AT&T Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results. AT&T operates in telecommunications, media and technology through Communications, WarnerMedia, Latin America and Xandr. Time Warner results are included from its June 14, 2018 acquisition; consequently, 2018 and 2017 comparisons are not fully like-for-like.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $45.739 billion | $39.668 billion | $122.763 billion | $118.870 billion |
| Operating income | $7.269 billion | $5.807 billion | $19.936 billion | $18.689 billion |
| Net income attributable to AT&T | $4.718 billion | $3.029 billion | $14.512 billion | $10.413 billion |
| Diluted EPS | $0.65 | $0.49 | $2.19 | $1.69 |
| Operating margin | 15.9% | 14.6% | 16.2% | 15.7% |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $31.522 billion | $28.473 billion |
Q3 revenue rose 15.3% and nine-month revenue rose 3.3%. Growth primarily reflected acquisitions, particularly Time Warner, while Communications revenue declined. Operating income and AT&T-attributable net income increased; higher interest expense and acquisition-related amortization partly offset operating gains. The effective tax rate was 22.4% for Q3 and 22.5% for the nine months, down from 37.2% and 34.8%, respectively, in 2017.
- Cash flow and investment: Nine-month investing cash outflow was $59.987 billion, including $43.116 billion for acquisitions and $16.695 billion for property and equipment purchases. Financing cash outflow was $13.679 billion. Cash and cash equivalents were $8.657 billion at September 30, down from $50.498 billion at December 31, 2017. Dividends paid were $9.775 billion.
- Debt and liquidity: Debt totaled $183.418 billion, including $14.905 billion maturing within one year; cash was $8.657 billion. The reported debt ratio was 49.8% and net debt ratio 47.4%. AT&T had no borrowings under its $12 billion revolving credit agreement and reported compliance with credit-facility covenants.
- Shareholder returns: Dividends declared were $0.50 per share in Q3 and $1.50 per share for the nine months. Time Warner shareholders received AT&T shares representing approximately 16% of the combined company.
- Selected operating indicators: North American wireless subscribers were 167.6 million, up from 152.2 million. Total video subscribers were 38.8 million versus 38.6 million; domestic satellite video subscribers declined to 19.6 million from 20.6 million. Domestic broadband connections were 15.7 million.
Material changes and comparability
- Time Warner contributed $8.204 billion of Q3 revenue and $9.709 billion for the nine months, but its 2017 results are not included in the reported comparison. WarnerMedia generated $2.528 billion of Q3 segment contribution.
- Communications revenue fell 2.4% in Q3 and 3.7% for the nine months, reflecting legacy-service declines, customer shifts to unlimited wireless and OTT video, and the accounting presentation of Universal Service Fund fees. Mobility revenue grew 3.3% in Q3, while Entertainment Group and Business Wireline revenue declined 7.0% and 7.9%.
- ASC 606 revenue recognition was adopted January 1, 2018 using the modified retrospective method; prior periods were not restated. For comparison, AT&T’s pro forma Q3 2018 results under its historical accounting method were revenue of $46.607 billion, AT&T-attributable net income of $4.273 billion and diluted EPS of $0.59, versus reported revenue of $45.739 billion, net income of $4.718 billion and EPS of $0.65.
- Reported results also reflect higher depreciation and amortization, particularly amortization of acquired WarnerMedia intangibles. A change in the estimated customer relationship life reduced Q3 net income by $107 million? No: the filing reports an increase to net income of $107 million, or $0.02 per diluted share, in Q3 and $233 million, or $0.04 per diluted share, for the nine months.
Outlook, commentary and risks
- Management expected an effective tax rate of approximately 23%. It projected 2018 capital investment of approximately $24 billion, or $22 billion net of expected FirstNet reimbursements and vendor financing. AT&T expected about $1.3 billion in FirstNet reimbursements in Q4 2018, subject to approved build milestones.
- Management said comparable wireless service revenue trends had improved after the first year of unlimited plans and expected that improvement to continue through the remainder of 2018. It also cited ongoing pressure from competition, legacy-service declines, customer shifts to OTT video and wireless pricing.
- Time Warner consideration totaled $79.358 billion, excluding acquired net debt. Purchase-price allocations remained preliminary and could change materially. AT&T cited integration costs, execution and synergy risks, added debt and interest expense, and potential pressure on financial flexibility and dividends.
- The DOJ appealed the court decision permitting the Time Warner acquisition; AT&T said it would defend the decision. Other disclosed matters include NFL SUNDAY TICKET litigation and ongoing unlimited-data-plan claims. The FTC agreed to dismiss its DIRECTV claims with prejudice after a court substantially limited potential liability. Contracts covering approximately 12,000 wireline employees had expired, with negotiations continuing.
- Other notable items include a $395 million pretax gain from acquiring the remaining Otter Media interest and $2.726 billion of nine-month pension and postretirement actuarial gains. The filing also identifies foreign-exchange, regulatory and privacy, content piracy, technology, competition, spectrum, litigation and network-disruption risks.
Investor verification priorities
- Check subsequent developments and the outcome of the DOJ appeal, and assess the final Time Warner purchase-price allocation and integration progress.
- Reconcile reported growth with the partial-year acquisition contribution and ASC 606 effects; review comparable results under the historical accounting method.
- Track debt reduction, refinancing needs, interest expense, cash balances and compliance with debt covenants.
- Test the capital investment and FirstNet reimbursement outlook against actual cash spending and receipts.
- Monitor Communications trends—especially wireless churn, video subscriber losses, legacy revenue declines—and the profitability of Latin America and WarnerMedia.