AT&T Inc. — Form 10-Q, third quarter 2012
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. AT&T provides wireless, wireline voice and data, broadband, video, and business communications services. On May 8, 2012, it sold its Advertising Solutions business, retaining a 47% interest in the buyer, YP Holdings; the sale affects year-over-year comparability.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $31.459 billion | $31.478 billion | $94.856 billion | $94.220 billion |
| Operating income | $6.037 billion | $6.235 billion | $18.955 billion | $18.208 billion |
| Operating margin | 19.2% | 19.8% | 20.0% | 19.3% |
| Net income attributable to AT&T | $3.635 billion | $3.623 billion | $11.121 billion | $10.622 billion |
| Diluted EPS | $0.63 | $0.61 | $1.90 | $1.79 |
| Operating cash flow | Not separately reported | Not separately reported | $28.944 billion | $27.150 billion |
| Capital expenditures | Not separately reported | Not separately reported | $13.619 billion | $14.625 billion |
Cash flow and liquidity. Nine-month investing cash outflow was $13.251 billion and financing cash outflow was $16.661 billion. Cash declined from $3.185 billion at year-end 2011 to $2.217 billion at September 30, 2012. Current assets were $18.958 billion versus current liabilities of $30.798 billion. AT&T reported $3.433 billion of debt maturing within one year and $60.314 billion of long-term debt; its reported debt ratio was 38.6%.
Capital returns. AT&T paid $7.738 billion in dividends and repurchased about 244.5 million shares for $8.374 billion during the first nine months. The declared dividend was $0.44 per share in Q3 and $1.32 per share year to date.
Material changes and operating trends
- Q3 revenue was essentially flat, while nine-month revenue increased 0.7%. The Advertising Solutions sale reduced reported revenue by $803 million in Q3 and $1.463 billion year to date.
- Wireless service revenue grew 4.5% in Q3 and 4.4% year to date; wireless segment revenue rose 6.6% and 5.6%, respectively. Wireless segment income fell 5.8% in Q3, but increased 7.2% year to date. Higher smartphone sales, upgrades, commissions, and related costs pressured Q3 margins.
- Wireline revenue declined 1.6% in Q3 and 1.1% year to date. Data revenue grew, including U-verse and strategic business services, but voice revenue fell 10.8% and 10.3%, respectively. Switched access lines declined 12.8% year over year.
- Wireless subscribers reached 105.9 million, up 5.1% year over year, but Q3 net additions fell 68.1% to 678,000. Postpaid smartphone and data usage grew, while total ARPU declined 1.3% in Q3.
- Nine-month net income attributable to AT&T increased 4.7%; Q3 increased 0.3%. The Q3 effective tax rate was 32.0%, down from 34.0%, primarily reflecting benefits from resolution of audit issues.
Outlook, commentary, risks and unusual items
- Management expected full-year 2012 capital expenditures at the low end of a $19–$20 billion range, subject to a favorable regulatory environment and while meeting network build targets.
- AT&T cited significant wireless spectrum and capacity constraints in some markets, with possible expansion to additional markets. It said constraints could affect service quality and new service deployment if not addressed. The company planned to discontinue 2G service by approximately January 1, 2017.
- AT&T agreed to acquire NextWave for $600 million, subject to regulatory approval and other closing conditions, and anticipated closing by year-end 2012. The FCC approved a joint proposal enabling use of WCS spectrum for mobile Internet; deployment was expected to begin within approximately three years.
- Management filed for approval to contribute a preferred equity interest in its Mobility business, estimated at $9.5 billion, to the pension trust. Approval was anticipated in 2013; before contribution, the estimated required 2013 pension contribution was approximately $300 million.
- Q3 results included a $55 million investment impairment. Nine-month interest expense included approximately $151 million of debt-redemption call premiums, partly offset by gains on related interest-rate swaps.
- A proposed settlement of the Universal Service Fees class action capped class and counsel liability at approximately $150 million, subject to final court approval. The filing also identifies unresolved labor negotiations and regulatory, competitive, litigation, pension, cybersecurity, and network-disruption risks.
Important facts for investors to verify
- Whether wireless data growth and U-verse/business data growth can offset continuing declines in traditional wireline voice and lower total wireless ARPU.
- Whether subscriber additions, churn, device costs, and wireless capacity constraints affect future wireless margins and cash generation.
- Progress on spectrum access, the NextWave acquisition, and planned 2G network retirement, including required approvals and costs.
- Timing and approval of the proposed pension-trust contribution, and its effect on pension funding and cash needs.
- Final approval and financial treatment of the Universal Service Fees settlement, and developments in labor negotiations.
- Execution of the full-year capital spending outlook while sustaining dividends and share repurchases; the filing says repurchases are intended to continue but provides no earnings guidance.