AT&T Earnings: Network Outage Didn’t Stop Solid Growth or Cash Flow

Key Morningstar Metrics for AT&T

• Fair Value Estimate: $23.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of AT&T’s Earnings

We saw much to like in AT&T’s T first-quarter results. The firm delivered near-record-low wireless customer churn, and it increased revenue per wireless customer despite the network outage and resulting bill credits in February. Cost-cutting and the slow pace of phone upgrades have buoyed margins, while network investment has moderated, yielding solid free cash flow. The fixed-line business services segment remains AT&T’s primary weak spot, with revenue and margins again contracting sharply. Our fair value estimate remains $23, and we believe the market is underestimating the stability of the US wireless industry.

AT&T added 349,000 net postpaid wireless phone customers during the quarter, down from 424,000 a year ago. Management emphasized that the customers it adds aren’t “empty calories,” likely referring to the second phone number offering that modestly boosted Verizon’s VZ results during the quarter (68,000 reported net losses versus 127,000 net losses a year ago) and T-Mobile’s TMUS third-line free promotion.

Customer retention remains excellent, with 9% fewer customers disconnecting service during the quarter than a year ago, while the customer base was 2.2% larger. However, the firm continues struggling to attract new customers, with gross postpaid phone additions down 11% year over year. The outage likely impeded customer acquisition, but management claims the impact was negligible.

Revenue per postpaid wireless phone customer increased 0.9% compared with the prior year. Management declined to disclose details, but we suspect this metric would have grown by about 2% without outage bill credits. Wireless service revenue rose 3.3% during the quarter, at the high end of management’s forecast for the year, pulling firmwide services revenue up 0.9%. The wireless segment EBITDA margin expanded nearly 3 percentage points versus a year ago to 43.5%, driving consolidated adjusted EBITDA up 3.9%.