AT&T Inc. 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine-month period ended on the same date. AT&T Inc. operates as a holding company providing wireless and wireline communications services, managed networking, directory advertising, and publishing services. The company is a large accelerated filer with 5,893 million common shares outstanding as of October 31, 2008.
Key Financial Metrics
| Metric (in millions) | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Total Operating Revenues | $31,342 | $30,132 | $92,952 | $88,579 |
| Operating Income | $5,618 | $5,304 | $18,165 | $14,912 |
| Net Income | $3,230 | $3,063 | $10,463 | $8,815 |
| Diluted EPS | $0.55 | $0.50 | $1.75 | $1.42 |
| Operating Cash Flow (9M) | $22,773 (2008) vs $24,345 (2007) | |||
| Capital Expenditures (9M) | $14,388 (2008) vs $12,124 (2007) | |||
| Debt Ratio | 40.6% (Sep 30, 2008) vs 35.3% (Sep 30, 2007) | |||
| Cash & Equivalents | $1,594 (Sep 30, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 4.0% in Q3 and 4.9% for the nine months, driven primarily by wireless service growth (+14.3% in Q3) and data revenues. This offset a continued decline in voice revenues (-8.1% in wireline Q3).
- Profitability: Operating income rose 5.9% in Q3 and 21.8% for the nine months. Operating margins improved to 17.9% in Q3 (from 17.6%) and 19.5% for the nine months (from 16.8%).
- Expense Drivers: Operating expenses increased 3.6% in Q3, largely due to $782 million in equipment costs related to the iPhone 3G launch and hurricane-related expenses. Nine-month expenses rose 1.5%, impacted by a $374 million workforce reduction charge in Q1.
- Segment Performance:
- Wireless: Operating income surged 21.0% in Q3 and 64.9% for the nine months, fueled by a 9.2 million customer base increase and improved margins.
- Wireline: Operating income declined 7.6% in Q3 due to access line losses and competition from VoIP/cable, though data revenue grew 5.3%.
- Advertising & Publishing: Operating income decreased 9.3% in Q3, driven by declines in print revenue.
- Debt & Liquidity: The debt ratio increased to 40.6% due to $10.1 billion in long-term debt issuances and $9.3 billion spent on wireless spectrum licenses. Cash provided by operating activities decreased slightly year-over-year due to higher tax payments and declines in operating liabilities.
Outlook, Risks, and Management Commentary
- Guidance: Management expects 2008 capital expenditures to remain in the mid-teens as a percentage of consolidated revenue. The company intends to focus on reducing debt rather than share repurchases for the remainder of 2008, though repurchases may resume if the economic environment improves.
- Market Conditions: Management notes significant declines in securities markets and liquidity in the banking system. While AT&T has access to short-term borrowings, continued market weakness could impact pension funding requirements and customer demand.
- U-verse Expansion: Deployment of U-verse services (TV, broadband, voice) continues, with approximately 14 million living units passed. Regulatory challenges regarding classification as a "cable service" in certain municipalities pose potential delays.
- Legal & Regulatory:
- NSA Litigation: 24 pending lawsuits allege unlawful assistance to the NSA. The Attorney General filed a certification under the FISA Amendments Act of 2008 to dismiss these suits; AT&T believes they will be dismissed.
- Patent Dispute: A Federal Circuit ruling vacated an ITC exclusion order regarding Qualcomm chips, allowing AT&T to continue selling handsets using the disputed technology.
- DirectV Agreement: AT&T announced an agreement to market and sell DIRECTV services as a co-branded offering starting February 1, 2009, replacing the DISH Network partnership.
Investor Verification Checklist
- Spectrum Investment ROI: Verify the long-term revenue impact of the $9.3 billion spent on 700 MHz spectrum licenses and other wireless acquisitions.
- Wireline Churn: Monitor the rate of access line disconnections and the success of U-verse in offsetting traditional voice revenue declines.
- Debt Servicing: Assess the impact of the increased debt ratio (40.6%) and interest expense on future cash flows, particularly given the volatile credit market environment.
- iPhone 3G Economics: Evaluate whether the surge in equipment sales and associated costs (commissions, handset subsidies) is sustainable and profitable over the long term.
- Regulatory Risks: Track the outcome of U-verse regulatory challenges and the final disposition of the NSA-related litigation.