AT&T Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Financial amounts below are in millions of dollars unless stated otherwise. AT&T provides wireless and wireline communications services. Results include Leap Wireless from its March 13, 2014 acquisition; Leap had no meaningful effect on reported Q1 operating results.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Operating revenue | $32,476 | $31,356; up 3.6% |
| Operating income | $6,278 | $5,940; up 5.7% |
| Operating margin | 19.3% | 18.9% |
| Income before tax | $5,651 | $5,330; up 6.0% |
| Net income attributable to AT&T | $3,652 | $3,700; down 1.3% |
| Diluted EPS | $0.70 | $0.67 |
| Operating cash flow | $8,799 | $8,199 |
| Capital expenditures | $5,716 | $4,252 |
| Cash and cash equivalents at period-end | $3,611 | $3,339 at Dec. 31, 2013 |
- Investing cash outflow was $6,082; financing cash outflow was $2,445. Dividends paid were $2,398 and treasury-stock purchases were $1,237.
- At March 31, debt maturing within one year was $8,301 and long-term debt was $71,575, for total balance-sheet debt of $79,876. The reported debt ratio was 46.6%, versus 45.0% at year-end 2013. AT&T had no advances under its $8,000 revolving credit facilities and reported compliance with their covenants.
- The quarterly dividend declared was $0.46 per share, compared with $0.45 a year earlier. The company repurchased approximately 37 million shares during the quarter.
- Wireless revenue rose 7.0% to $17,866, and segment income rose 8.1% to $5,033; segment operating margin increased to 28.3% from 28.0%. Wireline revenue fell 0.4% to $14,601, and segment income declined 10.5% to $1,461; segment margin decreased to 10.0% from 11.1%.
Material changes and management commentary
- Revenue growth reflected wireless device sales under AT&T Next, subscriber growth and smartphone adoption, as well as U-verse and strategic business services. Cost of services and sales increased 6.1%, notably from higher wireless handset costs, network costs, U-verse content and Universal Service Fund fees.
- AT&T Next increased equipment revenue but shifts some customer payments to installments and is associated with lower monthly service charges. Management said the program’s expansion could further pressure service revenue; operating cash flow is expected to be lower in 2014 as the program grows.
- Wireline legacy voice and data declines continued, partly offset by U-verse and strategic business services. Network access lines fell 15.9% year over year; total wireline broadband connections were nearly flat, while U-verse Internet connections increased 30.3%.
- Wireless subscribers reached 116.0 million, up 8.2% year over year, including approximately 4.5 million from Leap. Total churn edged up to 1.39% from 1.38%; postpaid churn rose to 1.07% from 1.04%. Postpaid phone-only ARPU plus AT&T Next increased 2.0%, while reported total ARPU declined 1.9%.
- Net income attributable to AT&T decreased despite higher operating income. The effective tax rate increased to 33.9% from 29.2%, primarily because Q1 2013 included benefits from tax audit settlements. Equity income from affiliates fell, principally due to lower América Móvil income; 2014 other income included a $122 gain on investment sales.
Outlook, risks and unusual items
- Management expected 2014 capital expenditures to be around $21 billion and described 2014 as the peak investment year for Project VIP; it expected investment to trend back toward historic levels after completion. No specific full-year earnings or revenue guidance is provided in the filing text.
- Management expects continued growth in wireless and wireline IP-based services and continued declines in traditional voice and basic wireline data. It also expected lower 2014 operating cash flow, citing AT&T Next installment collections, Leap integration costs and higher tax payments.
- AT&T completed the Leap acquisition for $1,248 in cash, excluding Leap’s cash on hand, and assumed debt. It reported preliminary acquired goodwill of $346 and licenses of $3,070. In April it redeemed additional Leap notes; the filing describes $1,889 of cash paid including interest and premiums and $1,600 of principal.
- The planned $2,000 cash sale of Connecticut wireline operations remained subject to regulatory approvals; closing was expected in Q4 2014. The business represented approximately $1,200 in 2013 annual revenue.
- Wireless spectrum and network capacity are significant risks: AT&T warned that constraints could expand and affect service quality or new service launches if it cannot obtain sufficient spectrum. Potential FCC spectrum-auction limits were not finalized.
- Other cited uncertainties include competition and customer churn, changes in broadband and IP regulation, U-verse regulatory and PEG-programming disputes, and the outcome of the DOL’s pending decision on retroactive approval of the company’s pension-trust contribution. Management said expected pension lump-sum distributions could trigger settlement accounting and plan remeasurement in 2014.
- AT&T reported that no material risk-factor developments occurred in the quarter. It said the Harris County environmental case was not expected to result in a material amount, if any. The filing’s forward-looking statements remain subject to the risks described in the report.
Important facts for investors to verify
- Whether AT&T Next’s equipment-revenue growth can offset lower service revenue and installment-related pressure on cash flow.
- Wireless subscriber, churn and margin trends, including the effects of Leap integration and competitive pricing.
- Execution of the $21 billion capital-spending plan, network capacity improvements and access to additional spectrum.
- Debt growth, near-term maturities, cash generation and the company’s capacity to fund dividends, repurchases and investment.
- Regulatory approval and expected timing of the Connecticut sale, and the final DOL decision concerning the pension contribution.