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These Synergies with DIRECTV Are Helping AT&T Expand Margins

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AT&T expects cost synergies

AT&T (T) closed its acquisition of DIRECTV for $49 billion one year ago, and already the acquisition has turned out to be a good transaction for AT&T, with synergy targets well ahead of the schedule. At the time of acquisition, AT&T had targeted cost synergies of $2.5 billion by 2018. It is already ahead of this schedule and on track to achieve cost synergies of $1.5 billion by the end of 2016.

These synergies are already helping AT&T expand its margins as well. AT&T’s EBITDA margins have increased from 33.9% in 4Q15 to 41.4% in 2Q16. On a YoY (year-over-year) basis, its EBITDA margins grew by 130 basis points from 40.1% in 2Q15 to 41.4% in 2Q16.

ATT margins

This margin expansion is helping AT&T further its lead over competitors Verizon Communications (VZ), T-Mobile (TMUS), and Sprint (S). Verizon, T-Mobile, and Sprint had EBITDA margins of 36%, 36%, and 31%, respectively.

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AT&T’s free cash flow

AT&T’s new cost synergies with DIRECTV will also help AT&T expand its free cash flow—an important metric for shareholders. AT&T is looking to grow this number from $15.9 billion in 2015 to more than $20 billion by 2020.

In addition to the synergies with DIRECTV, AT&T also expects $3 billion in cost savings from Project Agile, specifically from the automation and digitalization of its operations. AT&T also expects its spending on capex to be at the lower end of its guidance for 2016, which would also help the company increase its free cash flow.

In the next part, we’ll discuss which telecom company is set to benefit most from Apple’s iPhone 7 sales.

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