AT&T’s fiber business starts to boost profits

wireless business is AT&Tof (T -2.06%) The main source of revenue and profit, but the company’s fiber business cannot be ignored. AT&T is building its fiber optic network across the US, an expensive proposition that will take time to pay off. We are now starting to see earnings flow to the company’s results.

A record year for fiber

AT&T adds 1.2 million fiber subscribers in 2022, bringing its total to 7.2 million. This marks the fifth consecutive year that AT&T has acquired at least 1 million fiber customers.

Winning a fiber customer will require AT&T not only to expand its fiber network closer to that customer, but also to convince that customer to adopt the service.By the end of 2022, there will be Potential AT&T fiber customers are approximately 22 million, including 19 million homes and 3 million businesses in 100 metro areas. The current penetration rate is about 38%.

AT&T plans to increase the number of potential customer locations to more than 30 million by the end of 2025. If penetration remains constant, the company will have around 11.4 million fiber subscribers by that target. Expanding penetration will add an additional benefit to that number.

While extending a fiber optic network is costly, the benefits per customer are higher than with traditional wired service or even wireless service. AT&T’s postpaid phone average revenue per user was $55.43 in the fourth quarter, while consumer fiber average revenue per user was $64.82. That number is also growing at a healthy rate, up 8.8% year-over-year.

In addition to expanding its wholly-owned fiber optic network, AT&T is also working with black stone Bring fiber to areas beyond its fiber footprint. Through the Gigapower joint venture, AT&T expects to reach an additional 1.5 million potential fiber customers, a number that will grow over time.

an inflection point

AT&T now has more fiber subscribers than non-fiber and DSL subscribers on its cable lines. The decline in those legacy businesses has been a drag on AT&T’s cable performance, but the company now expects fiber to drive sustainable revenue and profit growth in its consumer cable business.

The impact of fiber optics is starting to show up in AT&T’s fourth-quarter results. Total consumer wireline revenues rose just 2.2 percent due to a decline in traditional service revenue. Within the segment, broadband revenues rose 7.2%, driven by a 31% increase in fiber revenue.

Higher revenue per subscriber from fiber and the mid-teens internal rate of return AT&T has achieved with its fiber buildout is now boosting profits. Fourth-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) margin for the consumer wireline segment was 37%, up from 31.4% a year earlier. If fiber continues to be a bigger piece of the cake, there is room for this number to expand further.

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

part of growing up story

While AT&T is facing the same tough economy as other companies, the wireless and fiber-optic giant expects solid revenue growth in its core business this year. In addition to the expected 5% growth in broadband, AT&T expects wireless service revenue to grow at least 4%. The company didn’t provide guidance for overall revenue, which could be impacted by device sales, though it does expect revenue to grow in 2023.

Last year and this year will be the peak years for AT&T to pour money into its 5G and fiber network. Even with those big investments, the company expects free cash flow to rise to $16 billion this year from about $14 billion in 2022. Earnings per share will fall due to pension costs and higher tax rates, but the cash flow is what the company will use to pay dividends and continue to reduce debt.

AT&T is valued at about $145 billion after its post-earnings rally, roughly nine times its free cash flow guidance. The combination of 5G growth, fiber growth, and cooling capex through 2024 and beyond should drive free cash flow higher in the coming years. Even though the stock is up nearly 40% from last year’s lows, it’s not too late to buy AT&T stock.

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