AT&T's Fiber Business Is Starting to Boost Profits

The wireless business is AT&T's (T 1.30%) main source of revenue and profits, but the company's fiber business shouldn't be ignored. AT&T is in the process of building out its fiber network across the United States, an expensive proposition that has taken time to pay off. We're now starting to see the benefits flow through to the company's results.

A record year for fiber

AT&T added 1.2 million fiber subscribers during 2022, boosting its total to 7.2 million. That marks five years in a row when AT&T gained at least 1 million fiber subscribers.

Winning a fiber customer requires AT&T to not only extend its fiber network close to that customer but also to convince that customer to adopt the service. At the end of 2022, the number of potential customers for AT&T fiber was around 22 million, including 19 million homes and 3 million businesses across 100 metro areas. The penetration rate right now is roughly 38%.

AT&T plans to boost the number of potential customer locations beyond 30 million by the end of 2025. If the penetration rate remains the same, the company would have around 11.4 million fiber subscribers by the time it reaches that target. Expanding the penetration rate would add additional upside to that number.

While expanding the fiber network is costly, the payoff is higher revenue per customer compared to legacy wireline services and even wireless services. AT&T's postpaid phone-average revenue per subscriber was $55.43 in the fourth quarter, while consumer fiber produced average revenue per subscriber of $64.82. That number is also growing at a healthy pace, up 8.8% year over year.

On top of expanding its wholly owned fiber network, AT&T has partnered with BlackRock to bring fiber to areas outside of its fiber footprint. Through the Gigapower joint venture, AT&T expects to reach an additional 1.5 million potential fiber customers, with that number growing over time.

An inflection point

AT&T now has more fiber subscribers than it has non-fiber and DSL subscribers in its wireline segments. The decline in those legacy businesses has been dragging down AT&T's wireline results, but the company now expects fiber to drive sustainable revenue and profit growth in its consumer wireline business.

The impact of fiber started to show up in AT&T's Q4 results. Overall consumer wireline revenue grew by just 2.2% thanks to declining revenue from legacy services. Within that segment, broadband revenue jumped 7.2%, driven by 31% growth in fiber revenue.

The higher revenue per subscriber from fiber and the mid-teens internal rate of return AT&T is achieving with its fiber build-out are now boosting the bottom line. The consumer wireline segment generated an earnings before interest, taxes, depreciaiton, and amortization (EBITDA) margin of 37% in Q4, up from 31.4% in the prior-year period. As fiber continues to become a bigger piece of the pie, this number has room to expand further.

AT&T expects broadband revenue to grow by at least 5% in 2023, with a growing fiber customer base and rising average revenue per subscriber more than offsetting continued declines in legacy revenue.

One part of the growth story

While AT&T is running up against the same tough economy that every other company is dealing with, the wireless and fiber giant expects solid revenue growth this year in its core businesses. On top of the 5% expected growth in the broadband business, AT&T sees wireless service revenue rising at least 4%. The company didn't provide guidance for overall revenue, which can be impacted by equipment sales, although it does expect revenue to grow in 2023.

Last year and this year will be the peak investment years for AT&T as it pours cash into its 5G and fiber networks. Even with those heavy investments, the company expects to grow free cash flow to $16 billion this year, up from around $14 billion in 2022. Earnings per share will decline due to pension costs and a higher tax rate, but that cash flow is what the company will use to pay its dividend and continue to knock down its debt.

AT&T is valued at around $145 billion following its post-earnings rally, roughly 9 times its free-cash-flow guidance. A combination of growth in 5G, growth in fiber, and a cooling of capital spending in 2024 and beyond should drive free cash flow higher in the coming years. Even with the stock up nearly 40% from its low last year, it's not too late to buy AT&T stock.