AT&T’s (T) DirecTV satellite TV and Mexican wireless businesses were Q4 bright spots, and accounting was a sore point, as the sprawling telecom giant reported light December quarter revenue and in-line EPS. AT&T 2016 guidance was in-line with a prior forecast given when the DirecTV acquisition closed in July. Shares in AT&T, which reported Q4 earnings after the market close Tuesday, were up about 0.5% near 35.50 as of early afternoon in the stock market today.
Here are five takeaways from AT&T’s Q4 report:
1. AT&T Goes To Mexico
AT&T’s push into Mexico’s wireless market is looking better amid high investments. AT&T acquired Mexico’s No. 3 wireless firm, Iusacell, as well as Nextel Mexico out of bankruptcy, for a combined $4.4 billion. It’s spending over $3 billion to upgrade networks. In Q4, AT&T reported 593,000 wireless subscriber additions in Mexico after losing a total of 689,000 the past three quarters.
“It’s clear AT&T is running as fast as possible to rebuild and rebrand that business,” said Philip Cusick. He estimates EBITDA (earnings before interest, taxes, depreciation and amortization) of $600 million in 2016 and $320 million in 2017.
2. DirecTV Subscriber Growth
The satellite TV broadcaster is showing impressive growth. DirecTV added 214,000 U.S. subscribers in Q4, up from 26,000 in the September quarter. AT&T is targeting DirecTV subscribers with new wireless product bundles. The problem is, AT&T’s landline U-verse video business is underperforming amid its focus on satellite TV/wireless marketing. AT&T lost 240,000 U-verse TV customers in the December quarter.
AT&T aims to have positive net video additions in 2016 combined (including DirecTV and U-verse) notes Mike McCormack, a Jefferies analyst in a report. AT&T is training technicians to install both broadband and DirecTV services when going to homes. “New offers, an improved sales channel, and single truck roll installs provide the catalyst for further satellite success,” added McCormack.
3. The Postpaid Problem
AT&T continues to lose market share among “postpaid” wireless phone subscribers — those billed monthly — amid aggressive marketing by T-Mobile US (TMUS) and Sprint (S). Verizon Communications (VZ) has still been adding postpaid customers.
In Q4, AT&T lost 256,000 postpaid phone subscribers. It marked the fifth consecutive quarter of postpaid phone subscriber losses, noted Tim Horan, analyst at Oppenheimer. On the bright side, Horan noted that AT&T added 469,000 prepaid subscribers. AT&T has ramped up marketing for its Cricket prepaid services.
4. Complex Accounting
AT&T’s accounting and financial reporting is getting harder to follow amid acquisitions and restructurings. “For all of 2016, they will be lapping numbers that aren’t quite pro forma, that don’t quite line up with new segment reporting, that still benefit from accounting distortions in wireless, and that have the benefit of an almost blank check of one-time revisions and adjustments,” lamented Craig Moffett, analyst at MoffettNathanson in a report.
At Pacific Crest Securities, analyst Michael Bowen said: “AT&T is becoming an increasingly complex business. AT&T’s strategic priorities in (Internet of Things), international expansion and video/wireless bundles continue to overshadow its core business. It remains difficult for us to foresee meaningful upside to our estimates; wireless service revenue pressure should be met by strength in DirecTV and international.”
5. AT&T Guidance Looks Up
AT&T, as CEO Randall Stephenson has oft-noted, is a big ship to steer with $147 billion in pro-forma 2015 revenue. In 2016, it’s steady as she goes, said Stephenson on the Q4 earnings call.
“We’re tracking almost exactly on what we told you (when the DirecTV deal closed),” he said. “When you look at 2016, what you can expect is double-digit consolidated revenue growth, adjusted EPS growth in the mid-single-digit range or better, stable consolidated margins with a solid business plan to improve in each segment, even while we’re investing in Mexico. And we expect our free cash flow dividend payout ratio to be in the 70s, with a goal of growing free cash flow this year.”