Business context and reporting period
AT&T Inc. is a global telecommunications, media and technology holding company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. Reportable segments are Communications, WarnerMedia and Latin America. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $42.340B | $44.588B | $126.069B | $134.372B |
| Operating income | $6.132B | $7.901B | $17.150B | $22.634B |
| Net income attributable to AT&T | $2.816B | $3.700B | $8.707B | $11.509B |
| Diluted EPS | $0.39 | $0.50 | $1.19 | $1.57 |
| Operating cash flow | Not stated separately | Not stated separately | $33.048B | $36.725B |
| Capital expenditures | Not stated separately | Not stated separately | $13.283B | $15.843B |
- Operating margin was 14.5% in Q3 2020 versus 17.7% a year earlier, and 13.6% for the first nine months versus 16.8%.
- Nine-month operating cash flow less capital expenditures was approximately $19.8B, compared with $20.9B in 2019; this is a simple calculation from reported figures, not a separately reported company measure.
- At September 30, cash and cash equivalents were $9.758B. Debt maturing within one year was $5.898B and long-term debt was $152.980B, or approximately $158.9B combined. Reported debt ratio was 44.9% and net debt ratio 42.1%.
- Current assets were $49.971B and current liabilities $59.565B. The company had $15B of revolving credit facilities with no amounts outstanding at quarter-end and reported compliance with its credit facility covenants, including the maximum 3.5-to-1 net debt-to-EBITDA ratio.
- Common dividends declared were $0.52 per share for Q3 and $1.56 per share for the nine months. Cash dividends paid on common and preferred shares totaled $11.215B over nine months.
Material changes versus the prior comparable period
- Revenue fell 5.0% in Q3 and 6.2% year to date; service revenue declined while equipment revenue rose 6.7% in Q3. Management cited video and legacy-service erosion, pandemic-related disruption and lower international roaming, as well as foreign exchange effects in Latin America.
- WarnerMedia revenue declined 10.0% in Q3 and 14.7% year to date, with lower theatrical releases, television production and licensing. Segment operating contribution fell 38.3% and 26.8%, respectively, including higher HBO Max investment.
- Communications revenue declined 3.1% in Q3 and 3.5% year to date. Mobility revenue was broadly stable, while Entertainment Group revenue declined 10.2% in Q3, driven largely by video losses.
- Latin America revenue declined 19.3% in Q3 and 19.0% year to date, reflecting currency and COVID-19 effects. Venezuela operations were closed in May; Vrio recorded a $2.212B goodwill impairment in Q2, contributing to $2.515B of nine-month impairments and abandonments.
- Operating income declined more sharply than revenue. Nine-month results included a $900M noncash gain on a spectrum transaction, while operating costs also reflected employee separation charges and COVID-related expenses. Orbital slot license amortization added $373M of Q3 expense and $1.138B year to date.
- Operating cash flow decreased by $3.677B year over year, which management attributed in part to working-capital payment timing. Capital expenditures were lower; gross capital investment including vendor financing payments and excluding FirstNet reimbursements was $15.391B, down $3.156B from the prior-year period.
Outlook, management commentary, risks and unusual items
- The filing provides no clear full-year earnings or revenue guidance. Management expected COVID-19 to continue adversely affecting results and cash flows; it identified Q4 risks from theater closures and delayed releases, depressed international roaming, and added costs to protect employees, contractors and customers. Management also said it expected operating and support expense improvements from efficiency actions.
- Management estimated COVID-related incremental costs of $190M in Q3 and $940M for the first nine months. It separately estimated approximately $1.715B of Q3 and $2.185B of nine-month operating and comparability impacts, including shifted sports costs and advertising, production delays, theater disruption and reduced roaming.
- The company said its liquidity and capital resources had not been materially affected by COVID-19 through the first nine months, while noting continuing uncertainty around the pandemic, consumer demand, collections, supply chains and network utilization.
- Other notable items included $1.224B of Q3 debt redemption costs, substantial debt issuance and refinancing activity, and issuance of $3.869B of preferred stock plus $1.979B of preferred interests in a subsidiary during the first nine months.
- After quarter-end, AT&T completed the sale of its 65.3% interest in CME for $1.1B on October 13 and sold Puerto Rico and U.S. Virgin Islands operations for approximately $1.95B on October 31. The latter proceeds were intended to redeem $1.95B of subsidiary preferred interests.
- Key risks include prolonged pandemic effects, continued video and legacy-service declines, competition, regulatory and spectrum matters, content production and advertising trends, foreign exchange and political conditions in Latin America, and the company’s substantial debt and financing needs.
Most important facts for investors to verify
- Whether revenue and operating contribution trends in Communications, WarnerMedia and Latin America stabilize, particularly video subscriber losses and WarnerMedia production and licensing recovery.
- The ongoing impact of COVID-19 on operating results, cash generation, customer collections and Q4 performance, including the distinction between incremental costs and estimated comparability impacts.
- Debt reduction and refinancing progress, near-term maturities, the effect of debt exchanges and redemptions, and compliance with leverage covenants.
- Cash-flow sustainability after capital investment, dividends, vendor financing, receivables sales and supplier-financing arrangements.
- Execution and financial effects of HBO Max investment, spectrum deployment and post-quarter asset sales, including the stated use of Puerto Rico and U.S. Virgin Islands sale proceeds.