AT&T Q1 Earnings Report Reveals Moderated Business Customer Spending

‘People are making their businesses more efficient – trimming,’ AT&T CEO John Stankey said on an earnings call.

AT&T reported signs of businesses moderating their spending on remote working tools since the height of the pandemic during its first fiscal quarter earnings call Thursday.

The news preceded a nearly 10 percent decline in its share price and appeared to affect wireless competitors, with a 3 percent decline in Verizon’s stock price and a 2 percent decline for T-Mobile.

AT&T’s news follows on a released statement from publicly traded solution provider CDW that its own first fiscal quarter 2023 would fall below expectations due to “intensifying economic uncertainty” hurting the U.S. IT market.

On Thursday, Dallas-based AT&T reported results for the first quarter of its fiscal year, a quarter that ended March 31. CEO John Stankey, while overall upbeat about the vendor’s performance, said that some products and services business customers bought at the height of COVID-19 to move to remote work “have reached their point of use that they no longer need them” as people return to the office from remote work and the economy normalizes.

[RELATED: AT&T To Spend On 5G, Fiber In 2023 With The Help Of BlackRock]

AT&T Q1 Results

“People are making their businesses more efficient – trimming,” Stankey said on the call. “And the wireless business is, of course, correlated to headcount. And as some businesses have done some things to trim their employee ranks, you see that flowing through on handsets and data cards and things like that.

Stankey continued: “It’s, again, nothing that’s out of the pattern of what we expected in terms of overall growth in the industry. We still have very healthy business services growth. We feel very comfortable about our share. … We’re penetrating in segments like in the public safety area better than the market in total. All considered, that’s pretty consistent with what we expected this year.”

Stankey and Chief Financial Officer Pascal Desroches told analysts on the call that, in their view, the company performed within expectations.

“We started the year with the expectation that we’d be operating against a less predictable macro backdrop,” Stankey said on the call Thursday. “This belief has proven true thus far. And what we’re seeing is in line with the expectations we built into our guidance in January, including a moderation of growth for wireless services.”

IBM, which announced its first-quarter earnings Wednesday, reported a “deceleration” and “weakness” in its consulting business but said that software demand remained “very steady.”

Moderated spending since the height of COVID-19 has already hit multiple tech vendors this year, prompting major layoffs from the likes of Microsoft, Google and Amazon Web Services.

AT&T traded at about $18 a share Thursday at 2 p.m. ET, down 10 percent from market close Wednesday.

Verizon traded at about $37 a share, down 3 percent from market close Wednesday.

And T-Mobile traded at about $147 a share, down about 1 percent from market close Wednesday.

Among AT&T’s results was $1 billion in free cash flow when Wall Street expected $2.61 billion, according to Reuters.

AT&T’s reported $30.1 billion in revenue for the quarter was $80 million below expectations, according to Seeking Alpha. That revenue was still a 1.4 percent increase year over year. Lower business wireline revenues played a role, offset by higher revenue from mobility, Mexico and consumer wireline.

Verizon and T-Mobile report their quarterly earnings Tuesday and April 27, respectively.

AT&T CEO Stankey Upbeat

Stankey told analysts on the call Thursday that the vendor continues to reposition its business around communication services, especially 5G and fiber.

“As the last few years have demonstrated, the solutions we provide are more critical than ever before,” Stankey said. “And we only expect the demand for purpose built best in class Internet access to grow. The resiliency of the services we provide, coupled with our improved financial flexibility, provide us with the right toolset to navigate the economic environment. We remain on track to deliver the 2023 financial and operating commitments we made to our shareholders at the start of the year.”

He said that the company continues to build fiber and that the supply chain has held up, with “manageable” inflationary pressure.

“Everything is going great,” he said.

Desroches said that AT&T’s first quarter would be “the low watermark for free cash flow” due to being the highest quarter for device payments with the fourth quarter – the winter holidays – having the heaviest volume for devices.

“We pay for those in Q1, he said. “You saw our capital spend is elevated relative to the annual guidance that we gave.”

When asked about spending habits by consumers and business customers, Stankey said that “we’ve seen probably places in both segments where consumer at the lower end of the market are probably making the kind of decisions that people make when money is a little bit tighter.”

“There may be extending the use of their device a little bit longer,” Stankey said. “It’s not an issue of them not wanting the service. They’re just making the decision to stick with their current handset a little bit longer and maybe pushing that discretionary decision to move up. So we’ve seen a little bit of a drop off relative to some of the traditional upgrade rates and the shopping rates associated with that.”

Augmented Reality Still An Opportunity

When asked about AT&T’s opportunity with augmented reality devices, Stankey said that all wireless providers will be “instrumental to making this happen.”

Although getting device makers “to operate in the right way with the radio access layer” has “been a little bit of a journey,” AR will become an opportunity with 5G proliferation.

“We’re all building networks that are capable of supporting that and we will, as we have in the past, probably be one of the types of channels that help distribute these additional devices that people ultimately will use in new ways,” he said. “And more than likely they’re going to be things that are nice add-ons to family plans.”

Detailed AT&T Q1 Results

For the quarter, AT&T reported $6.7 billion of cash from operating activities, down $1 billion year over year.

The company reported $4.3 billion in capital expenditures and $6.4 billion in capital investment during the quarter. Capital expenditures were $4.6 billion for the quarter a year ago. Capital investment included $2.1 billion of vendor financing cash payments.

AT&T reported 424,000 postpaid phone net adds, making 11 straight quarters of 400,000-plus net adds.

However, the adds have been in a deceleration since the second fiscal quarter of 2022, according to Reuters.

AT&T Fiber saw 272,000 net adds, making 13 straight quarters with 200,000-plus net adds. This division also saw about 30 percent of revenue growth year over year, pushing consumer broadband revenues up 7.3 percent year over year.

Domestic wireless service revenues grew 5.2 percent year over year, marking the best first-quarter mobility operating income in AT&T history.

In AT&T’s mobility unit, revenues hit $20.6 billion for the quarter, up 2.5 percent year over year. Services revenues were $15.5 billion, up 5.2 percent year over year. Equipment revenues were $5.1 billion, down 4.7 percent year over year.

Operating income was $6.3 billion, up 10 percent year over year. Operating income margin was 30.5 percent, up from 28.3 percent a year ago. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $8.4 billion, up 8 percent year over year. The 40.7 percent EBITDA margin was up from 38.6 percent a year ago.

Total wireless net adds were 5.1 million, with 542,000 postpaid net adds. The 424,000 postpaid phone net adds offset 56,000 net lost postpaid tablet and other branded computing devices.

AT&T saw 174,000 other net adds and 40,000 prepaid phone net adds.

Business wireline revenues were $5.3 billion, down 5.5 percent year over year with less demand for legacy voice and data services and product simplification. AT&T did see growth in connectivity services, however, according to the vendor.

AT&T reduced operating expenses in the unit by 1 percent year over year to $5 billion. Operating income was $378 million, down 41 percent year over year. Operating income margin was 7.1 percent, down from the 11.3 percent seen a year ago.

Business wireline EBITDA was down 11.9 percent year over year with $1.7 billion. The margin was 32 percent, down from 34.4 percent a year ago.

AT&T has more than 750,000 U.S. business building lit with AT&T fiber with 3 million U.S. business customer locations. More than 10 million business customer locations are on or within 1,000 feet of AT&T fiber in the U.S., according to the vendor.

The consumer wireline revenue for the quarter was $3.2 billion, up 2.5 percent year over year. The 7.3 percent gain in broadband revenue offset declines in legacy voice and data and other services, according to AT&T.

AT&T reported 30.7 percent growth in fiber and 13.6 percent decline in non-fiber revenue.

Operating expenses grew 4.8 percent year over year to $3.1 billion with higher network and customer support costs part of the reason.

Consumer wireline operating income was $94 million, down 41 percent year over year. Operating income margin was 2.9 percent, down from 5 percent seen a year ago.

Consumer wireline EBITDA was $955 million, up 3.2 percent year over year. The margin was 29.5 percent, about flat compared to a year ago.