AT&T (T -0.59%) CFO Pascal Desroches gave investors a variety of updates while speaking at a technology, media, and telecommunications conference earlier this week. The message was mixed overall. The telecom giant is winning fewer postpaid phone subscribers and fewer fiber subscribers than expected due to various issues, but the situation is looking just fine in terms of profitability.
A normalizing market
AT&T's core wireless business performed well during most of the pandemic, and it continued to thrive through last year. After the initial pandemic disruption passed in early 2020, AT&T was routinely adding between 600 thousand and 900 thousand net postpaid phone subscribers each quarter. This trend continued through the end of 2022.
This year, things have slowed down quite a bit. In the first quarter, AT&T managed to add just 424 thousand net postpaid phone subscribers. In the second quarter, according to Desroches' update, the company is on pace to add just over 300 thousand net postpaid phone subscribers.
There are multiple issues driving down the subscriber growth rate. First, the wireless industry is normalizing following the pandemic. Second, new product launches from competitors may be drawing away some potential customers. Verizon launched myPlan in May, which offers customizable, unlimited wireless service with a selection of discounted add-ons like the Disney streaming bundle, Walmart's Walmart+ membership, and Apple Music. Additionally, AT&T is putting a focus on the profitability of the subscribers it wins rather than raw subscriber gains.
The fiber business is also seeing a slowdown, but there's more good news than bad. AT&T expects to add somewhere around 250 thousand fiber subscribers in Q2, down slightly from recent quarters. However, initial penetration rates in areas that AT&T adds to the fiber network are higher than expected, and rising average revenues per user help offset the slower subscriber growth.
Given the state of the economy, it's not surprising that consumers are holding back. Smartphone users may be pushing off upgrading their phones to save money, which means that an opportunity to switch wireless providers is pushed off as well. And home internet users with slower, cheaper plans than AT&T's fiber may be more concerned about price than internet speed for now.
Free cash flow is still on track
While AT&T is seeing subscriber growth slow across the board, this won't affect the company's cash flow. AT&T continues to expect free cash flow for the full year to exceed $16 billion, with between $3.5 billion and $4.0 billion set to be delivered in Q2. If AT&T hits that target, free cash flow through the first half of 2023 will be higher compared to the same period last year.
Wireless-service revenue is also on track, with the company expecting about 5% growth in the first half of the year. Equipment sales will likely be lower, though, as consumers hold onto their smartphones for longer. Fiber and 5G, both of which can drive average revenues per subscriber higher, are being deployed on schedule. By the end of 2023, AT&T expects its mid-band 5G to cover 200 million people, and by the end of 2025, it expects 30 million consumer and business locations to be passed by its fiber network.
AT&T is clearly not immune to economic uncertainty, and subscriber growth could slow further if consumers remain under pressure from elevated inflation and rising interest rates. But even so, AT&T stock is priced for disaster. Trading at just 7 times free-cash-flow guidance, AT&T stock looks like a bargain.
