AT&T Inc. — Q2 2011 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. AT&T provides wireless and wireline communications, broadband, video, managed networking and advertising services. Amounts below are in millions of dollars except per-share data and customer counts.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $31,495 | $30,808 | $62,742 | $61,338 |
| Operating income | $6,165 | $6,083 | $11,973 | $12,054 |
| Operating margin | 19.6% | 19.7% | 19.1% | 19.7% |
| Net income attributable to AT&T | $3,591 | $4,003 | $6,999 | $6,456 |
| Diluted EPS | $0.60 | $0.67 | $1.18 | $1.09 |
- Revenue mix: Q2 wireless service revenue rose 7.4% to $14,157 and wireline data revenue rose 7.1% to $7,356; wireline voice revenue fell 12.2% to $6,342. Directory revenue declined 16.5% to $841.
- Profit and margins: Q2 operating income increased 1.3%, but AT&T-attributable net income declined 10.3%. Operating costs rose 2.4%, including a 7.1% increase in cost of services and sales. Wireless segment income rose 1.9% in Q2, while wireline segment income fell 3.6% and Advertising Solutions income fell 25.4%.
- Cash flow: Six-month operating cash flow was $16,757, versus $15,811. Capital expenditures were $9,405; operating cash flow less capital expenditures was $7,352. Investing activities used $9,450, financing activities used $4,913, and cash increased $2,394 to $3,831.
- Debt and liquidity: At June 30, cash was $3,831; debt due within one year was $7,910 and long-term debt was $58,663. The reported debt ratio was 36.8%, compared with 37.1% at December 31, 2010. AT&T reported no borrowings under its $5 billion and $3 billion revolving credit facilities and compliance with their covenants.
- Dividend: Dividends declared were $0.43 per share for Q2 and $0.86 for the first half, compared with $0.42 and $0.84, respectively, in 2010.
Material changes versus prior periods
- Wireless service and data growth, smartphone sales and U-verse/IP data growth supported revenue. Total wireless customers increased 9.4% year over year to 98.6 million; postpaid churn rose to 1.15% from 1.01% in Q2 2010, and net postpaid additions declined.
- Traditional wireline pressure continued: switched access lines fell 12.2% year over year. U-verse video connections grew 36.0% to 3.407 million, and broadband connections rose 3.3% to 16.473 million.
- Six-month net income increased 8.4% despite lower operating income, in part because the 2010 comparison included a $995 healthcare-legislation-related tax charge. The 2010 comparison also included a $647 gain on exchanging Telmex Internacional shares for América Móvil shares; 2011 other income was substantially lower.
- Interest expense increased 12.5% in Q2, primarily because AT&T stopped capitalizing interest on LTE spectrum deemed ready for use.
Outlook, risks and unusual items
- Management expected 2011 capital expenditures to be around $20 billion, subject to a favorable regulatory environment, funded through operating cash flow and potentially incremental borrowing. Wireless spending included network expansion and initial LTE deployment; the filing described an expected summer 2011 commercial LTE launch.
- Management expected continued growth in data services and pressure on voice revenue and ARPU. No specific earnings or revenue guidance is provided in the filing text.
- The proposed T-Mobile acquisition was valued at approximately $39 billion, subject to approvals, with closing anticipated by the end of Q1 2012. AT&T identified integration, financing, approval and synergy risks; failure to close could require a $3 billion breakup fee, a roaming agreement and spectrum transfer. A bridge facility of up to $20 billion was arranged.
- Other risks include wireless spectrum and capacity constraints, competition and wireline line losses, regulatory changes, U-verse deployment disputes, litigation, benefit-cost assumptions, and network or supplier disruptions. Management stated that a material adverse outcome was unlikely in the retiree phone concession and wireless universal-service-fee cases; NSA-related cases against AT&T entities had been dismissed, with an appeal pending.
- AT&T announced an intent to tender its Telmex shares following a proposed offer; estimated proceeds were $1.37 billion, with an expected after-tax gain of $0.01–$0.03 per diluted share if completed. The filing also notes a $320 million acquisition of partnership minority interests completed July 1, 2011.
Important facts for investors to verify
- Progress, regulatory conditions, financing needs and potential breakup exposure for the T-Mobile transaction.
- Whether wireless subscriber growth and data monetization can offset higher handset costs, churn and declining voice ARPU.
- Execution of the approximately $20 billion 2011 capital-spending plan and the effect of network investment on cash generation and debt.
- Persistence of wireline voice and advertising declines versus growth in U-verse, broadband and strategic business services.
- Comparability of earnings: the prior-year tax charge and investment-exchange gain materially affect year-over-year comparisons.