(Adds executive and analyst comment, share price update)
By Sinead Carew
NEW YORK Jan 28 AT&T Inc's fourth quarter
wireless subscriber growth and its free cash flow target lagged
well behind analyst estimates, sending its shares down 2 percent
in late trade on Tuesday.
Chief Executive Randall Stephenson also told investors on
the company's conference call that a U.S. spying scandal was
hurting its business irrespective of any effect it could have on
prospects for overseas acquisitions.
With a price war brewing and market share losses to smaller
rival T-Mobile US and market leader Verizon Wireless
at home, some investors want AT&T to expand
overseas with an acquisition of Vodafone Group Plc even
after it ruled out such deal for now.
AT&T added fuel to investor worries with a free cash flow
target of $11 billion for 2014 and 2015 down from $13.6 billion
in 2013. This implies that a "nerve-wracking" 86 percent of its
cash flow will be needed for paying dividends, according to
MoffettNathanson analyst Craig Moffett.
"That doesn't leave much room for a price war," Moffett
said in a research note. "AT&T may or may not return to Vodafone
in the second half, but they need to do ... something."
Analysts had hoped for 2014 free cash flow closer to $14
billion. AT&T, which is beefing up its network in an effort to
compete better, also set a 2014 capital budget in the $21
billion range, which was $1 billion more than analysts expected.
On top of financial concerns, investors are worried about
whether competition will become more intense as T-Mobile U.S.
has spent several quarters directly marketing to AT&T customers,
while AT&T recently offered to pay T-Mobile customers to switch.
For the fourth quarter, AT&T had subscriber net additions of
566,000, behind the average Wall Street expectation for 636,000
according to eight analysts contacted by Reuters.
It also trailed market leader Verizon Wireless which had 1.6
million subscriber additions, and T-Mobile U.S. which had
While AT&T executives spoke of intense competition on the
quarterly conference call they said their customer defection
rate, known in the industry as churn, was their best ever for
the fourth quarter, and showed that they were holding their own.
Jefferies analyst Michael McCormack was disappointed with
the free cash flow and capital budget targets, although he noted
that AT&T's churn of 1.11 percent was much better than his
expectation for 1.19 percent.
"I think the market was expecting a much worse result in
terms of wireless profitability and market share losses," he
The company reported stronger than expected wireless
profitability with a service margin of 37.4 percent, compared
with 29.1 percent in the year-ago quarter and analyst
expectations closer to 34 percent.
While the bulk of AT&T's business is domestic, CEO
Stephenson noted for the first time on Tuesday that his company
was being hurt by revelations from former NSA contractor Edward
Snowden of a widespread U.S. surveillance program that used
records of communications on networks including that of AT&T.
U.S. equipment maker Cisco Systems Inc recently
blamed the scandal for a loss of business in China.
Stephenson said he had discussed the matter with European
policy makers at the World Economic Forum in Switzerland last
week as the NSA scandal fallout was "not inconsequential" to
He explained that AT&T had issued a statement on Monday
ruling out a Vodafone bid at least for now because of a request
from UK regulators over the weekend due to press reports about
his meetings with European officials.
Although he did not quantify the financial impact of the NSA
issue, Stephenson said: "We are having customers ask us a lot of
Some investors worry that the NSA affair could hurt AT&T's
ability to gain European regulatory approval for a purchase of
Vodafone if it pursued such a deal.
"We've had some business impacts from the NSA," Stephenson
told investors during the company's quarterly earnings call.
"Its affecting our ongoing business today irrespective of
anything that might relate to M&A."
EARNINGS, REVENUE SLIGHTLY AHEAD
AT&T reported fourth-quarter earnings of $6.9 billion, or
$1.31 per share, compared with a loss of $3.86 billion, or 68
cents per share in the year-ago quarter when it had a massive
The latest quarter included a pension related gain.
Excluding unusual items AT&T earnings per share was 53 cents
in the quarter compared with Wall Street expectations for 50
cents, according to Thomson Reuters I/B/E/S.
Revenue rose to $33.16 billion from $32.58 billion slightly
ahead of Wall Street expectations for $33.06 billion according
to Thomson Reuters I/B/E/S.
For 2014, AT&T forecast continued revenue growth in the 2 to
3 percent range.
AT&T shares fell to $33.00 in late trade after closing at
$33.70 in the regular New York Stock Exchange session.
(Reporting by Sinead Carew; Editing by David Gregorio and