AT&T Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Amounts are in U.S. dollars and millions unless stated otherwise. AT&T provides communications and digital entertainment services in the U.S. and internationally.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $39,365 | $40,535 | (2.9%) |
| Operating income | $6,864 | $7,131 | (3.7%) |
| Operating margin | 17.4% | 17.6% | Down 0.2 percentage points |
| Net income attributable to AT&T | $3,469 | $3,803 | (8.8%) |
| Diluted EPS | $0.56 | $0.61 | (8.2%) |
| Operating cash flow | $9,218 | $7,900 | +$1,318 |
| Capital expenditures, excluding construction interest | $5,784 | $4,451 | +$1,333 |
| Cash dividends paid | $3,009 | $2,947 | +$62 |
Operating cash flow less capital expenditures was approximately $3.4 billion, calculated from the filing figures. Company EBITDA in the segment reconciliation was $12,991, versus $13,694 a year earlier; EBITDA is a non-GAAP measure.
Revenue fell as service revenue declined 1.7% and equipment revenue fell 15.3%. Management cited legacy wireline declines, wireless customers adopting unlimited and Mobile Share plans, and fewer handset upgrades and more bring-your-own-device activity. Lower equipment and other service costs and reduced depreciation partly offset revenue pressure; broadcast, programming and operations costs rose 7.5%.
Liquidity, debt and capital
- Cash and cash equivalents were $14,884 at March 31, 2017, up from $5,788 at year-end. Approximately $1,303 was held in foreign jurisdictions, some subject to repatriation restrictions.
- Total debt was approximately $133.2 billion, comprising $12,681 due within one year and $120,568 of long-term debt, compared with approximately $123.5 billion at December 31, 2016. Q1 financing included $12,440 of long-term debt issuance and $3,053 of repayments.
- The debt ratio was 51.6% and the net debt ratio 45.8%; the latter was 47.5% at year-end. The company reported compliance with its credit facility covenants, including a maximum net debt-to-EBITDA ratio of 3.5-to-1.
- AT&T had $12 billion available under an undrawn revolving credit agreement. A $30 billion bridge loan and $10 billion term loan were arranged for the pending Time Warner transaction; neither was drawn as of the filing.
- Q1 declared dividends were $0.49 per share. Management said 2017 free cash flow after dividends would be used primarily to pay down debt.
Segments and notable comparisons
- Business Solutions: Revenue decreased 4.3% to $16,848; segment contribution rose 1.4% to $4,360. Fixed strategic services grew 8.1%, while legacy voice and data revenue fell 17.0%.
- Entertainment Group: Revenue was nearly flat at $12,623 and contribution was $1,597. Video revenue rose 1.3% and high-speed internet revenue 7.7%; linear video connections declined 1.2%.
- Consumer Mobility: Revenue fell 7.1% to $7,740 and contribution fell 6.2% to $2,339. Service revenue was pressured by customer migration to Business Solutions and lower-priced plans; total subscribers declined 5.1% year over year.
- International: Revenue grew 15.7% to $1,929, and the segment contribution loss narrowed to $100 from $184. Growth included Latin American video and Mexican wireless subscribers; foreign exchange remains a factor.
Outlook, transactions and risks
- Management expected 2017 capital expenditures of approximately $22 billion and capital expenditures at 15% of service revenue or lower in each year from 2017 through 2019.
- The proposed Time Warner acquisition was valued at approximately $108.2 billion including Time Warner net debt. It remained subject to DOJ and other required regulatory approvals and was expected to close before year-end 2017. Under specified termination conditions, AT&T could owe a $500 million termination fee.
- FirstNet selected AT&T to build and operate a nationwide first-responder broadband network. The arrangement provides for 20 MHz of spectrum and up to $6.5 billion in success-based payments over five years. AT&T estimated approximately $40 billion of spending over the 25-year contract; scope depends on state participation. Management did not expect a material 2017 impact.
- After quarter-end, AT&T was the successful bidder for $910 million of spectrum in 18 markets; it also received a $1,438 million auction-deposit refund in April.
- Risks include intense competition, declining legacy services, wireless churn and pricing pressure, handset and equipment demand variability, programming costs, foreign exchange exposure, regulatory outcomes, litigation, labor negotiations, network or security incidents, and execution and regulatory approval of major acquisitions. AT&T stated there were no material developments to the risk factors in its 2016 Form 10-K.
- Contingencies include pending subscriber class actions related to NFL SUNDAY TICKET and a proposed FCC penalty of $100 million concerning legacy unlimited data-plan disclosures. The company disputed the allegations. It reported a finalized settlement with DOJ in the SportsNet LA matter, subject to court process, and a written FTC settlement in the DIRECTV matter that still required Commission approval.
- Management attributed lower depreciation in part to changes in estimated useful lives and salvage values of certain network assets. A wireless-business restructuring generated tax benefits; the effective tax rate was 33.5%, versus 35.3% in Q1 2016.
Important facts for investors to verify
- Whether service-revenue trends, wireless subscriber churn and handset upgrade activity improve or continue to pressure revenue and margins.
- Progress on debt reduction, refinancing needs and the effect of the Time Warner transaction financing on leverage and interest expense.
- Actual 2017 capital spending versus the approximately $22 billion outlook, and cash generation after dividends.
- Regulatory approvals, financing and closing conditions for Time Warner, plus FirstNet state participation and resulting buildout economics.
- Developments, potential costs and final outcomes in the cited antitrust, consumer-protection and unlimited-plan matters; the filing does not quantify potential losses for several of these claims.