AT&T Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Unless noted, dollar amounts are in millions. Results discussed are from continuing operations and exclude businesses reported as discontinued operations. Comparisons are with Q1 2022.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $30,139 | $29,712 | +1.4% |
| Operating income | $6,002 | $5,537 | +8.4% |
| Operating margin | 19.9% | 18.6% | +1.3 percentage points |
| Income from continuing operations | $4,453 | $5,149 | -13.5% |
| Net income attributable to AT&T common stock | $4,176 | $4,762 | -12.3% |
| Diluted EPS attributable to common stock | $0.57 | $0.65 | Down $0.08 |
| Cash from operating activities | $6,678 | $7,630 | -12.5% |
| Capital expenditures | $4,335 | $4,568 | -5.1% |
Service revenue rose 2.6% to $24,617, while equipment revenue fell 3.3% to $5,522. Operating expenses were nearly flat at $24,137. The simple difference between operating cash flow and capital expenditures was $2,343, versus $3,062 in Q1 2022; this is not presented in the filing as a separately defined measure.
Net income fell despite higher operating income, in part because other income, net, declined to $935 from $2,157. Q1 2022 included a $1,053 actuarial pension gain; there was no comparable actuarial remeasurement in Q1 2023. Interest expense increased to $1,708 from $1,626, reflecting higher rates, lower capitalized interest and the accounting treatment of Mobility preferred interests, partly offset by lower debt balances. The effective tax rate was 22.8%, compared with 21.9%.
Segments and operating trends
- Communications: Revenue increased 1.0% to $29,152; operating income rose 3.9% to $6,743. Mobility revenue grew 2.5% and operating income grew 10.2%, supported by 5.2% growth in service revenue. Postpaid phone net additions were 424,000, down from 691,000; postpaid churn increased to 0.99% from 0.94%.
- Business Wireline: Revenue declined 5.5% to $5,331 and operating income fell 40.8% to $378. Management cited ongoing declines in legacy voice, data and network services and expects these trends to continue.
- Consumer Wireline: Revenue grew 2.5% to $3,239, driven by broadband growth, including fiber. Operating income declined 40.9% to $94 as expenses and depreciation increased. Fiber broadband connections rose 19.2% year over year to 7.487 million.
- Latin America—Mexico: Revenue increased 28.0% to $883; the operating loss narrowed to $30 from $102. Management cited subscriber growth and favorable foreign-exchange effects.
Cash, debt and liquidity
- Cash and cash equivalents were $2,821 at quarter-end, down $880 from December 31, 2022. About $1,078 was held by foreign entities and may be subject to repatriation restrictions.
- Total debt was $137,484, up from $135,890 at year-end. Debt maturing within one year was $13,757, including $3,258 of commercial paper. The weighted-average rate on short-term borrowings was approximately 5.7%; the weighted-average rate on the long-term debt portfolio, including derivatives, was approximately 4.1%.
- The debt ratio was 55.9%, compared with 56.1% at year-end and 48.5% at March 31, 2022. AT&T reported compliance with applicable credit-facility covenants. Its $12 billion revolving credit facility had no amount outstanding at quarter-end.
- Investing cash use was $3,818, including $4,335 of capital expenditures. Including $2,113 of vendor-financing payments, capital investment was $6,448. Financing cash use was $3,711, including debt repayments, vendor financing payments and $2,014 of dividends paid.
- Supplier and vendor financing obligations were significant: $5,003 of vendor financing payables and $5,129 of direct supplier financing were outstanding at quarter-end. The filing states the supplier-financing program does not change normal contracted payment cycles or cash from operations.
Outlook, notable items and risks
- No broad company-level earnings or revenue guidance is provided in the supplied filing text. Management expects continued Business Wireline declines, while broadband revenue growth is expected to continue as AT&T expands its fiber footprint. It also expects Business Wireline operating-expense improvements through the remainder of 2023 from transformation efforts.
- In April 2023, AT&T issued an additional $5,250 of Telco LLC preferred interests, with an initial annual distribution rate of 6.85%, subject to declaration and later reset. It used proceeds primarily to repurchase the remaining Mobility preferred interests for $5,414, including accrued distributions. The repurchase removes their potential dilution from EPS calculations in subsequent quarters.
- AT&T agreed to transfer approximately $8,050 of pension obligations and related plan assets to Athene through annuity contracts, with no expected cash or asset contribution by AT&T. The company expected a one-time, non-cash pretax settlement gain of approximately $350 in Q2 2023; the final amount depends on actuarial and other assumptions.
- Management cited inflation, competition, changing consumer churn, legacy-service declines, network investment needs, spectrum availability and regulatory uncertainty among risks. It noted the Affordable Connectivity Program could exhaust its funding in 2024 absent additional funding, and that further state net-neutrality requirements may emerge. The filing reported no material risk-factor developments for Q1 2023.
Important facts for investors to verify
- Whether Mobility subscriber additions, churn and service-revenue growth persist, and how pricing actions and promotions affect customer retention and margins.
- Whether fiber growth offsets continuing declines in Business Wireline, copper broadband and legacy voice services, including the cost and timing of network investment.
- Cash-flow performance, including working-capital movements, receivable sales, supplier financing and vendor-financing payments; these affect the interpretation of reported operating and investing cash flows.
- Debt maturities, refinancing costs, leverage and covenant headroom, especially given the large amount of debt due within one year and higher short-term borrowing rates.
- The final pension settlement gain and completion and terms of the pension annuity transaction, as well as the continuing cost and distribution terms of the Telco preferred interests.