AT&T Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2016. AT&T provides communications and digital entertainment services through Business Solutions, Entertainment Group, Consumer Mobility and International. Comparisons are affected by the 2015 acquisitions of DIRECTV and Mexican wireless businesses; Q3 2015 included 68 days of DIRECTV operations, versus a full quarter in 2016.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Operating revenue | $40.890 billion | $39.091 billion | $121.945 billion | $104.682 billion |
| Operating income | $6.408 billion | $5.923 billion | $20.099 billion | $17.253 billion |
| Net income attributable to AT&T | $3.328 billion | $2.994 billion | $10.539 billion | $9.339 billion |
| Diluted EPS | $0.54 | $0.50 | $1.70 | $1.71 |
| Operating margin | 15.7% | 15.2% | 16.5% | 16.5% |
| Interest expense | $1.224 billion | $1.146 billion | $3.689 billion | $2.977 billion |
- Q3 revenue rose 4.6%, operating income 8.2%, and AT&T-attributable net income 11.2%. For the nine months, revenue rose 16.5%, operating income 16.5%, and attributable net income 12.8%. Acquisition timing and scope are important to interpreting these increases.
- Nine-month net cash from operating activities was $29.202 billion, compared with $26.695 billion a year earlier. Investing activities used $18.189 billion, including $15.283 billion of property and equipment purchases and $2.922 billion of acquisitions. Financing activities used $10.239 billion. Cash increased $774 million from year-end 2015 to $5.895 billion.
- At September 30, cash was $5.895 billion; current assets were $37.374 billion and current liabilities $47.102 billion. Debt totaled approximately $125.221 billion, including $7.982 billion maturing within one year. The reported debt ratio was 50.1% and net debt ratio 47.8%. The company reported $12 billion of revolving credit capacity with no advances outstanding.
- Capital expenditures, excluding interest during construction, were $15.283 billion for the first nine months. Dividends paid were $8.850 billion; dividends declared were $1.44 per share for the period. The board approved a quarterly dividend increase from $0.48 to $0.49 after quarter-end.
Material changes and segment developments
- Service revenue increased 4.9% in Q3, primarily reflecting DIRECTV and growth in IP broadband and fixed strategic business services. Legacy wireline voice and data continued to decline; wireless service revenue was pressured by installment plans that reduce monthly service charges.
- Entertainment Group Q3 revenue increased 17.1% to $12.720 billion and segment contribution rose to $1.488 billion. DIRECTV drove much of the growth. Satellite video connections increased 6.2% year over year, while U-verse video connections fell 22.9%; the segment reported a small net video subscriber loss in Q3.
- Consumer Mobility Q3 revenue declined 5.9% to $8.267 billion and segment contribution fell 6.2% to $2.572 billion. Postpaid service revenue remained under pressure from lower-priced plans and customer migrations to Business Solutions. Total consumer wireless subscribers declined 1.7% year over year; total churn increased to 2.11% from 1.90%.
- Business Solutions Q3 revenue was essentially flat at $17.767 billion and contribution was $4.303 billion. Growth in wireless service and fixed strategic services was offset by a 12.3% decline in legacy voice and data revenue.
- International Q3 revenue increased 23.1% to $1.879 billion, while the segment continued to record an operating loss ($54 million). Mexican wireless subscribers increased 32.2% year over year; currency movements and operating costs remain relevant.
Outlook, commentary, risks and unusual items
- Management expected 2016 capital investment for existing businesses to be around $22 billion, including capital expenditures and Mexico network vendor-financing payments. It expected capital investment at approximately 15% of service revenue or lower in each of 2016–2018.
- Management said Q4 Entertainment Group margins would face pressure from a full quarter of NFL Sunday Ticket costs, annual content cost increases and DIRECTV NOW launch costs. It also warned that the year-end 2016 U.S. 2G shutdown could weigh on Q4 churn and subscriber additions.
- After quarter-end, AT&T agreed to acquire Time Warner for approximately $85.4 billion in equity value, or approximately $108.7 billion including Time Warner net debt, in a 50% cash/50% stock transaction. A $40 billion bridge facility was committed but had not been drawn. Closing was expected before year-end 2017, subject to shareholder, regulatory and other approvals. Certain regulatory failures or termination circumstances could trigger a $500 million payment. The transaction would add financing, integration, dilution and regulatory risks.
- A change in estimated customer relationship lives increased the amortization period to approximately 4.5 years; it increased Q3 net income by $79 million ($0.01 per diluted share) and nine-month net income by $161 million ($0.03 per diluted share).
- Other material exposures include competitive pressure, legacy-service declines, wireless spectrum and capacity constraints, foreign exchange and regulatory uncertainty, and litigation. Matters disclosed include NFL Sunday Ticket class actions, FTC litigation concerning DIRECTV marketing, an FCC proposed $100 million forfeiture concerning the legacy unlimited data plan, and a DOJ antitrust complaint filed after quarter-end concerning SportsNet LA negotiations. AT&T disputed the allegations in these matters.
- AT&T reported effective disclosure controls as of September 30, 2016. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much reported revenue and earnings growth reflects acquired operations versus underlying organic performance, particularly given the differing DIRECTV comparison periods.
- Whether the company can sustain operating cash flow and meet capital investment and dividend commitments while managing approximately $125.2 billion of debt and the proposed Time Warner financing.
- Subscriber trends, churn, pricing and margins in Consumer Mobility; continued declines in legacy wireline services; and video subscriber retention and content costs.
- Time Warner approval, financing, integration and synergy assumptions, including the effect of additional debt and shares on leverage, interest expense and dividend flexibility.
- Developments in the 2G shutdown, spectrum availability, regulatory proceedings and litigation, including the potential financial or operational consequences.