AT&T Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results. AT&T operates in communications, media and technology through Communications, WarnerMedia, Latin America and Xandr. The Time Warner acquisition closed June 14, 2018, so WarnerMedia results are included for a full quarter in 2019 but only from the acquisition date in the Q2 2018 comparison.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $44.957bn | $38.986bn | $89.784bn | $77.024bn |
| Operating income | $7.500bn | $6.466bn | $14.733bn | $12.667bn |
| Operating margin | 16.7% | 16.6% | 16.4% | 16.4% |
| Net income attributable to AT&T | $3.713bn | $5.132bn | $7.809bn | $9.794bn |
| Diluted EPS | $0.51 | $0.81 | $1.06 | $1.56 |
- Q2 revenue increased 15.3% year over year, principally reflecting the full-quarter contribution from Time Warner; service revenue rose while equipment revenue declined. Q2 operating income increased 16.0%, but net income attributable to AT&T fell 27.7%.
- For the first six months, operating cash flow was $25.336bn, versus $19.176bn. Investing activities used $7.299bn, including $10.654bn of capital expenditures; financing activities used $14.783bn. Operating cash flow benefited in part from receivables transfers and working-capital effects.
- Cash and cash equivalents were $8.423bn at June 30, up from $5.204bn at year-end 2018. Total debt on the balance sheet was $170.562bn, comprising $12.772bn due within one year and $157.790bn of long-term debt. The reported debt ratio was 46.8% and net debt ratio 44.5%.
- AT&T reported $15bn of revolving credit facilities with no amounts drawn at quarter-end and said it complied with its credit covenants, including a maximum net debt-to-EBITDA ratio of 3.5-to-1. The weighted-average interest rate on long-term debt was approximately 4.4%.
- Dividends paid during the first half were $7.436bn; dividends declared were $1.02 per share. Operating lease liabilities totaled $23.912bn, separately recognized following adoption of the lease accounting standard.
Material changes and segment trends
- Consolidated revenue growth mainly reflects the acquisition of Time Warner, making the WarnerMedia comparison not like-for-like. Communications revenue was nearly flat in Q2 (+0.3%); its operating contribution rose 3.8%, supported by wireless and Entertainment Group performance.
- Wireless service revenue grew, but Q2 postpaid churn increased to 1.08% from 1.02%; postpaid net additions were negative. Connected-device connections grew, including connected-car additions. Video connections declined 9.9% year over year, and premium TV connections fell 8.7%.
- WarnerMedia reported Q2 revenue of $8.350bn and segment operating contribution of $2.025bn, but the prior-year quarter contains only partial post-acquisition results. Latin America revenue fell 9.9% and segment contribution was a loss of $209m, with foreign exchange pressure cited. Xandr revenue grew 23.7%, while contribution declined 2.4%.
Outlook, commentary, risks and unusual items
- The filing provides no specific consolidated revenue or EPS guidance. AT&T said it planned to extend mobile 5G service to parts of at least 29 U.S. cities by year-end 2019 and expected nationwide coverage reaching more than 200 million people in the first half of 2020.
- Q2 results included a $1.699bn pension actuarial loss, compared with a $1.796bn actuarial gain in Q2 2018; management identified this reversal as a major reason for lower other income and earnings. The pension discount rate was reduced to 3.70% at June 30, and quarterly remeasurement was expected to continue through 2019.
- The $740m gain on the April sale of Hulu partially offset other-income pressures. The June Hudson Yards sale-leaseback generated $2.081bn of proceeds and a $102m loss, primarily from transaction costs.
- Management cited competitive pressure, customer migration from legacy voice and linear video, wireless churn, foreign exchange and regulatory uncertainty, pension assumptions, network investment requirements, and successful integration of WarnerMedia among relevant risks. The DOJ’s appeal of the Time Warner merger approval ended after the D.C. Circuit affirmed AT&T’s win and the DOJ did not seek Supreme Court review. The company reported no material risk-factor developments for the quarter.
Important facts for investors to verify
- Separate acquisition-driven revenue growth from underlying trends, particularly when evaluating WarnerMedia and consolidated comparisons.
- Assess the sustainability of operating cash flow, including the effects of receivables sales, supplier financing and working-capital timing.
- Track debt maturities, leverage and covenant headroom, alongside lease liabilities and dividend funding.
- Monitor pension remeasurement assumptions and their effect on earnings, as well as wireless churn and continuing video subscriber losses.
- Compare actual 5G deployment and capital investment with management’s stated rollout expectations; the filing does not provide a specific financial forecast.