AT&T expects strong free cash flow in 2010 despite an incremental investment in the wireless, Ethernet backhaul and U-verse platform.
Fourth-Quarter Flashback
AT&T reported fourth-quarter earnings per share of 51 cents matched the Zacks Consensus Estimate while increasing from 41 cents reported a year ago. Net income surged 25.6% year-over-year, driven by strong wireless subscriber gains and aggressive cost-cutting measures.
Consolidated revenues of $30.9 billion were also in line with the Zacks Consensus Estimate. However, revenues marginally declined year-over-year, primarily due to lower wireline voice and print advertising revenues, which offset growth in wireless and wireline data services.
AT&T registered a staggering net gain of 2.7 million wireless subscribers (the second largest quarterly net addition ever) in the quarter driven by strong iPhone activations. The carrier registered lowest ever fourth quarter churn while ARPU (average revenue per user) remained healthy, driven by solid data growth.
On the wireline side, growth momentum for U-verse video and broadband service continued, helping AT&T to partly offset the precipitous decline in its legacy fixed-line voice business.
Estimate Revisions Trend
Agreement
Estimates are trending upwards since the fourth-quarter results, showing a clear directional agreement. Out of a total of 26 analysts currently covering the stock, 7 have raised their estimates over the last 30 days with 6 analysts making positive revisions over the last week. No downward revisions have been made over the same time periods.
Estimates for 2010 have also been positive, with 4 out of 32 analysts lifting their forecasts in the last 7 days with no negative revisions. The current Zacks Consensus Estimate for 2010 is $2.20, reflecting 4.16% year-over-year growth.
This positive revision can be, in part, attributable to the recent nationwide deployment of HSPA 7.2 standard based 3G network and the addition of Apple’s (AAPL) new tablet PC “iPad” to AT&T’s premium and extensive device portfolio. The iPad not only offers a fresh avenue for growth in wireless but also effectively complements the carrier’s new HSPA 7.2 network, which has doubled the existing 3G network throughput.
Magnitude
The magnitude of revisions for the forthcoming quarter is static over the last 7 and 30 days. However, there has been an increase of 1 cent over the last couple of months. Estimates for 2010 have gone up by a penny over the past week and month.
Our Take
We remain 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. Other positive aspects are represented by the higher dividend payouts and opportunity for margin expansion.
We also expect that the iPhone, which has been the lifeblood for AT&T’s wireless business, will continue to perform in line with expectations. The iPhone has a greater contribution to ARPU than the regular handsets and iPhone subscribers use more data services through web surfing, which continues to boost data revenues and margins. As such, the iPhone has a major impact on AT&T’s earnings performance and share price.
Following a similar move by its archrival Verizon, AT&T has slashed 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.
Nevertheless, we maintain a cautious approach due to weakening demand of wireline voice services and the ongoing price and promotional war. AT&T is increasingly under pressure from Verizon’s aggressive anti-iPhone marketing campaigns. Moreover, AT&T may lose its iPhone exclusivity in 2010 and there is mounting speculation about Verizon selling the device.
We currently have a Neutral recommendation on AT&T, which is supported by a Zacks #3 Rank (Hold).
Read the full analyst report on “T”
Read the full analyst report on “VZ”
Read the full analyst report on “AAPL”
Zacks Investment Research
