There will be a lot of cheering and expressions of surprise at AT&T’s 3Q earnings. We are not that surprised. For those of you who do not follow The Sunday Brief, or who did not get a chance to read the October 1 edition, our thesis on AT&T (the metamorphosis thesis, or how AT&T changes from an ugly caterpillar to a beautiful butterfly) is clearly outlined. CEO John Stankey reiterated many of these theses on the call (including the operating efficiencies from “filling in” metro areas).

So the stock rebounds to ($15.00 – $15.50/ share) levels not seen since the “lead” story emerged. Traders make some short-term money. What changes about the company’s futures from this report? Here are four observations:

1. Debt is still debt and AT&T has a lot of it. If they don’t focus even more on debt reduction ($138.0 billion gross, $128.7 billion net as of this report), they are going to be challenged to keep pace with fiber and C-Band expansion. AT&T still has $7.5 billion in annualized interest payments. At $2000/ home passed, that’s 3.75 million additional homes passed per year that they forego because of higher interest (and rates are only going one way should they need to refinance). There is a temptation to pay out cash in the form of higher dividends (shareholders have been paid for 7-quarters at the reset dividend level). We encourage the company to resist that urge and pay back debt (or hold as cash)
2. DSL price hikes are not run-ratable. The chart that leads this post shows that AT&T grew non-DSL revenues sequentially in the quarter even as units decreased (highlighted in green). That was not discussed on the call. Great news on growing customers into new speed tiers, but a 10% hike year-over-year for copper? Interesting. (Note: this could also be their fixed wireless ARPUs overshadowing losses in DSL).
3. Mobility ARPU is very flat. This is an indication of the costs to maintain their base. AT&T continues to make comments about owned assets producing sustainable returns, but the question becomes “If Verizon is going to enable cable, who cares?”
4. Looks like Dish is migrating to AT&T in greater numbers than anyone expected. Reseller subscribers grew 445K sequentially – that’s a big jump. Not a lot of profits yet, but a sign of things to come.

Bottom line: AT&T’s storyline is changing. That’s a good thing. Less lead, fewer employees, more fiber, more C-Band. Not out of the woods yet, and AT&T business wireline continues to limp along (asset utilization continues to be weak), but there are less negatives. Great report, but Sunday Brief readers should not be surprised.