AT&T Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. AT&T provides communications and digital entertainment services in the U.S. and internationally. Unless noted, financial amounts are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Operating revenue | $38,038 | $39,365 | Down 3.4% as reported; new revenue rules materially affect comparability. |
| Operating income | $6,201 | $6,356 | Down 2.4%; operating margin was 16.3%, versus 16.1%. |
| Net income attributable to AT&T | $4,662 | $3,469 | Up 34.4%; diluted EPS was $0.75 versus $0.56. |
| Operating cash flow | $8,947 | $8,965 | Nearly unchanged. |
| Property and equipment purchases | $5,957 | $5,784 | Cash flow from operations less these purchases was approximately $2,990. |
| Cash and cash equivalents | $48,872 | — | Balance-sheet cash at March 31; cash plus restricted cash was $49,225. |
| Total debt | $163,046 | — | $29,322 current and $133,724 long-term; debt ratio 52.6%, net debt ratio 36.8%. |
| Dividend declared per share | $0.50 | $0.49 | $3,070 paid during the quarter. |
Reported net income benefited from a lower effective tax rate (22.5%, versus 33.5%) following U.S. tax reform, and from a $930 postretirement-benefit actuarial gain included in other income. Interest expense rose $478 to $1,771, primarily due to higher debt balances ahead of the planned Time Warner acquisition and higher average interest rates.
Comparability caveat: AT&T adopted ASC 606 in 2018, including net presentation of certain regulatory fees and changed allocation of revenue in bundled contracts. Under the historical accounting method, Q1 2018 revenue would have been $38,930 and AT&T-attributable net income $4,187, or $0.68 per diluted share. These figures are not directly equivalent to the reported ASC 606 presentation. The filing also retrospectively adjusted prior-period presentation for other accounting standards.
Material changes and segment performance
- Consumer Mobility: Revenue increased 1.2% to $14,986 and segment contribution rose 2.8% to $4,655. Equipment revenue grew, while service revenue fell 6.8%; reported results reflect new accounting rules and customer migration to unlimited plans. Domestic wireless subscribers totaled 143.8 million.
- Business Solutions: Revenue fell 5.2% to $9,185 and contribution fell 4.7% to $2,084. Strategic services grew 5.5%, offset by declines in wireless service and legacy voice/data.
- Entertainment Group: Revenue declined 8.1% to $11,577 and contribution declined 15.0% to $1,335. Linear video subscriber losses and migration to lower-priced streaming weighed on video revenue; DIRECTV NOW connections increased.
- International: Revenue rose 5.0% to $2,025, but the segment recorded a $111 contribution loss. Mexican wireless subscriber growth supported revenue; foreign exchange and competition remain relevant factors.
Across the company, service revenue fell 7.7% while equipment revenue rose 51.0%. Management attributed much of the reported mix shift to ASC 606, alongside device sales and upgrades, unlimited-plan migration, declining legacy services, video pressure, and lower revenue allocation to service in bundled contracts. Cost reductions reflected accounting changes, cost management and automation, partly offset by higher equipment and programming costs.
Outlook, transactions, risks and unusual items
- Time Warner transaction: The proposed cash-and-stock acquisition remained pending. The U.S. Department of Justice sought to block it on antitrust grounds; trial arguments concluded April 30, 2018. The termination date was extended to June 21, 2018. Under specified termination circumstances, AT&T could owe Time Warner $500. AT&T had issued $30,372 of notes subject to mandatory redemption if the transaction did not close by April 22; remaining notes were scheduled for redemption May 23 at 101% of principal plus accrued interest.
- Debt and liquidity: The company reported $29,322 of debt maturing within one year. It had $48,872 of cash and cash equivalents, some held abroad and potentially subject to repatriation restrictions. Management said tax reform should significantly lower cash taxes from 2018 onward. The company was in compliance with credit-facility covenants, including a maximum net debt-to-EBITDA ratio of 3.5-to-1.
- Investment and operations: Q1 capital expenditures included approximately $140 for FirstNet; AT&T reported no FirstNet government reimbursements in the quarter. It marketed fiber-to-the-premises service to 8.2 million locations and said it was on track to reach 12.5 million by mid-2019. The filing describes planned 5G deployment and continuing network investment but gives no specific consolidated earnings or revenue guidance.
- Other unusual items: A postretirement plan change and remeasurement reduced the related liability by $1,682 in total. The company withdrew the planned Vrio IPO in April after related subsidiary debt issuances. The filing also notes Venezuela devaluation and employee-separation and natural-disaster charges in segment reconciliations.
- Contingencies and risks: Disclosed matters include DIRECTV NFL SUNDAY TICKET class actions, FTC litigation involving DIRECTV advertising, and FTC and class-action claims concerning AT&T Mobility’s legacy unlimited-data speed management. The filing also highlights competitive and technology risks, regulatory uncertainty (including net neutrality and 5G infrastructure), litigation, foreign exchange exposure, network disruptions, privacy/security matters, and the uncertainty of closing and integrating Time Warner. Management reported no material risk-factor developments for Q1 versus its 2017 Form 10-K.
AT&T expects to recognize approximately 50% of its $27,836 of remaining performance obligations over the remainder of 2018; the balance is expected thereafter. This disclosure is not company-wide revenue guidance.
Important facts for investors to verify
- How much of the reported revenue decline and margin movement reflects ASC 606 versus underlying customer, pricing and product trends.
- The outcome and timing of the Time Warner antitrust case, transaction closing conditions, mandatory debt redemptions and any related financing needs.
- Debt maturities, interest expense, net leverage, cash availability and the sustainability of operating cash flow after network investment and dividends.
- Whether video subscriber losses and legacy-service declines are offset by growth in streaming, broadband, strategic services and wireless connections.
- The persistence of the postretirement actuarial gain and tax benefits, and the effects of subsequent measurement-period tax adjustments or other one-time items.