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Why AT&T Could See Declining Profitability in Coming Quarters

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AT&T workers go on strike

Around 37,000 AT&T (T) workers started a three-day strike on May 19 after failing to reach an agreement with the wireless carrier (IYZ) over new contracts. These workers make up ~14% of the company’s total workforce. The carrier is negotiating new labor contracts with the employees. The company has agreed on some terms with the workers.

The workers want wage increases, job security against outsourcing, and a fair scheduling policy. Meeting these demands could push up the company’s expenses because outsourcing is one way for companies to lower their operating costs. As the graph below shows, the company had implemented cost-cutting measures. A higher payroll bill will further increase the company’s operating expenses, which would hurt the profitability of the company in the coming quarters.

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AT&T’s top line has taken a hit

The carrier’s operating expenses are about to rise, and there is no respite for the company on its top line either. AT&T reported revenue of $39.4 billion in fiscal 1Q17, which not only missed estimates but was also 2.8% lower compared to the revenues in the same quarter last year.

The reason behind the decline in revenues is subscriber loss. The wireless carrier lost 191,000 postpaid subscribers in fiscal 1Q17. On the other hand, T-Mobile (TMUS) gained a whopping 789,000 postpaid phone customers in the same quarter. AT&T’s stock has dropped 4.3% in the last month.

If this trend continues along with likely rising operating expenses, AT&T’s profitability will tank. The company’s current net margin is 7.9% compared to its five-year average of 8.6%. Meanwhile, Verizon’s (VZ) net margin stands at 10.4%.

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