AT&T Inc. — Second Quarter 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results include DIRECTV and Mexican wireless businesses from their 2015 acquisition dates; year-over-year comparisons therefore reflect a larger consolidated business and are not fully comparable.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $40.520B | $33.015B | $81.055B | $65.591B |
| Operating income | $6.560B | $5.773B | $13.691B | $11.330B |
| Net income attributable to AT&T | $3.408B | $3.082B | $7.211B | $6.345B |
| Diluted EPS | $0.55 | $0.59 | $1.17 | $1.22 |
| Operating margin | 16.2% | 17.5% | 16.9% | 17.3% |
Q2 revenue rose 22.7% and operating income 13.6%; six-month revenue rose 23.6% and operating income 20.8%. Net income attributable to AT&T increased 10.6% in Q2 and 13.6% year to date, while diluted EPS declined, alongside a substantial increase in weighted-average shares following the DIRECTV acquisition. Service revenue growth was largely acquisition-driven and also reflected IP broadband and fixed strategic services; equipment revenue declined.
- Cash flow: Six-month operating cash flow was $18.207B, versus $15.898B. Investing activities used $10.017B, including $9.702B of property-and-equipment purchases; financing activities used $6.103B. Cash ended at $7.208B, up $2.087B from year-end. Operating cash flow less reported property-and-equipment purchases was approximately $8.505B, before other investing items.
- Debt and liquidity: June 30 debt comprised $9.528B due within one year and $117.308B long term, or $126.836B total. Cash was $7.208B. The reported debt ratio was 50.5%; net debt ratio was 47.6%. AT&T had no advances outstanding under its $12B revolving credit facility and reported compliance with covenants.
- Dividends: Declared $0.48 per share for Q2 and $0.96 for the first half; paid $5.899B in dividends during the first half.
Material changes and segment results
- Entertainment Group: Q2 revenue was $12.711B and segment contribution $1.651B, versus a $208M contribution loss in Q2 2015. The change primarily reflects DIRECTV, acquired in July 2015. Satellite video had 20.454M subscribers; U-verse video connections fell 18.6% year over year.
- Business Solutions: Q2 revenue was nearly flat at $17.579B; contribution was $4.201B, down 0.7%. Fixed strategic-services revenue grew 8.4%, while legacy voice and data revenue fell 11.2%.
- Consumer Mobility: Q2 revenue declined 6.5% to $8.186B and contribution declined 1.7% to $2.574B. Lower postpaid service and equipment revenue was partly offset by lower operating costs and higher prepaid revenue.
- International: Q2 revenue was $1.828B, including Latin American video operations acquired with DIRECTV. Segment contribution was a loss of $184M, compared with a $131M loss a year earlier. Management cited foreign-exchange exposure.
Outlook, commentary, risks and unusual items
- Management expected 2016 capital investment, including Mexico vendor financing payments, to be around $22B, and capital investment at 15% of service revenue or lower in each year from 2016 through 2018. It intended to use free cash flow after dividends primarily to pay down debt. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management reported competitive pressure, ongoing declines in legacy wireline services, and wireless spectrum and capacity constraints in some markets. The expected year-end 2016 U.S. 2G shutdown could increase churn or reduce net additions if affected customers and connected devices do not migrate.
- Regulatory and legal matters include challenges to the FCC’s broadband rules; an FCC notice proposing a $100M penalty concerning disclosures for certain unlimited data plans; FTC litigation involving DIRECTV marketing and AT&T’s legacy unlimited-data plan; and class actions concerning DIRECTV’s NFL Sunday Ticket. AT&T disputes the allegations. The filing does not state a clear probable-loss estimate for these matters.
- A Q2 accounting-estimate change extended the estimated economic life of certain satellite and business customer relationships to approximately 4.5 years, increasing Q2 net income by $82M, or $0.01 per diluted share.
- Other notable items included $2.667B of first-half amortization of acquired intangibles, $528M of merger and integration charges, and a $736M gain on wireless spectrum transactions. A $7M loss was recorded in Q1 on repurchased equipment-installment receivables.
- The company is evaluating the effect of new lease and revenue-recognition standards. It expected to adopt the revenue standard in 2018 but had not determined the adoption method or quantified the effect.
Most important facts for investors to verify
- How much reported growth and the Entertainment Group improvement reflect acquisition timing versus underlying organic performance.
- Whether operating-margin pressure, declining legacy revenues, and wireless churn or subscriber additions improve or worsen in subsequent quarters.
- Debt reduction, cash generation, capital spending, dividend funding, and the effect of equipment-installment receivable sales on cash flow.
- Progress integrating DIRECTV, the profitability of International operations, and exposure to foreign currency movements.
- Developments and potential financial effects of the pending regulatory proceedings, lawsuits, 2G shutdown, and spectrum availability constraints.