AT&T's Stock Price Punished Over Cash Flow Concerns

AT&T shares closed 7.7% lower Thursday at $18.91 after the company released Q2 earnings and reported a decrease in free cash flow. The carrier lowered full-year free cash flow guidance to the $14 billion range, $2 billion less than expected, “to reflect heavy investment in growth and working capital impacts related to timing of collections.” AT&T had $1.4 billion in cash flow Q2, versus analysts’ estimate of $4.7 billion. Overall, AT&T posted adjusted earnings of 65 cents a share on $29.64 billion revenue.

AT&T is now covering 70 million mid-band POPs with 5G, “two quarters ahead of our year-end target, and [we] are now on track to approach 100 million mid-band POPs by the end of this year,” CEO John Stankey said on an analyst call. Stankey highlighted wireless and fiber adds.

“We brought in the most second quarter postpaid phone net adds in more than a decade, just like last quarter, building on our momentum from 2021,” Stankey said. The company reported 813,000 postpaid phone net adds in Q2. “Our success is not solely promotion-led, but instead reflective of our improved value proposition in the market,” he said.

AT&T had 300,000 fiber net adds. “We're finding success in serving more customers in new and existing markets,” Stankey said. Business wireline revenue was $5.6 billion, down 7.6% year over year “due to lower demand for legacy voice and data services, a strategic decision to deemphasize noncore services and lower revenues from the government sector,” AT&T said.

Stankey said “inflationary pressures [are] clearly impacting all parts of our economy,” and it estimates inflation will drive up its costs by more than $1 billion. AT&T didn’t expect the current 9% inflation rate, he said. How quickly inflation turns around will affect cash flow next year, Stankey said. “What happens in the overall economic pattern is a bit uncertain,” he said.

Capital expenditure spending for this year and next are expected to be in the $24 billion range, Chief Financial Officer Pascal Desroches said on the call. AT&T is on track to start deploying wireless coverage in its C-band and 3.45 GHz licenses, he said.

“Inflation and signs of looming economic weakness are the topics du jour for the whole market, as everyone is rightly focused on assessing whether the multiple compression the market as a whole has suffered thus far is a valuation reaction to higher discount rates or, instead, a harbinger of falling estimates to come,” MoffettNathanson’s Craig Moffett told investors. “But, truth be told, the bigger takeaway here is an old and familiar one,” he said: “Mobility results were relatively good, and Business Wireline results were really, really bad (Consumer Wireline results were no great shakes either).”

“AT&T has undergone profound transformation in the last 17 months, shedding Warner Media, spinning out control of DirecTV’s operations to TPG, and divesting a host of ancillary operations,” New Street said: “The set of businesses that are left makes AT&T look a lot like Verizon, just with a little more fiber and a little less wireless.”