To The Moon

AT&T(T.US)

17.650

17.680

-10.41%

+0.17%

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By Emily Bary

Shares of $AT&T(T.US)$ Inc. were on track for their worst day since 2000 Thursday after the company fell short of free-cash flow expectations but reiterated its full-year target on the closely watched metric.

Free-cash flow for the first quarter came in at $1 billion, whereas analysts were modeling $3.2 billion. AT&T (T) said previously that the first quarter tends to be seasonally slow on the metric due to the timing of device payments, incentive compensation and other factors, and executives reiterated many of those points Thursday.

Capital investments, device payments and incentive compensation "all peaked in the first quarter," Chief Financial Officer Pascal Desroches said on the company's earnings call.

Amir Rozwadowski, the company's head of investor relations, told MarketWatch that the company's capital investment was up on a year-over-year basis in the quarter due to the timing of 5G and fiber build-out initiatives.

"That's a function of cadence," he said, adding that the $1 billion in free-cash flow was in line with AT&T's own expectations and that the company still feels "on track" to deliver on its goal of at least $16 billion in 2023 free-cash flow.

Still, the miss seemed to spook Wall Street, with Wolfe Research analyst Peter Supino calling free-cash flow the "biggest concern" coming out of the report. The reiterated goal implies a back-half weighted ramp and could give investors "a reason to worry" about its achievability, he wrote.

AT&T shares finished off 10.4% in Thursday trading, their biggest one-day percentage decline in more than two decades and their second-worst drop on record. Only the stock's 12.7% tumble on Dec. 19, 2000, was steeper.

While the company met expectations as it delivered 424,000 postpaid phone net additions in the quarter, that marked a smaller haul than in recent quarters, reflecting expectations that industry subscriber growth would cool this year. The company posted upward of 650,000 postpaid phone net additions in each quarter of 2022.

"We're going after customers that we think are profitable customers, and we're doing it in the same way," Chief Executive John Stankey said on AT&T's conference call Thursday.

AT&T is seeing "really low churn levels for us on historical basis," Rozwadowski added, with more customers trading up to higher-priced plans. Postpaid phone churn was 0.81%, though that was up slightly from 0.79% in the year-prior period.

The results showed the tough "balance" that wireless companies must strike, according to SVB MoffettNathanson analyst Craig Moffett.

"Subscriber metrics have to be at least 'good enough' for investors to focus on financial metrics instead," he wrote in a note to clients. "And achieving those subscriber metrics must be 'cheap enough' that those financial metrics aren't compromised."

The company's "first-quarter results show why that's a such difficult trick to pull off."

During the quarter, AT&T logged income from continuing operations of $4.5 billion, or 57 cents a share, after earning $5.1 billion, or 65 cents a share, on that metric in the year-earlier period.

After adjustments, AT&T earned 60 cents a share from continuing operations, down from the 63 cents a share in earnings that it saw from continuing operations a year before. Analysts tracked by FactSet were expecting 58 cents a share in adjusted earnings.

The company continues to see opportunities for cost cuts, including as it reduces its legacy copper footprint. "Fiber is much more efficient and more cost effective to run," Rozwadowski said.

AT&T saw 272,000 net additions within its fiber broadband business in its most recent quarter.

"Considering the slowdown in fiber builds from some competitors and ongoing inflationary environment, remaining on target for its goal of 30 million fiber locations by 2025 is definitely a positive," Third Bridge analyst Jamie Lumley said.

Operating revenue for the period inched up to $30.14 billion from $29.71 billion a year before. Analysts tracked by FactSet were modeling $30.25 billion in revenue for the quarter.

AT&T shares have declined 4% this year as the S&P 500 index has gained 8%.

-Emily Bary