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Earnings Results: AT&T sees big subscriber gains but stock dips after earnings

An earlier version of this story misstated AT&T’s GAAP earnings per share for the third quarter. It was 82 cents.

AT&T Inc. posted a big quarter of subscriber gains Thursday, but its shares were slightly down as some questioned the impact of promotions on the company’s growth.

The telecommunications giant saw 1.22 million net additions within its mobility business for the third quarter, including 928,000 postpaid phone net additions, which made for the company’s best quarter on the phone metric in more than a decade. AT&T sees its network strength and “consistent, simple offers” as big momentum drivers, Chief Financial Officer Pascal Desroches said on the earnings call.

The company’s postpaid phone churn remained low at 0.72% for the quarter, compared with 0.69% a year earlier. AT&T said that churn improved when adjusted for the Keep America Connected program, through which telecommunications companies pledged to continue providing service to customers who had trouble paying their bills due to the pandemic.

The wireless industry has become more promotional in recent years, and AT&T has been aggressive with its offers, but executives downplayed the impact of promotions on the company’s latest results.

The deals are “one element of this broader strategy,” said Jeffery McElfresh, the chief executive of AT&T’s communications business, on the company’s earnings call. He also called out AT&T’s more “optimized” distribution channels and its “simplified” rate plans, and he said that not all of the company’s customers take advantage of the promotions.

“We know, based on these metrics that we see, that we’re adding high-value customers and don’t believe that this is driven uniquely by any kind of subsidy or extra cash flow that happens to be in the marketplace,” he added.

Several analysts, however, keyed in on the promotions in their notes to clients. “Mobility service revenues increased by 4.6%, and, while the segment [earnings before interest, taxes, depreciation, and amortization] dollars are increasing, the cost of the retention promotions continues to weigh on margins (41.7% vs 43.1% in the previous year quarter),” Bernstein’s Peter Supino wrote.

Government stimulus checks and carrier offers are likely driving industry-wide subscriber growth that’s far outpacing population growth, MoffettNathanson’s Craig Moffett wrote, and those trends don’t seem particularly sustainable to him.

AT&T likely hopes that its “customer gains will eventually translate into faster service revenue growth,” according to Moffett, but AT&T would need to grow average revenue per user (ARPU) in order to do so, and right now the metric is declining.

Shares of AT&T were off 0.9% in Thursday afternoon trading following the report, which also contained better-than-expected earnings-per-share numbers.

The company posted net income of $5.9 billion, or 82 cents a share, roughly double the $2.8 billion, or 39 cents a share, that AT&T reported in the year-prior quarter. After adjustments, AT&T earned 87 cents a share, up from 76 cents a year earlier and above the FactSet consensus, which called for 78 cents a share.

AT&T’s revenue declined to $39.9 billion from $42.3 billion, which the company said reflected the spinoff of its U.S. video business as well as lower business wireless revenue. Analysts tracked by FactSet were modeling $40.6 billion, but Moffett noted that “the problem seems to be the inclusion in consensus of some forecasts that may have included a full quarter of video revenue,” whereas AT&T’s transaction to make DirecTV a separate company actually closed in early August.

Revenue for AT&T’s communications unit increased to $28.2 billion from $27.2 billion. That included revenue from the company’s mobility unit, which rose to $19.1 billion from $17.9 billion as AT&T benefited from higher service and equipment revenue.

The WarnerMedia business saw revenue grow to $8.4 billion from $7.4 billion. WarnerMedia benefited from higher content revenue and saw a “partial recovery from prior-year impacts of the pandemic,” per its release. Subscription revenue increased to $4.0 billion from $3.5 billion, mainly reflecting traction for the HBO Max streaming service. AT&T had 69.4 million global HBO Max and HBO subscribers at the end of the third quarter.

AT&T anticipates that its full-year adjusted earnings per share will “be at the high end of the low- to mid-single digit growth range” and the company said that it’s “on track” with its free-cash-flow target, which is in the “$26 billion range.” AT&T also expects that its HBO Max and HBO global subscriber count will fall at the “higher end” of its 70 million to 73 million target.

Shares of AT&T have declined 9.9% so far this year as the S&P 500

has risen 20.8%.

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