Competition Thwarts AT&T's Results
The narrow-moat firm is having some success cross-selling wireless service with video, but we don't believe the success justifies the price paid for Direct TV.
AT&T (T) reported fourth-quarter results that were light in both revenue and EBITDA margins. However, due to the lower tax rate, we expect to maintain our fair value estimate. Our narrow moat rating is intact and we believe the shares are fairly valued. While the firm’s revenue held up better in the fourth quarter--only declining 0.4%--it fell 2% for the year versus our projection of a drop of 1.1%. While AT&T did much better growing its postpaid wireless telephone base by 329,000, versus a 67,000 decline in the fourth quarter of 2016, it still saw consumer mobility revenue fall 1.7% in the quarter and 5% for the year. Competition remains difficult pushing down postpaid average revenue per user 1.9% in the quarter to $68.20.
The firm is having some success cross-selling wireless service with video, which has improved churn. We’re happy to see the improvement, but don’t believe the success justifies the price AT&T paid for Direct TV. However, Direct TV Now, its over-the-top service, added 368,000 video customers taking its total to almost 1.2 million. This more than offset the 207,000 decline in traditional video subscribers, though they don’t generate as much revenue. We expect Direct TV Now subscriber growth will continue to help offset traditional video customer declines.
AT&T’s international segment showed solid revenue growth of 16% in the quarter to $2.2 billion, but it continues to lose money due to the expense of building out its operations in Mexico and the cost of gaining subscribers there. While the revenue growth is nice, we don’t see AT&T being able to generate a sufficient return in Mexico to justify the amount of capital being spent there.
The continued losses in Mexico and the subscriber acquisition costs in the U.S. kept the firm’s EBITDA margin at 22.4% in the quarter and 30% for the year versus our 32.4% projection. While we expect the firm can increase its margins from here, we’ve likely been too bullish on the speed it can happen.
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Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.