AT&T Inc. — 2010 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; unaudited. AT&T provides wireless, wireline, broadband, video, managed-networking, and advertising services. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $31,581 | $30,734 | $92,919 | $91,805 |
| Operating income | $5,464 | $5,372 | $17,585 | $16,612 |
| Operating margin | 17.3% | 17.5% | 18.9% | 18.1% |
| Income before tax, continuing operations | $5,077 | $4,731 | $16,791 | $14,632 |
| Net income attributable to AT&T | $12,339 | $3,192 | $18,837 | $9,516 |
| Diluted EPS | $2.08 | $0.54 | $3.17 | $1.61 |
| Cash from operating activities | — | $25,350 | $25,444 |
Revenue grew 2.8% in Q3 and 1.2% year to date. Operating income rose 1.7% and 5.9%, respectively. Net income and EPS were substantially affected by discrete tax and disposal items, rather than representing underlying operating growth on their own. Q3 and nine-month income tax benefits were $6,560 and $1,512, respectively, compared with tax expense of $1,463 and $4,886 in 2009.
- Cash flow and investment: Nine-month capital expenditures were $13,170, with a further $577 of construction-period interest. Net cash used in investing was $14,956; net cash used in financing was $10,889. Cash declined to $3,246 from $3,741 at year-end 2009.
- Debt and liquidity: September 30 balance sheets show $6,426 of debt maturing within one year and $62,540 of long-term debt. The reported debt ratio was 37.8%, versus 41.3% at December 31, 2009. AT&T reported no borrowings under its $9,465 credit agreement and compliance with its financial covenants; the agreement expires July 2011. The debt ratio improvement was partly driven by the tax settlement’s effect on equity.
- Shareholder returns: Dividends paid were $7,436 for the first nine months; dividends declared were $0.42 per share in Q3, compared with $0.41 a year earlier.
Material changes and operating trends
- Wireless: Segment revenue rose 11.4% in Q3 and 9.2% year to date. Service revenue increased 10.5% in Q3, led by data-service growth of 30.5%. Wireless customers totaled 92.8 million, up 13.7% from a year earlier; connected-device customers more than doubled to 7.8 million. Total churn improved to 1.32% from 1.42%. Postpaid net additions fell 44.1% in Q3, and overall service ARPU declined 2.3%; data ARPU rose 15.3%. Q3 segment margin decreased to 23.1% from 25.6%, largely due to device costs and commissions, including 5.2 million iPhone activations and upgrades.
- Wireline: Segment revenue declined 3.0% in Q3 and 3.8% year to date. Voice revenue fell 12.2% in Q3, alongside an 11.3% drop in switched access lines. Data revenue rose 7.4%, led by IP services and U-verse. Video connections increased 18.0% to 4.7 million. Q3 segment income rose 4.0% as expense reductions and data growth more than offset voice declines; year-to-date segment income declined 4.7%.
- Advertising Solutions: Revenue fell 17.3% in Q3 and 16.9% year to date, primarily from declining print advertising; segment income fell 37.5% and 37.7%, respectively. Interactive revenue growth only partly offset print declines.
- Acquisitions and dispositions: AT&T paid $2,372 for wireless properties acquired from Verizon Wireless, serving approximately 1.6 million subscribers; conversion to AT&T’s network technology is expected to require additional spending. AT&T sold Sterling Commerce in August for approximately $1,400 cash and reported a $767 after-tax disposal gain. It also recorded a $647 pretax gain from exchanging Telmex Internacional shares for América Móvil shares.
Outlook, commentary, risks, and unusual items
- Tax settlement: The September IRS settlement reduced Q3 income tax expense by $8,300, or $1.40 per diluted share. AT&T expects to pay approximately $300 to the IRS in Q4 2010. The settlement’s cash-flow effects are expected to extend over a 15-year period beginning in 2008. Separately, healthcare legislation caused a $995 first-quarter tax charge, or $0.17 per diluted share.
- Outlook: Management continued to expect 2010 capital expenditures of $18,000–$19,000, assuming a favorable regulatory environment. It expected wireless data revenue growth to continue, while warning that 2010 postpaid net additions would continue to decline from prior-year levels and voice ARPU would remain under pressure. No specific consolidated earnings guidance is provided in the supplied filing text.
- Competitive and execution risks: AT&T cited wireless and wireline competition, continuing access-line losses, device and network costs, and its ability to manage wireless data growth and network quality. U-verse deployment could be delayed by permits, equipment or software availability, and municipal disputes. The company also described uncertainty around proposed broadband reclassification, net-neutrality and other FCC and state regulatory proceedings.
- Legal and other contingencies: The filing discusses pending appeals in NSA-related litigation, a new class action alleging improper collection of certain universal-service and other fees, and retiree phone-concession litigation. Management stated that a material adverse outcome was unlikely in the latter two matters. The filing reports no material risk-factor developments for Q3.
Most important facts for investors to verify
- Assess earnings excluding the $8.3 billion IRS tax benefit, the Sterling disposal gain, investment gains, and the first-quarter healthcare-related tax charge; the filing does not provide a complete normalized earnings measure.
- Check whether wireless data growth and customer additions can offset lower postpaid additions, falling voice ARPU, and elevated device subsidies and network costs.
- Monitor wireline access-line and voice revenue declines against U-verse/IP growth, and the continuing deterioration in print advertising.
- Track capital spending, operating cash generation, upcoming debt maturities, and the July 2011 expiration of the credit agreement.
- Review developments in broadband regulation, U-verse permitting and litigation, and the disclosed fee-collection and NSA litigation matters.