AT&T Inc. 2020 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020, compared with the same period in 2019. AT&T operates in telecommunications, media and technology through Communications, WarnerMedia, Latin America and Xandr. The quarter was significantly affected by the emerging COVID-19 pandemic.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenue | $42.779 billion | $44.827 billion; down 4.6% |
| Operating income / margin | $7.486 billion / 17.5% | $7.233 billion / 16.1% |
| Net income attributable to AT&T | $4.610 billion | $4.096 billion |
| Net income attributable to common stock / diluted EPS | $4.578 billion / $0.63 | $4.096 billion / $0.56 |
| Cash from operating activities | $8.866 billion | $11.052 billion |
| Capital expenditures | $4.966 billion | $5.182 billion, including construction interest |
| Cash and cash equivalents at quarter-end | $9.955 billion | $12.130 billion at December 31, 2019 |
| Debt at quarter-end | $164.269 billion, including $17.067 billion due within one year | $163.147 billion at December 31, 2019 |
| Common dividend declared | $0.52 per share | $0.51 per share |
Operating expenses fell 6.1%, helping operating income rise despite lower revenue. The effective tax rate was 20.8%, versus 19.0%. The company reported a debt ratio of 45.7% and net debt ratio of 42.9%; it was in compliance with credit-facility covenants, including the maximum 3.5-to-1 net debt-to-EBITDA covenant.
Material changes versus the prior comparable period
- Communications revenue declined 2.6% to $34.249 billion, while segment operating contribution rose 2.4% to $8.203 billion. Mobility contribution improved 9.0%; Entertainment Group revenue fell 7.2% and contribution fell 9.7%.
- WarnerMedia revenue declined 12.2% to $7.359 billion and contribution declined 25.8% to $1.714 billion, reflecting lower advertising, theatrical and content-licensing revenue.
- Latin America revenue fell 7.5% to $1.590 billion and its operating contribution was a loss of $184 million, with foreign-exchange pressure affecting Vrio. Xandr revenue increased 14.8% to $489 million and contribution rose 18.2% to $299 million.
- Operating cash flow decreased $2.186 billion year over year, attributed primarily to WarnerMedia/HBO Max investment and production spending, lower receivable monetization and late-quarter business collection pressures.
- Other income included a $900 million gain on a spectrum transaction. The company also recorded $803 million of net other income, compared with $286 million a year earlier.
- Q1 comprehensive loss attributable to AT&T was $1.245 billion, despite net income, largely reflecting $5.906 billion of other comprehensive losses, including foreign-currency and derivative movements.
Outlook, risks and unusual items
- AT&T withdrew its prior financial guidance because the duration and economic effects of COVID-19 were uncertain. Management said the pandemic could affect future quarters and that its financial impacts could vary from Q1.
- COVID-19 contributed approximately $430 million, or $0.05 per share, in incremental Q1 costs, including bad-debt reserves, employee and contractor actions, and WarnerMedia production shutdown costs. Management expected more than half to be short-term.
- Other pandemic effects included reduced NCAA-related advertising, lower wireless equipment sales from store closures, and lower roaming revenue. Management said the net profitability impact of these operating comparisons was not significant. Risks include customer payment capacity, business-service demand, production delays, supply-chain disruption, network utilization and staffing constraints.
- Effective January 1, 2020, orbital-slot licenses changed from indefinite to finite lives and began being amortized over an average 15-year life. This increased Q1 amortization by $386 million, or $0.04 per diluted share.
- After quarter-end, AT&T drew a $5.5 billion term loan due December 31, 2020. It also paid approximately $950 million in April for spectrum licenses; the company had won licenses for approximately $2.4 billion gross, partly offset by $1.2 billion in vouchers.
- In March, AT&T announced it would cancel a planned Q2 accelerated share repurchase and suspend other repurchases to preserve flexibility and fund customer, employee and network priorities. Q1 included approximately $5.5 billion of treasury-stock purchases and $3.869 billion from preferred-stock issuance.
- Management expected nationwide 5G coverage in summer 2020 and anticipated HBO Max’s second-quarter launch. These plans and expectations were subject to execution, market and pandemic risks.
Most important facts for investors to verify
- Whether COVID-19’s effects on collections, bad debts, advertising, roaming, equipment sales and content production persist or intensify, and how those effects change cash flow.
- Cash-flow conversion and capital needs, including capital expenditures, vendor financing, receivables sales and the post-quarter spectrum payment.
- Debt maturities and refinancing needs, particularly the $5.5 billion term loan due at year-end 2020 and $17.067 billion of debt classified as due within one year at March 31.
- Whether Communications and Xandr growth can offset continuing declines in video, legacy wireline and WarnerMedia, and whether Latin America losses improve.
- The sustainability of the dividend and the company’s capital-allocation plans after halting share repurchases.
- Actual launch and performance of HBO Max and 5G, including related costs, subscriber uptake and expected returns.