AT&T INC. quarterly report, Q3 FY2013

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AT&T Inc. — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013. Amounts are in millions of dollars except per-share data and where noted. The interim statements are unaudited.

Business context

AT&T provides wireless and wireline communications services, including voice, data, broadband, video and managed networking. Its reportable segments are Wireless, Wireline and Other. The company is shifting toward IP-based data services while traditional voice and legacy data services decline.

Financial performance and key metrics

  • Q3 revenue: $32,158, up 2.2% year over year. Nine-month revenue was $95,589, up 0.8%.
  • Q3 earnings: Operating income was $6,188, up 2.5%; net income attributable to AT&T was $3,814, up 4.9%; diluted EPS was $0.72 versus $0.63. Nine-month operating income declined 3.8% to $18,241, while net income attributable to AT&T rose 1.9% to $11,336 and diluted EPS increased to $2.09 from $1.90.
  • Margins: Consolidated operating margin was 19.2% in both Q3 2013 and Q3 2012; nine-month margin fell to 19.1% from 20.0%. Wireless Q3 margin declined to 26.4% from 26.9%; Wireline declined to 10.6% from 12.1%.
  • Cash flow and investment: Nine-month operating cash flow was $26,879, compared with $28,656. Capital expenditures were $15,565; operating cash flow less capital expenditures was approximately $11,314. Investing activities used $18,660, including $3,984 for wireless spectrum and operations acquisitions.
  • Liquidity and debt: Cash was $1,371 at September 30, down from $4,868 at year-end 2012. Current assets were $18,435 and current liabilities $36,183. Debt totaled $76,223, including $7,873 due within one year, versus $69,844 at year-end. The debt ratio was 46.9%, compared with 43.0% at year-end 2012. AT&T had no borrowings under its $8,000 of revolving credit facilities and reported compliance with their covenants.
  • Shareholder returns: The company repurchased 312 million shares for $11,134 during the first nine months and paid $7,325 in dividends. Dividends declared were $0.45 per share in Q3 and $1.35 year to date.
  • Tax: Effective tax rates were 29.0% for Q3 and 30.5% for the first nine months, down from 32.0% and 33.4%, respectively, primarily reflecting benefits from tax audit settlements and prior-year asset sales.

Material changes versus comparable periods

  • Wireless revenue grew 5.1% in Q3, driven by data revenue growth of 17.6% and equipment revenue growth of 17.0%; wireless voice, text and other service revenue fell 2.6%. Wireless segment income rose 3.4% in Q3 but was down 0.4% for the first nine months.
  • Wireline revenue declined 1.0% in Q3. Data revenue increased 5.9%, including growth in U-verse and strategic business services, but voice revenue fell 9.7%. Wireline segment income decreased 13.7% in Q3.
  • Wireless subscribers totaled 109.5 million, up 3.4% year over year. Postpaid smartphone subscribers increased 13.7%; total wireline broadband connections were nearly flat, while switched access lines fell 15.6%.
  • Higher wireless device costs, network investment and U-verse-related costs pressured expenses. Nine-month comparisons also reflect the 2012 sale of Advertising Solutions, which contributed $1,049 of revenue in the prior-year period.
  • Cash from operations decreased partly because income tax payments increased by approximately $1,183. Capital expenditures and acquisitions increased, while share repurchases remained substantial.

Outlook, commentary, risks and unusual items

  • Management expects continued growth in wireless and wireline IP-based data revenue, alongside ongoing declines in traditional voice and basic wireline data. AT&T expects 2013 capital expenditures around $21 billion and approximately $20 billion in each of 2014 and 2015. The filing provides no clear full-year earnings or revenue guidance.
  • AT&T cited spectrum and network-capacity constraints in certain wireless markets, which it expects may expand. Insufficient spectrum or capacity could affect service quality and the ability to launch new services.
  • In September, AT&T contributed a preferred equity interest in its wireless holding company, valued at $9,104, to its qualified pension trust and added $175 in cash. It committed to further annual cash contributions of $175 in 2014–2016. The Department of Labor had proposed an exemption for retroactive approval; the filing identifies inability to obtain approval as a risk.
  • AT&T acquired Alltel U.S. retail wireless operations for $806 and 700 MHz spectrum for $1,900 plus spectrum assignments. The spectrum transactions included a recognized gain of approximately $293.
  • The pending Leap Wireless acquisition was valued at approximately $1,260 plus contingent value rights; Leap had approximately $2,700 of debt, net of cash, as of June 30. The deal was subject to FCC and DOJ review and was expected to close in Q1 2014. Certain failure-to-close provisions could require a termination fee or roaming arrangement and could lead to further spectrum purchases.
  • After quarter-end, AT&T announced an agreement under which Crown Castle would lease and operate approximately 9,100 towers and purchase approximately 600 for $4,850. AT&T expects to account for the proceeds as a financing obligation, will lease back tower capacity, and expected closing by year-end 2013.
  • Other risks include competitive pressure, ongoing wireline line losses, regulatory and litigation outcomes, pension costs, and the cost and availability of spectrum. Management reported disclosure controls and procedures were effective as of September 30, 2013.

Most important facts for investors to verify

  • Whether wireless data and U-verse growth can offset voice declines and rising equipment, network and customer-acquisition costs.
  • How AT&T funds its capital program, dividends and repurchases while debt and near-term maturities rise and cash balances fall.
  • The accounting, funding and regulatory consequences of the pension trust preferred-equity contribution, including the required future cash contributions.
  • Whether the Leap acquisition receives regulatory approval, closes on expected terms, and adds debt or other obligations as anticipated.
  • The final economics and financing treatment of the Crown Castle tower transaction, including lease commitments and purchase options.
  • Whether spectrum availability and network capacity are adequate to preserve service quality and support wireless growth.