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3 Things to Watch When AT&T Reports Earnings

AT&T (NYSE: T) will report its second-quarter earnings July 24 after the closing bell. After a disappointing first quarter, when it missed analysts expectations for both the top and bottom lines, AT&T is looking to bounce back. Fresh off its acquisition of WarnerMedia (formerly Time Warner), analysts expect it to report $0.85 in earnings per share on revenue of $39.34 billion.

But investors will want to look beyond just the top- and bottom-line results for AT&T when the company releases its report and provides additional details on its quarterly conference call with analysts. Here are three things to look for on Tuesdsay.

Image source: AT&T.

AT&T mobility

AT&T lost 22,000 postpaid phone subscribers in the first quarter, and investors shouldn't expect things to improve much in the second quarter. While AT&T has historically seen sequential improvements in postpaid phone net adds from the first to second quarter, a shift in focus may put continued pressure on net additions. Analysts at Cowen expect a net loss of 48,000 postpaid phone subscribers for the second quarter.

The carrier is more focused on attracting high value customers, particularly those who will take multiple services. It's working to improve its wireless service revenue in the face of competition, and it's fine losing low value customers as long as it's able to improve its overall service revenue. During the company's first-quarter earnings call CFO John Stephens told investors, "We're confident that service revenues will improve throughout the year. We still expect that we'll be positive for the full year on a comparable basis."

As such, investors should be focused first on service revenue, but don't forget to pay attention to its subscriber losses. Worse than expected subscriber losses are an indication that service revenue growth may not be sustainable.

Video subscribers

After its acquisition of DirecTV, AT&T became the largest pay-TV provider in the country. The launch of its DirecTV Now streaming service is helping offset losses in its traditional linear TV businesses -- Satellite and U-verse. Last quarter AT&T lost 187,000 traditional TV subscribers, but added 312,000 over-the-top customers.

But investors need to pay attention to revenue from the business. Video entertainment revenue fell precipitously to $8.4 billion in the first quarter, down from $9 billion in the first quarter last year.

AT&T offers aggressive discounts on DirecTV products for customers who subscribe to one of its unlimited wireless data plans. Many customers have the option of subscribing to DirecTV Now for as little as $10 per month. That's naturally putting pressure on revenue, as those subscribers are actually producing a loss for the video entertainment division.

As AT&T continues to lose traditional subscribers to over-the-top services, video revenue ought to continue falling. Management says it can still be profitable due to lower costs associated with serving DirecTV Now customers versus installing a satellite on a customer's roof. But if AT&T is selling the service for below cost, that math doesn't really work.

Debt and dividend payments

After closing the WarnerMedia (formerly Time Warner) acquisition, AT&T said it had $180 billion in debt. It also issued 1.2 billion new shares to former Time Warner shareholders, for which it has to pay a $0.50-per-share dividend every three months.

That puts it on some shakier financial footing than AT&T investors might be used to. AT&T produces a ton of cash flow every quarter -- more than enough to service its debt -- but a big draw of the stock is its dividend.

Management has increased the dividend 34 consecutive years, and it will likely do everything in its power to keep that streak alive. Its most recent dividend increase in December was a measly $0.01 per quarter.

Investors should look for commentary from management about how it plans to balance servicing its debt and managing its capital returns program.

Investors interested in AT&T need to look past the basics and really dig into the numbers. These three things provide a starting spot for investors to dissect the company's upcoming earnings release.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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