AT&T Inc. 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
This Quarterly Report (Form 10-Q) covers the three and nine months ended September 30, 2007. AT&T Inc. operates in the communications services industry, providing wireless and wireline services, managed networking, and directory advertising. The reporting period is significantly impacted by the December 29, 2006, acquisition of BellSouth Corporation, which resulted in the full consolidation of BellSouth and AT&T Mobility (formerly a 60% joint venture) into AT&T's financial statements.
Key Financial Metrics
| Metric (in millions) | Three Months Ended 9/30/07 | Nine Months Ended 9/30/07 |
|---|---|---|
| Total Operating Revenues | $30,132 | $88,579 |
| Operating Income | $5,304 | $14,912 |
| Net Income | $3,063 | $8,815 |
| Diluted Earnings Per Share | $0.50 | $1.42 |
| Operating Cash Flow (9 months) | N/A | $24,220 |
| Capital Expenditures (9 months) | N/A | ($12,124) |
| Total Debt (Long-term + Current) | $60,611 | $60,611 |
| Cash and Cash Equivalents | $2,714 | $2,714 |
Note: Debt figures represent the sum of "Debt maturing within one year" ($6,026) and "Long-Term Debt" ($54,585) as of September 30, 2007.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 92.7% in the third quarter and 87.8% for the nine-month period compared to 2006. This growth is primarily attributable to the inclusion of BellSouth and AT&T Mobility revenues, which were previously reported as equity income or excluded.
- Profitability: Net income rose 41.5% in the quarter and 62.7% year-to-date. Operating income margins decreased slightly in the quarter (17.6% vs. 18.7%) due to merger-related charges and amortization, but improved year-to-date (16.8% vs. 16.4%).
- Accounting Changes: Equity in net income of affiliates decreased significantly (75% in Q3) because AT&T Mobility is now a wholly-owned subsidiary, shifting its results from equity income to operating revenues and expenses.
- Segment Performance:
- Wireline: Revenues up 25.4% (Q3) driven by BellSouth; voice revenues declined pro forma due to access line losses.
- Wireless: Revenues up 14.4% (Q3) driven by subscriber growth and data usage (including iPhone launch); operating income margin improved to 18.0%.
- Advertising & Publishing: Revenues up 59.6% (Q3) due to BellSouth consolidation; operating income margin decreased to 31.8% due to amortization of acquired intangibles.
Guidance, Outlook, and Risks
- Capital Expenditures: AT&T expects 2007 and 2008 capital expenditures to be in the mid-teens as a percentage of consolidated revenue. Specific guidance includes $4,500–$5,000 million for U-verse services deployment through the end of 2008.
- Share Repurchases: The company completed a $10 billion buyback in July 2007 and has 86.2 million shares remaining under its current authorization, which expires at the end of 2008.
- Dividends: Quarterly dividend increased to $0.355 per share. Management intends to consider dividend growth in 2008.
- Regulatory Risks: Significant uncertainty surrounds the classification of U-verse services (cable vs. telecommunications), impacting franchise requirements and deployment costs. FCC proceedings regarding special access pricing and broadband forbearance are ongoing.
- Legal Contingencies:
- NSA Litigation: 24 pending lawsuits alleging unlawful assistance to the National Security Agency; management intends to vigorously defend.
- Patent Litigation: A jury verdict awarding $156 million in damages for prepaid calling card patent infringement was overturned by the court on October 29, 2007, pending appeal.
- Unusual Items: The adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) resulted in a $50 million reduction to retained earnings and the recognition of $5,791 million in unrecognized tax benefits.
Key Facts for Investor Verification
- Merger Integration: Verify the realization of projected merger synergies ($2,000 million achieved YTD 2007) against ongoing integration costs and amortization of intangible assets.
- U-verse Deployment: Monitor the regulatory status of U-verse services, particularly the Connecticut franchise ruling and potential impact on expansion costs and timelines.
- Wireless Churn and ARPU: Track wireless customer churn rates (1.7% in Q3) and Average Revenue Per User (ARPU) trends, specifically the shift from voice to data revenue.
- Debt Management: Review the debt ratio (35.3% at 9/30/07) and the company's ability to service increased debt levels resulting from the BellSouth acquisition and capital spending.
- Tax Position: Assess the impact of the $5,791 million unrecognized tax benefits and ongoing IRS audits on future cash flows and effective tax rates.