AT&T Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts are in millions of dollars except per-share data and subscriber figures. Results are unaudited. AT&T operates telecommunications, media and technology businesses.
Business context and major transaction
Q1 results include WarnerMedia in continuing operations. On April 8, 2022, AT&T completed its separation and combination of WarnerMedia with Discovery; AT&T shareholders received 0.241917 WBD shares per AT&T share. AT&T received approximately $40.4 billion, including $38.8 billion in cash and $1.6 billion of debt retained by WarnerMedia. Beginning with Q2 2022, WarnerMedia, Vrio, Xandr and Playdemic are to be presented as discontinued operations, including for prior periods. Prior-period comparisons are also affected by the 2021 separations of U.S. video and Vrio.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $38.1 billion | $43.9 billion | (13.3%) |
| Operating income | $5.6 billion | $7.7 billion | (26.4%) |
| Operating margin | 14.8% | 17.4% | Down 2.6 percentage points |
| Net income attributable to AT&T | $4.8 billion | $7.6 billion | (36.3%) |
| Net income attributable to common stock | $4.8 billion | $7.5 billion | (36.5%) |
| Diluted EPS | $0.65 | $1.02 | (36.3%) |
| Cash from operating activities | $5.7 billion | $9.9 billion | Down $4.2 billion |
| Capital expenditures | $4.7 billion | $4.0 billion | Up $0.7 billion |
Revenue fell primarily because of the prior-year video and Vrio businesses no longer being included, along with lower Business Wireline revenue. Higher Mobility and Consumer Wireline revenue and WarnerMedia subscription and content revenue partly offset those declines. Earnings also reflected lower operating income and lower other income, including smaller pension actuarial gains than in Q1 2021. Interest expense declined to $1.7 billion from $1.9 billion. The effective tax rate was 21.8%, versus 21.1%.
Segment revenue and operating contribution: Communications revenue was $28.9 billion, up 2.5%, while contribution fell 5.4% to $7.0 billion. Mobility revenue grew 5.5%, but contribution declined 3.2%; postpaid phone net additions were 691,000 and postpaid phone-only churn was 0.79%. Consumer Wireline revenue rose 2.0%, with fiber broadband connections up 21.1% year over year. Business Wireline revenue decreased 6.7%, and management expected the legacy-service decline to continue. WarnerMedia revenue increased 2.5% to $8.7 billion, but contribution fell 35.7% to $1.3 billion, with higher programming, marketing and selling costs. Latin America revenue dropped 49.8% to $690 million, mainly reflecting the Vrio sale; its operating contribution loss narrowed to $102 million.
Cash, debt and liquidity
Cash and cash equivalents were $38.6 billion at March 31, 2022, compared with $21.2 billion at year-end. The quarter-end cash balance included approximately $29.8 billion raised in connection with the WarnerMedia transaction and retained by AT&T at closing; it is therefore important not to view the full balance as recurring operating cash generation. Operating cash flow declined year over year, which the company attributed chiefly to lower receivable securitization, higher content cash spending and higher bonus payouts. WarnerMedia content cash investment was $5.1 billion, up $614 million year over year.
Cash used in investing was $12.7 billion, including $9.2 billion for spectrum acquisitions and $4.7 billion of capital expenditures; AT&T also received $1.3 billion of DIRECTV distributions classified as investing cash flow. Cash provided by financing was $24.3 billion, reflecting debt issuance and other financing flows, partly offset by dividends and repayments. Common and preferred dividends paid totaled $3.7 billion.
Total debt was $207.6 billion at quarter-end, versus $177.4 billion at December 31, 2021; the increase included Spinco/WarnerMedia debt issued ahead of the separation. Debt maturing within one year was $27.3 billion. The company reported a 52.7% debt ratio, compared with 49.1% at year-end, and was in compliance with its credit-facility covenants. It reported $15.0 billion of revolving credit facilities with no amounts drawn at quarter-end. After quarter-end, Spinco debt was conveyed to WBD; AT&T also reported repaying certain term loans and announcing debt redemptions.
Outlook, commentary and notable items
- AT&T announced an expected annual common dividend of $1.11 per share, or approximately $8 billion annually, following completion of the WarnerMedia transaction. The filing text does not provide clear comprehensive full-year earnings or cash-flow guidance.
- Management described continued investment in 5G and fiber. It expected Consumer Wireline broadband growth to continue and Business Wireline legacy-service revenue declines to persist. The company expected to receive the 3.45 GHz spectrum licenses in Q2 2022, supporting planned C-band and 5G deployment.
- Changes in estimates effective January 1, 2022 extended the amortization period for certain customer contract costs, lowering Q1 expense by approximately $135 million, and extended the estimated useful life of owned fiber assets, lowering depreciation by $70 million. These estimate changes increased reported Q1 earnings relative to the prior method.
- Adoption of a new convertible-instrument accounting standard reduced diluted EPS by $0.01 in Q1 2022; the filing notes that potential dilution from Mobility II preferred interests may vary with share price and instrument value.
- The company cited risks including competition, customer demand, execution and costs of network and spectrum investment, regulation and privacy requirements, supply-chain disruptions, litigation, economic and geopolitical conditions, benefit-plan assumptions, and the ability to realize expected divestiture benefits. It reported no material new risk-factor developments for Q1.
Most important facts for investors to verify
- How the WarnerMedia separation proceeds, debt transfer and discontinued-operations recast affect comparable results, continuing debt and future cash flow.
- Whether operating cash flow and free cash generation improve after the transaction, given lower Q1 operating cash flow, elevated content spending and network investment.
- Debt reduction progress, near-term maturities, refinancing costs and covenant headroom after the reported debt repayments and redemptions.
- Whether wireless subscriber growth and fiber expansion translate into sustainable revenue and margins, particularly as equipment sales and promotions pressure Mobility profitability.
- The sustainability of the announced $1.11 annual dividend against post-transaction cash generation and capital requirements.
- The effect of the revised customer-cost and fiber-asset estimates, and of pension remeasurement gains, on reported earnings versus underlying operating performance.