AT&T Earnings Still Intertwined with iPhone -- Earnings Preview

   By Thomas Gryta 
 

AT&T Corp. will report third-quarter financial results after the markets close on Wednesday afternoon. Here is what you need to know:

EARNINGS FORECAST: Earnings of 64 cents a share is the average of analysts surveyed by Thomson Reuters, compared with earnings of 66 cents a year ago.

REVENUE FORECAST: Revenue of $33.2 billion is forecast, compared with $32.2 billion last year.

WHAT TO WATCH FOR:

--IPHONE EFFECT: Once the exclusive seller of the iconic device, AT&T is still intertwined with the iPhone. MoffettNathanson estimates that 75% of smartphone sales at the carrier are iPhones, compared with 50% at Verizon. Wall Street will listen for customer adoption trends of AT&T's no-contract Next plans, through which customers pay full price for smartphones using monthly installments. The move away from traditional smartphone subsidies and service contracts will relieve some of the margin pressure that usually accompanies a new iPhone. Wireless margins could hit 40% in the fourth quarter, a feat unseen at AT&T since 2009.

--COMPETITION: After years with little movement, AT&T and Verizon are facing greater competition from T-Mobile and Sprint. AT&T has made its own moves and maintained low churn--a measure of service cancellations--partly by moving much of its customer base to cheaper plans. AT&T has said churn for the quarter will be 1% or lower, but investors are watching whether low churn will continue or if subscribers with discounted pricing will jump ship with the next device upgrade. Verizon reported its highest third-quarter churn in four years on Tuesday, according to data from UBS.

--CAPITAL EXPENDITURE: Investors will be looking for hints about AT&T's spending plans for coming years or even the last months of 2014 amid concerns that its cash flow leaves it with little margin to spare after covering its dividend. AT&T expects about $21 billion in capital expenditure this year and $11 billion in free cash flow, with about 91% of that paying the company's dividend, estimates Morgan Stanley.

--DIRECTV DEAL: AT&T's planned acquisition of DirecTV for $49 billion is projected to close in the first half of 2015, but not before it goes through the regulatory ringer. DirecTV met a key component of the deal in recently extending its broadcasting deal with the National Football League. Wall Street will be probing for insights on any advantageous terms of that eight-year deal along with any indication of regulatory concessions or hurdles.

--OTHER DEALMAKING: AT&T is a huge company built on a pile of massive mergers. Even with the DirecTV deal pending, the company hasn't ruled out other moves. Investors will look for the company's commentary on the strategy around possibly buying Mexican assets from former partner America Movil or doing more content deals.

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