AT&T Inc. — Q1 2010 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2010, compared with Q1 2009. AT&T provides wireless and wireline communications, broadband, video, managed networking and advertising services in the U.S. and internationally. Amounts below are in millions of dollars except per-share data and where noted.
Key financial results
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenue | $30,649 | $30,571 | Up 0.3% |
| Operating income | $6,010 | $5,737 | Up 4.8% |
| Operating margin | 19.6% | 18.8% | Up 0.8 percentage points |
| Income before taxes | $5,438 | $5,010 | Up 8.5% |
| Net income attributable to AT&T | $2,475 | $3,126 | Down 20.8% |
| Diluted EPS | $0.42 | $0.53 | Down $0.11 |
| Operating cash flow | $7,253 | $7,915 | Down $662 |
| Capital expenditures | $3,156 | $3,173 | Down $17 |
| Cash and cash equivalents | $2,617 at Mar. 31 | $3,802 at Dec. 31 | Down $1,185 |
| Total debt | $69,461 at Mar. 31 | $72,081 at Dec. 31 | Down $2,620 |
| Debt ratio | 40.4% | 43.2% at Mar. 31, 2009 | Down 2.8 percentage points |
| Dividend declared per share | $0.42 | $0.41 | Up $0.01 |
Operating cash flow less reported capital expenditures was approximately $4.1 billion; this simple measure does not deduct interest during construction or other investing outlays. Current assets were $22.4 billion and current liabilities were $36.7 billion at March 31, 2010. Debt maturing within one year was $9.4 billion.
Material changes and operating performance
- Wireless service revenue rose 10.3% to $12.85 billion, while total wireless segment revenue rose 8.2%. Wireless segment income increased 20.7% to $4.17 billion; segment operating margin improved to 29.9% from 26.9%.
- Wireless customers reached 87.0 million, up 11.2% year over year. Net additions were 1.86 million, including 1.05 million connected devices. Total churn improved to 1.30% from 1.56%; postpaid net additions fell 42.9% to 512,000. Overall wireless ARPU declined 0.4%, while postpaid data-services ARPU increased 21.9%.
- Wireline revenue fell 4.6% to $15.42 billion and segment income fell 16.7% to $1.72 billion. Voice revenue declined 12.0%; data revenue increased 5.6%, led by IP data growth of 18.0%. Switched access lines declined 10.9% year over year; video connections increased 25.2% to 4.42 million.
- Advertising Solutions revenue declined 16.7% to $1.04 billion, primarily because of lower print advertising; segment income fell 35.2% to $228 million. Other segment income increased to $115 million from $9 million, mainly reflecting higher equity-method affiliate income.
- Lower SG&A, depreciation and amortization, and pension/postretirement costs helped lift operating income. Cost of sales increased 1.1%, partly due to U-verse growth, Universal Service Fund costs and smartphone upgrade equipment costs.
Cash flow, debt and liquidity
Cash from operations was $7.25 billion, compared with $7.92 billion in Q1 2009; management attributed the prior-year comparison primarily to significantly lower performance-based payments in 2009. Investing activities used $3.53 billion, including $3.16 billion of capital expenditures, $184 million of construction interest and acquisition-related spending. Financing activities used $4.91 billion, including $2.51 billion of long-term debt repayments and $2.48 billion of dividends. AT&T reported no borrowings under its $9.465 billion credit agreement and stated it was in compliance with its covenants.
Outlook, commentary and risks
- Management continued to expect 2010 capital expenditures of $18–19 billion, subject to a favorable regulatory environment, funded through operating cash flow and potentially incremental borrowing.
- Management expected postpaid wireless net additions to decline from prior-period levels and anticipated continued data-revenue growth, alongside ongoing pressure on voice and other service ARPU.
- A $995 million non-cash tax charge, or $0.17 per diluted share, was recorded following 2010 health-care legislation changing the tax treatment of Medicare Part D subsidies. It raised the effective tax rate to 52.9% from 36.1%. AT&T said it would evaluate potential changes to active and retiree health benefits.
- AT&T was awaiting FCC approval to acquire certain Verizon Wireless assets for approximately $2.35 billion, anticipated in the first half of 2010; network conversion costs were expected. Required sales of eight Centennial service areas remained subject to regulatory approval.
- Key exposures include persistent wireline line losses and competition, wireless pricing and network capacity, access to spectrum, the cost and timing of U-verse deployment, and evolving federal, state and local regulation. The filing notes that broadband and net-neutrality proceedings could affect the business, but their impact was not yet determinable.
- U-verse deployment could be delayed by permitting, litigation, regulatory decisions, or equipment and software availability. AT&T also described pending litigation, including an appeal in NSA-related cases dismissed at the trial court; management said it considered the appeal without merit.
- AT&T intended to tender its Telmex Internacional shares for América Móvil shares and could purchase up to $600 million of América Móvil shares to maintain its ownership percentage; the impact was still being evaluated.
Most important facts for investors to verify
- Whether wireless service and data growth can offset falling wireline voice, access-line and print-advertising revenue, while sustaining margins.
- The extent to which the $995 million tax charge explains the reported earnings decline, and whether subsequent health-benefit changes create further costs or savings.
- Delivery of the $18–19 billion capital-spending plan, operating cash flow, and debt maturities and repayment needs.
- Progress and costs for the pending wireless asset acquisition and Centennial divestitures, and the outcome of the América Móvil/Telmex-related transactions.
- Developments in U-verse permits and litigation, broadband regulation, spectrum availability, and other material legal or regulatory proceedings.