AT&T Inc. Q1 2009 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009, filed on May 6, 2009. AT&T Inc. operates in the communications services industry, providing wireless and wireline services, managed networking, directory advertising, and publishing. The company is a large accelerated filer with approximately 5.9 billion common shares outstanding as of April 30, 2009.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Operating Revenues | $30,571 million | $30,744 million |
| Operating Income | $5,737 million | $5,980 million |
| Net Income Attributable to AT&T | $3,126 million | $3,461 million |
| Diluted EPS | $0.53 | $0.57 |
| Operating Cash Flow | $7,915 million | $4,957 million |
| Cash and Equivalents (End of Period) | $3,812 million | $1,963 million |
| Total Debt (Short + Long Term) | $74,350 million | $74,991 million |
| Debt Ratio | 43.2% | 39.5% |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 0.6% ($173 million) year-over-year. This was driven by a $1,187 million decline in voice revenues and decreases in directory and other revenues, partially offset by a $1,041 million increase in wireless service revenue and a $278 million increase in data revenue.
- Profitability Pressure: Operating income fell 4.1% to $5.737 billion, and Net Income dropped 9.7% to $3.126 billion. The operating margin decreased from 19.5% to 18.8%.
- Expense Drivers: Cost of sales increased 2.1% primarily due to higher wireless equipment costs (Apple iPhone 3G) and increased pension/OPEB expenses. Selling, general, and administrative expenses decreased 2.0% due to workforce reductions, though this was offset by higher pension costs and commissions.
- Segment Performance:
- Wireless: Operating income increased 13.0% to $3.341 billion, driven by subscriber growth (78.2 million customers) and data revenue growth.
- Wireline: Operating income decreased 27.4% to $2.141 billion due to significant access line declines and voice revenue drops.
- Advertising Solutions: Operating income decreased 17.7% to $344 million due to declining print ad revenues.
- Cash Flow: Operating cash flow improved significantly to $7.915 billion, largely due to decreased tax payments ($2.793 billion reduction vs. prior year).
Outlook, Risks, and Management Commentary
- Capital Expenditures: Management expects 2009 capital expenditures to range between $17,000 million and $18,000 million, focused on wireless network expansion and U-verse services.
- Debt Strategy: The company intends to focus on reducing debt levels in 2009 rather than share repurchases, although a repurchase authorization for 400 million shares remains in place until the end of 2009.
- Dividends: The quarterly dividend was increased to $0.41 per share (from $0.40 in Q1 2008).
- Key Risks:
- Regulatory: Uncertainty regarding the classification of U-verse services (cable vs. video service) and potential state/local regulations affecting deployment.
- Legal: Pending litigation regarding NSA assistance (immunity provision under FISA Amendments Act) and retiree phone concession class actions.
- Operational: Labor contract negotiations for approximately 80,000 wireline employees; contracts expired in April 2009.
- Financial: Sensitivity to foreign currency fluctuations affecting international equity investments (e.g., América Móvil, Telmex) and pension plan asset returns.
Investor Verification Checklist
- Verify the sustainability of wireless subscriber growth and data ARPU trends amidst voice ARPU declines.
- Monitor the outcome of labor contract negotiations for 80,000 wireline employees and potential strike risks.
- Assess the impact of regulatory rulings on U-verse deployment costs and timelines.
- Review the resolution of the IRS examination regarding 2003-2005 tax returns and the expected $650 million deposit.
- Track the company's ability to meet its debt reduction goals given the increased debt ratio (43.2%) and pension funding obligations.