AT&T Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; dollars in millions unless stated otherwise. AT&T provides communications and digital entertainment services in the U.S. and internationally.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $39,837 | $40,520 | $79,202 | $81,055 |
| Operating income | $7,323 | $6,560 | $14,187 | $13,691 |
| Net income attributable to AT&T | $3,915 | $3,408 | $7,384 | $7,211 |
| Diluted EPS | $0.63 | $0.55 | $1.19 | $1.17 |
| Operating margin | 18.4% | 16.2% | 17.9% | 16.9% |
- Q2 revenue fell 1.7%, while operating income rose 11.6% and AT&T-attributable net income rose 14.9%. For the first half, revenue declined 2.3%, while operating income rose 3.6% and attributable net income rose 2.4%.
- Six-month operating cash flow was $18,160, versus $18,207 a year earlier. Capital expenditures, excluding interest during construction, were $10,750, implying approximately $7,410 of operating cash flow after that spending. Dividends paid were $6,021.
- At June 30, cash and equivalents were $25,617, compared with $5,788 at year-end 2016. Current assets were $53,547 and current liabilities $48,012.
- Balance-sheet debt was $143,655, including $10,831 due within one year, compared with $123,513 at year-end. Debt ratio was 53.3% versus 49.9% at year-end; net debt ratio was 43.8% versus 47.5%. Debt issuance drove much of the cash increase. Weighted average long-term debt interest rate, including derivatives, was approximately 4.3%.
- Quarterly dividend declared was $0.49 per share; first-half dividends declared were $0.98 per share.
Business trends and changes versus prior year
- Management attributed lower revenue mainly to legacy wireline voice and data declines, lower equipment sales, and lower wireless service revenue as customers adopted unlimited plans. Video and strategic business services partly offset these pressures.
- Business Solutions revenue fell 2.7% in Q2, but segment contribution rose 6.1% to $4,459 as costs declined. Fixed strategic services revenue grew 8.0%; legacy voice and data revenue fell 15.7%.
- Entertainment Group revenue was nearly flat at $12,682; segment contribution was $1,655. Video revenue grew, but legacy voice and data continued to decline. Total video connections were down 0.5% year over year; DIRECTV NOW had 491,000 connections.
- Consumer Mobility revenue declined 4.8% and segment contribution fell 6.8% to $2,400. Postpaid service revenue was pressured by migrations to Business Solutions and unlimited-plan pricing; prepaid revenue grew. Total segment subscribers fell 4.7%, and postpaid churn was unchanged at 1.09% in Q2.
- International revenue rose 10.8% to $2,026, and its segment loss narrowed to $32 from $184. Growth reflected Latin American video and Mexican wireless revenue; foreign exchange, competition and higher operating costs remain relevant factors.
- Cost reductions and a lower depreciation charge supported consolidated margins. The depreciation decline included $327 in Q2 from revised useful-life and salvage-value estimates for certain assets, adopted in Q4 2016.
Outlook, material items and risks
- Capital spending: Management expected 2017 capital expenditures to be around $22 billion and at 15% of service revenue or lower in each of 2017–2019. No specific earnings guidance was provided in the filing.
- Time Warner transaction: The proposed 50% cash/50% stock acquisition had an announced value of about $85.4 billion, with total transaction value including Time Warner net debt estimated at about $107.2 billion. Closing was expected before year-end 2017, subject to U.S. Department of Justice and foreign regulatory review. Financing included a $22.5 billion debt offering initiated July 27; specified notes require redemption at 101% plus accrued interest if the merger does not close by April 22, 2018, or is earlier terminated.
- FirstNet: AT&T was selected to build and manage a nationwide first-responder network. The program anticipates $6.5 billion of success-based payments over five years; AT&T estimated about $40 billion of investment over the 25-year contract. State participation determines scope; seven states had opted in as of July 31. The company did not expect a material 2017 impact.
- Unusual benefits: A postretirement plan change reduced the benefit liability by $1,563 through prior-service credits in other comprehensive income and triggered a $259 actuarial gain recognized in Q2 earnings. These items aided reported expenses/results and should be distinguished from ongoing performance.
- Other exposures: Competitive pressure, customer shifts to unlimited plans and slower device upgrades, rising programming costs, foreign-currency and regulatory risks, network investment needs, and integration/financing of Time Warner are important uncertainties. The filing also describes DIRECTV NFL SUNDAY TICKET class actions (dismissed by the court June 30, subject to possible further proceedings), an FTC DIRECTV matter with settlement approval pending, and an FTC unlimited-data case set for en banc review.
- Management reported effective disclosure controls as of June 30, 2017. It stated there were no material risk-factor developments from those discussed in the 2016 Form 10-K.
Key facts for investors to verify
- Whether revenue stabilization can offset continuing legacy wireline declines and the impact of unlimited plans on wireless service revenue and ARPU.
- Whether margin improvement persists after separating recurring cost savings from the pension-related gain and lower depreciation associated with estimate changes.
- Debt and interest-cost trajectory, and how cash flow after capital spending and dividends will fund debt reduction and the proposed acquisition.
- Time Warner regulatory approval, closing timetable, financing terms and mandatory-redemption exposure if the deal fails.
- FirstNet state participation, actual deployment costs and payment terms, along with resolution of the identified litigation and regulatory matters.