Both AT&T (T +1.28%) and Verizon (VZ 0.31%) reported quarterly earnings in April, so investors got a peek into how the coronavirus pandemic affected two of the largest wireless carriers in the U.S. The insights are helpful, particularly to understand each company's strengths and weaknesses.
Let's unpack first-quarter results with an eye toward discerning each company's resiliency during difficult times. Then we can determine which is the better investment.
Image source: Getty Images.
AT&T's challenges
AT&T's earnings release for the 2020 first quarter showed revenue of $42.8 billion, a decline from 2019's $44.8 billion. Different factors played into the revenue drop, not all of them coronavirus-related.
For instance, AT&T's entertainment segment, which includes its new AT&T TV service and DIRECTV, lost over one million subscribers in the quarter. The division has been losing subscribers for several quarters as consumers shift to streaming services and away from traditional TV options. Combine that with the first quarter's drop in advertising revenue due to the cancellation of lucrative events like the March Madness college basketball tournament, and it's no surprise the division's $10.5 billion in Q1 revenue was a decline from 2019's $11.3 billion.
In addition, AT&T's 2018 acquisition of Time Warner, now the WarnerMedia division, created a large debt load. With theaters now closed and production of new entertainment content shut down, WarnerMedia revenue in the first quarter dropped to $7.4 billion compared with 2019's $8.4 billion.
The question is how fast WarnerMedia can recover post-pandemic. In the long run, WarnerMedia's success depends on adoption of its upcoming HBO Max streaming service, advertising revenue, and how well its theatrical content resonates with audiences.
But it's not all bad news for AT&T. The company's wireless service revenue increased 2.5% year over year to $13.97 billion. In fact, wireless service revenue has risen for several consecutive quarters.
| Quarter | Wireless Service Operating Revenue |
|---|---|
| Q1 2020 | $13.97 billion |
| Q4 2019 | $13.95 billion |
| Q3 2019 | $13.93 billion |
| Q2 2019 | $13.82 billion |
| Q1 2019 | $13.63 billion |
Data source: AT&T.
Also, AT&T has about $10 billion in cash at the end of the first quarter with $3.9 billion in free cash flow. So the company currently has the funds to not only continue meeting its debt obligations, but to also support its dividend.
Promising signs for Verizon
For Verizon's 2020 first quarter, total revenue declined 1.6% to $31.6 billion from last year's $32.1 billion. The closure of nearly 70% of company-operated retail stores due to the pandemic contributed to a greater than 16% year-over-year drop in wireless equipment sales from $4.9 billion to $4.1 billion. Meanwhile, Verizon's consumer division saw a 1.7% year-over-year decline in revenue, while its business segment was down 0.5% year over year.
The revenue drops across Verizon's divisions mask several positive signs. Its business segment witnessed 79.9% year-over-year Q1 growth in net additions to its wireless retail customer base.
This growth in business accounts led to the segment's wireless service revenue increasing 6.9% year over year to $2.9 billion in the first quarter. Verizon's consumer division also experienced year-over-year growth in wireless service revenue, up 0.9% to $13.5 billion. The company's $16.4 billion in total Q1 wireless service revenue remained consistent with pre-pandemic quarterly amounts earned throughout 2019.
Moreover, the company ended the first quarter with $7 billion in cash. Free cash flow stood at $3.6 billion, up from $2.8 billion at the end of Q1 2019. This cash position means Verizon's finances are in good shape, and it can fund its dividend.
Beyond the pandemic, Verizon's first-quarter results illustrate the resiliency of its wireless service revenue. The company's strong growth in its business segment is a positive sign, and a move that further strengthens this division is Verizon's intention to acquire BlueJeans, a videoconferencing platform.
My verdict
When it comes to U.S. telecom stocks, AT&T and Verizon are stalwarts. The cash positions for each company allow them to weather the coronavirus storm.
Of the two, Verizon is the more reliable company. AT&T's WarnerMedia segment suffers from the mercurial nature of consumer entertainment, and its declining DIRECTV unit is a drag on its core wireless business.
Meanwhile, Verizon is more of a pure wireless player, so it can focus strategies and resources on continuing to grow its wireless business. Verizon's Q1 results showed the importance of its wireless equipment segment. Here, Verizon's push to accelerate 5G network deployment helps, since some consumers will need to upgrade their mobile phones to be compatible with 5G.
Because of these factors, Verizon proves the better buy in this match-up.
