AT&T Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2015, compared with Q1 2014; balance-sheet figures are compared with December 31, 2014. AT&T provides wireless, wireline, broadband, video, and related communications services. The period includes the January acquisition of Mexican wireless provider GSF Telecom. AT&T completed its Nextel Mexico acquisition on April 30, 2015, after quarter-end.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / prior balance date | Change |
|---|---|---|---|
| Operating revenue | $32.576 billion | $32.476 billion | +0.3% |
| Service revenue | $28.962 billion | $29.776 billion | -2.7% |
| Equipment revenue | $3.614 billion | $2.700 billion | +33.9% |
| Operating income / margin | $5.456 billion / 16.7% | $6.278 billion / 19.3% | Income -13.1% |
| Net income attributable to AT&T | $3.200 billion | $3.652 billion | -12.4% |
| Diluted EPS | $0.61 | $0.70 | Lower |
| Operating cash flow | $6.738 billion | $8.799 billion | Lower by $2.061 billion |
| Capital expenditures, excluding construction interest | $3.848 billion | $5.716 billion | Lower by $1.868 billion |
| Cash and cash equivalents | $4.444 billion | $8.603 billion at Dec. 31, 2014 | Lower by $4.159 billion |
| Total debt | $96.453 billion | $82.067 billion at Dec. 31, 2014 | Higher by $14.386 billion |
| Current assets / current liabilities | $27.410 billion / $37.651 billion | $32.028 billion / $37.282 billion at Dec. 31, 2014 | — |
Q1 net cash used in investing activities was $21.587 billion, principally reflecting spectrum and business acquisitions. Financing activities provided $10.690 billion, including $16.572 billion of long-term debt issuance; dividends paid were $2.434 billion. The declared dividend was $0.47 per share, versus $0.46 a year earlier. The debt ratio was 52.5%, compared with 48.6% at year-end 2014. The company reported $8 billion in revolving credit facilities with no advances outstanding at quarter-end.
Material changes versus the prior comparable period
- Total revenue was nearly flat, as equipment growth largely offset declining service revenue. AT&T attributed service pressure in part to Mobile Share Value and device-installment plans, legacy wireline declines, and the sale of Connecticut wireline operations.
- Operating expenses increased 3.5%, led by higher wireless equipment costs, network costs, U-verse costs, and employee-related charges. Lower SG&A and depreciation partly offset the increase.
- Wireless revenue rose 1.8%, but segment income fell 11.7% to $4.443 billion and operating margin declined to 24.5% from 28.3%. Wireless subscribers reached 121.8 million, up 5%; postpaid churn improved to 1.02% from 1.07%.
- Wireline revenue declined 3.1% and segment income declined 4.0%. U-verse Internet connections increased 14.9%, while total switched access lines fell 19.6% and total wireline broadband connections declined 2.5%.
- Q1 included a $566 million reduction in income tax expense year over year; the effective tax rate fell to 29.2% from 33.9%, primarily due to tax benefits related to restructuring part of the enterprise business.
Outlook, management commentary, risks, and unusual items
- Management expected 2015 capital expenditures of approximately $18 billion, excluding newly acquired businesses. AT&T also stated an intention to bid at least $9 billion in the 2016 600 MHz auction, subject to spectrum availability and auction conditions.
- The pending DIRECTV transaction was expected to close in Q2 2015, subject to regulatory approvals and other conditions. The stated transaction value at announcement was approximately $48.5 billion, with DIRECTV reporting $15.129 billion of net debt at March 31. AT&T disclosed a potential redemption obligation for certain notes at 101% of principal if the transaction was not completed by November 30, 2015, or the agreement was earlier terminated.
- AT&T paid $18.189 billion for AWS-3 spectrum licenses and acquired GSF Telecom for $2.5 billion less approximately $700 million of net debt. The April 30 Nextel Mexico acquisition was for $1.875 billion less approximately $427 million of net debt and other adjustments. AT&T issued a further $17.5 billion of debt in May for general corporate purposes, including acquisitions.
- Management cited wireless spectrum and capacity constraints in some markets, competition and service-price pressure, declining legacy wireline services, and regulatory uncertainty. The FCC’s 2015 broadband reclassification and net-neutrality order was being appealed; management said it could adversely affect broadband services and results.
- The FTC lawsuit concerning AT&T Mobility’s data-speed management program remained pending; AT&T disputed the allegations. Labor contracts covering approximately 17,000 wireline employees had expired in April, with employees working under expired terms; another contract covering approximately 24,000 employees was due to expire in August.
- Derivative collateral postings increased cash demands: AT&T posted $2.572 billion net during Q1, with approximately $911 million returned after quarter-end. The filing also notes a special pension termination charge of approximately $150 million related to a retirement offer and a planned approximately $1.2 billion lump-sum pension distribution in 2015.
- No material risk-factor developments were reported for Q1. The filing cautions that interim results are not necessarily indicative of full-year results. No formal earnings guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Whether service-revenue pressure and lower wireless margins continue, and whether equipment-installment growth compensates for lower service revenue.
- Completion, financing, regulatory conditions, and integration costs for DIRECTV and the Mexican acquisitions; track debt reduction following the transactions.
- Cash generation relative to dividends, capital spending, spectrum investment, and the $18 billion 2015 capital-expenditure outlook.
- Liquidity and refinancing needs, including current maturities, floating-rate borrowings, derivative collateral requirements, and the disclosed DIRECTV-related note redemption provision.
- Developments in the FTC litigation, broadband regulation, spectrum availability, and labor negotiations.