● AT&T stock down 13% ahead of Q3 earnings.

● Wall Street Projecting lower revenues and earnings increase.

● Focus on the impact of divestments and 5G network rollout.

AT&T Inc. (NYSE: T) is scheduled to report its third-quarter results on October 21, 2021, before the market opens. The earnings report comes when the company is in the middle of a significant transition as it continues to sell off and spin-off assets to focus on the core wireless business.

The outcome of the earnings report will be pivotal given that the company’s sentiments have taken a significant hit in the market. The stock is already down by about 13% year to date, underperforming the overall market.

Chart showing AT&T underperformance in 2021

Wall Street expects the wireless carrier to deliver a year-over-year increase in earnings. However, revenues could come much lower compared to the same quarter last year. The stock could move higher on the numbers topping expectation. Similarly, a bad change could prove painful and could see the stock edging lower.

Q3 Expectations

Wall Street expects the telecommunications giant to deliver quarterly earnings of $0.79 a share, representing a 4% year-over-year increase. The increase would mostly be attributed to reduced operational costs following the divestment of non-core assets and businesses. On the other hand, operating income is expected to decline to $7.3 billion from $7.6 billion delivered the same quarter last year.

Revenue is expected to drop 2.2% to $41.42 billion, attributed to the divestment of some businesses in the quarter. Communications revenue is expected to tank to $28.18 billion from $34.29 billion recorded the same quarter last year.

Chart showing AT&T Q2 Results

For the full year, AT&T is expected to deliver EPS of $3.25, representing a 2.3% year-over-year increase. Sales, on the other hand, are expected at $168.38 billion, down 2% year-over-year.

What to look out for

In the AT&T Q3 report, investors’ will focus on some of the key areas the company is looking to build out from, as part of the ongoing transition. In the recent past, the company has made impressive strides on the rollout of fiber, and 5G connections, affirming it remains focused on the wireless business.

In the third quarter, it launched 5G networks in selected areas that now cover more than 250 million users in 14,000 cities. The 5G+ network is available in 38 cities. Consequently, it will be interesting to see the impact the rollout has on the top-line and bottom-line growth as the company moves to focus on its core wireless business.

Amid the impressive investments on the 5G network, AT&T’s bottom-line could have taken a significant hit. The expansion drive should continue to eat into earnings which explain why the company could struggle to top estimates. At the same time, the wireline division has always struggled with losses —  and that is not expected to change.

Additionally, the focus should be on the TV subscription and legacy services, which have been declining recently. High-speed internet revenues have come under pressure in recent quarters owing to a decline in legacy Digital Subscriber Line waiting to see if the momentum continued in Q3.

HBO Max will also be in the spotlight given that the unit reported 2.8 million domestic subscriber additions in Q2 taking the count for HBO and HBO Max to 47 million.

Chart showing HBO subscription growth

The company now has 67.5 million customers, 12 million more than it had a year ago. Consequently, investors will want to know if the company is on course to achieve the 70 million to 73 million figures forecasted.

Debt is another big issue that has clobbered AT&T over the years. It will be interesting to see what management intends to do to trim the debt, which has risen to $147.51 billion. While the company is expecting $26 billion in free cash flow this year, part of it should go into debt payment. Management has already hinted at trimming some of the hefty distributions to shareholders to pay down debt.

Bottom line

AT&T shares are currently trading at a discount going by the 10% plus drop year to date. While the company has been making the right moves to create shareholder value, an earnings beat in Q3 is key to strengthening investor sentiments and causing the stock to rerate higher.