AT&T Earnings: Improving Cash Flow Should Drive Solid Debt Reduction in the Coming Quarters

AT&T T delivered strong free cash flow during the third quarter, prompting management to update expectations for the year from “$16 billion or better” to about $16.5 billion. Wireless customer trends, while still not as strong as a year ago, also bounced back from a soft second quarter, as management had foreshadowed. We continue to believe the competitive balance in the U.S. wireless industry is improving, with the three major carriers poised to deliver steady growth and expanding cash flow. We are maintaining our $23 fair value estimate on AT&T, leaving the shares materially undervalued.

Net postpaid phone customers of 468,000 dropped from 708,000 a year ago but improved from 326,000 last quarter. Management believes AT&T is now receiving its fair share of industry growth following the one-off loss of a large enterprise customer last quarter. We still suspect that AT&T is losing some ground to competitors in attracting new customers, but customer retention was impressive during the quarter. Revenue per customer continues to inch higher, pushing wireless service revenue up 3.7% versus the same quarter a year ago. Cost cutting and the continuing decline in phone upgrades lifted the wireless EBITDA margin more than 2 percentage points year over year to 43%.

Consolidated free cash flow hit $5.2 billion during the quarter, lifting the total year to date to $10.4 billion, nearly 30% higher than last year. Net debt declined more than $3 billion during the quarter to $129 billion, or about 3.0 times consolidated EBITDA. AT&T should generate plenty of cash during the fourth quarter to fund the dividend, pay the final $2 billion of C-band spectrum clearing costs, and surpass its $128 billion year-end net debt target. Free cash flow should expand further in 2024 as wireless network investment moderates. We expect management will remain focused on debt reduction, repaying maturities rather than refinancing at higher rates.