AT&T Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; dollar amounts are in millions unless stated otherwise. AT&T operates in communications, media and technology through Communications, WarnerMedia and Latin America segments.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $40,950 | $44,957 | $83,729 | $89,784 |
| Operating income | $3,532 | $7,500 | $11,018 | $14,733 |
| Net income attributable to AT&T | $1,281 | $3,713 | $5,891 | $7,809 |
| Net income attributable to common stock | $1,229 | $3,713 | $5,807 | $7,809 |
| Diluted EPS | $0.17 | $0.51 | $0.81 | $1.06 |
| Cash from operating activities | Not separately provided | Not separately provided | $20,925 | $25,336 |
Q2 operating margin was 8.6%, down from 16.7%; the six-month margin was 13.2%, down from 16.4%. Interest expense declined 5.0% in Q2 to $2,041 and 5.4% for the half to $4,059. The effective tax rate was 37.5% for Q2 and 25.5% for the half, elevated mainly by a nondeductible Vrio goodwill impairment.
At June 30, cash and cash equivalents were $16,941. Current assets were $56,555 and current liabilities $69,469. Debt maturing within one year was $15,576; long-term debt was $153,388. Total debt obligations were reported as $168,964. The company reported compliance with its credit-facility covenants, including a maximum net debt-to-EBITDA ratio of 3.5-to-1. Cash used in investing activities was $10,278 and cash used in financing activities was $5,911 for the first half. Capital expenditures, including construction interest, were $9,432.
Material changes versus prior periods
- Revenue fell 8.9% in Q2 and 6.7% for the first half. Management attributed declines to pandemic effects and ongoing pressure in video and legacy services, alongside lower WarnerMedia advertising and theatrical revenue and Latin America foreign-exchange pressure.
- Q2 operating income fell 52.9% and common-stock net income fell 66.9%. First-half operating income declined 25.2% and common-stock net income declined 25.6%.
- Segment revenue declined in Q2: Communications 4.7%, WarnerMedia 22.9% and Latin America 29.9%. Communications Mobility contribution improved, but Entertainment Group and Business Wireline contributions fell; WarnerMedia and Latin America contributions also weakened.
- Video connections continued to contract: total video connections were down 19.7% year over year. Fiber broadband connections increased 27.9%, while total broadband connections declined 3.3%.
- First-half operating cash flow declined $4,411 year over year; management cited lower incremental receivable securitization as the primary driver.
Outlook, management commentary and notable items
- AT&T said COVID-19 was expected to continue adversely affecting operating results and cash flows for at least the duration of the pandemic. It identified Q3 risks including disrupted sports advertising timing, theater closures and delayed releases, lower international roaming, employee-protection costs, and accelerated linear-TV disconnections. No quantified earnings or revenue guidance is provided in the supplied filing text.
- Management estimated COVID-related incremental costs of $320 in Q2 and $750 for the first half. It separately estimated Q2 operating and comparability pressures of $510 and first-half pressures of $470, including lost advertising and content revenue, roaming weakness and lower equipment sales.
- AT&T recorded a $2,212 goodwill impairment in Vrio, associated with Latin America’s adverse economic and political conditions, subscriber losses and higher country-risk premiums. Venezuela DIRECTV operations were closed in May, resulting in 2.2 million subscriber disconnections excluded from reported Vrio net additions.
- A $900 gain was recorded in Q1 from spectrum-license vouchers applied to an FCC auction. The company completed its $2,379 acquisition of 37/39 GHz spectrum and paid $949 in Q2. Orbital-slot licenses began being amortized in 2020, increasing expense by $379 in Q2 and $765 in the first half.
- HBO Max launched in May 2020. HBO/HBO Max U.S. subscribers reached 36.3 million at June 30, versus 34.6 million at December 31, 2019; higher launch-related programming and marketing costs weighed on HBO results. AT&T announced nationwide 5G coverage in July 2020.
- After quarter-end, AT&T redeemed $4,264 of notes in July and issued $11,000 of notes in August, stating proceeds would be used to pay down near-term debt. The filing reports no material risk-factor developments for Q2, while emphasizing pandemic uncertainty, regulatory and competitive pressures, network and spectrum investment needs, and Latin America exposure.
Important facts for investors to verify
- Whether COVID-19 revenue, cost and subscriber effects persist or intensify, particularly in advertising, theatrical content, roaming and video.
- How AT&T’s liquidity, near-term maturities and debt reduction evolve after the July redemptions and August issuance; assess cash flow alongside dividends and capital investment.
- Whether Communications revenue and margins can stabilize as video and legacy services contract, and whether fiber, strategic business services and Mobility offset those declines.
- Vrio’s impairment assumptions, ongoing Latin America subscriber trends, foreign-exchange exposure and consequences of the Venezuela closure.
- HBO Max subscriber growth and profitability, and the cost and returns associated with 5G and spectrum investment.