01—Abstract
Summary
Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.
AT&T's 2007 Form 10-K (filed February 27, 2008) shows a company transformed by the December 2006 BellSouth acquisition, which consolidated AT&T Mobility (formerly Cingular) and made 2007 the first full year of combined operations.
Consolidated operating revenues rose 88.6% to $118.9 billiona, operating income rose 98.3% to $20.4 billion, and net income climbed 62.5% to $11.95 billion, or $1.94 diluted EPS. Operating margin expanded from 16.3% in 2006 to 17.2% in 2007, which management attributes to merger synergies (roughly $3 billion in 2007), workforce reductions, and the higher-margin wireline operations acquired from BellSouth. Much of the revenue gain reflects acquisitions rather than organic growth; on a pro forma basis, which assumes the deals closed January 1, 2005, revenue grew only 1.6% in 2007.
The balance sheet and cash flow profile also changed sharply. Long-term debt grew to $57.3 billionb and total assets reached $275.6 billion, with goodwill and licenses rising substantially. Operating cash flow nearly doubled to $34.1 billion, but capital spending jumped to $17.7 billion and the company returned significant capital to shareholders through $10.4 billion in buybacks and $8.7 billion in dividends.
Management guided to continued revenue growth in 2008 led by wireless and broadband, expects capital expenditures in the mid-teens as a percentage of revenue, and raised the quarterly dividend 12.7% to $0.40c per share. Key risks include access-line erosion from cable, wireless and VoIP competition, U-verse deployment execution and regulatory exposure, the NSA litigation, and the E911 location-accuracy order.
02—Key points
Key Highlights
- Revenue of $118.9B (+88.6%) and operating income of $20.4B (+98.3%), driven primarily by the BellSouth acquisition and the consolidation of AT&T Mobility; pro forma revenue growth was only 1.6%
- Wireless customers reached 70.1 million (up from 61.0 million), with churn improving to 1.7% and postpaid churn at 1.3%; wireless segment income rose 53.9% to $6.8B
- Wireline voice revenue fell 6.2% pro forma, reflecting access-line losses to wireless, cable and VoIP, while data revenue grew 4.7% pro forma, led by IP data
- Net income of $11.95B and diluted EPS of $1.94; operating cash flow of $34.1B versus $15.6B in 2006
- Capital expenditures rose to $17.7B, including about $2.5B for U-verse, with a target of passing roughly 30 million living units by 2010
- Shareholder returns: $10.4B of 2007 share repurchases, $8.7B in dividends, and a 12.7% quarterly dividend increase to $0.40; a new 400M-share authorization was approved in December 2007
- Balance sheet leverage increased, with long-term debt of $57.3B and a debt ratio of 35.7%; $4.0B of new debt was issued in February 2008, and a $2.5B 700 MHz spectrum purchase closed in February 2008
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2008, AT&T Inc. lost $0.02.
- Revenue$123.44B100.0%
- Cost of revenue−$56.69B45.9%
- Gross profit$66.75B54.1%
- Operating costs−$68.44B55.4%
- Operating income−$1.69B1.4%
- Interest, other & tax−$935.0M0.8%
- Net income−$2.63B2.1%
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2008Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $123.44B$118.93B | +3.8% |
| Cost of Revenue | $56.69B$46.80B | +21.1% |
| Gross Profit | $66.75B$72.13B | −7.4% |
| SG&A Expenses | $48.77B$30.15B | +61.8% |
| Operating Expenses | $125.13B$98.52B | +27.0% |
| Operating Income | -$1.69B$20.40B | −108.3% |
| Interest Expense | $3.37B$3.51B | −3.9% |
| Net Income | -$2.63B$11.95B | −122.0% |
| EPS (Basic) | $-0.44$1.95 | −122.6% |
| EPS (Diluted) | $-0.44$1.94 | −122.7% |
| Shares Outstanding (Diluted) | 5.96B— | — |
05—Questions
Frequently Asked Questions
How much of AT&T's 2007 revenue growth was organic versus acquisition-driven?
Most of it was acquisition-driven. Reported revenue rose $55.9B (88.6%), largely because 2007 included a full year of BellSouth and AT&T Mobility while 2006 included only two days. On a pro forma basis, assuming the acquisitions closed January 1, 2005, revenue grew just 1.6% in 2007 (to $118.9B from $117.1B), with wireless service up 14.5% and voice down 6.2%.
Is AT&T's wireline business losing ground?
Traditional voice is in decline. Pro forma voice revenue fell 6.2% in 2007 as customers disconnected primary and additional lines in favor of wireless, VoIP and cable. Retail switched access lines fell to about 57.8 million from 60.4 million pro forma. Management is offsetting this with bundling and growth in data and IP services, where pro forma data revenue rose 4.7%.
What drove the improvement in operating margins, and is it sustainable?
Operating margin rose from 16.3% to 17.2%, reflecting merger synergies (about $3B in 2007), workforce reductions, and the higher-margin BellSouth wireline business. Offsetting factors include roughly $5.9B of amortization on acquired intangibles and $1.3B of merger integration costs. Management expects adjusted margins to expand further in 2008, but growth initiatives such as U-verse and IBM-related service costs will add pressure.
What are the main risks flagged in the filing?
Key risks include intensifying competition from cable, wireless and VoIP providers; regulatory uncertainty around U-verse video franchising and municipal right-of-way access; the E911 Order requiring PSAP-level location accuracy by 2012, which AT&T says is not attainable with current technology; 24 pending NSA-related lawsuits; the Broadcom/Qualcomm ITC dispute that could affect handset availability; and the risk that BellSouth integration savings take longer to realize than expected.
How is AT&T funding its capital spending and shareholder returns?
Primarily through operating cash flow of $34.1B, supplemented by debt issuance. In 2007 AT&T received $11.4B in net debt proceeds, used to fund buybacks and general corporate needs. Share repurchases of $10.4B and dividends of $8.7B exceeded free cash flow after capex (about $16.4B), so the gap was financed with borrowings. Debt maturing within one year totaled $6.9B, and the company had a $10B undrawn credit facility.
06—Continue