01—Abstract
Summary
Summary of the 10-K filed February 25, 2010. Cited figures are marked; the original filing is the authoritative source.
AT&T's 2009 10-K shows a company whose top line was roughly flat but whose profitability fell.
Operating revenues were $123.0 billiona, down 0.8% from $124.0 billion in 2008, while operating income fell 6.8% to $21.5 billion and the operating margin compressed from 18.6% to 17.5%. Diluted EPS was $2.12, down from $2.16, and net income attributable to AT&T was $12.5 billion, down 2.6%. The decline was driven by shrinking wireline voice revenue (down 13.4%) and print directory declines, along with higher pension and OPEB expense, partly offset by strong wireless service growth (up 9.6%) fueled by the Apple iPhone and data services (up 33.4%).
The balance sheet and cash generation remain solid. Operating cash flow was $34.4 billionb, which covered capital expenditures of $16.6 billion and dividends of $9.7 billion, leaving room for debt reduction. Total debt fell to $72.1 billion from $75.0 billion, and the debt ratio improved to 41.3% from 43.7%.
The dividend was raised 2.4% to $0.42c per quarter, and management said it intends to focus on reducing debt in 2010. Management guided 2010 revenues to be stable, capital investment to $18-19 billion, and operating margins to be stable, with upside if the economy improves.
Key risks include a challenging economic recession, continued access-line losses to cable, wireless, and VoIP competitors, regulatory uncertainty around U-verse video and net neutrality, labor contract renewals (with a possible work stoppage), and pressure on the wireless ARPU from declining voice revenue. The company also has pending acquisitions, including a roughly $2.35 billiond purchase of wireless assets from Verizon, and recently closed the Centennial acquisition.
02—Key points
Key Highlights
- Revenue of $123.0B was down 0.8% year over year, while operating income fell 6.8% to $21.5B and operating margin declined to 17.5% from 18.6%.
- Wireless segment was the growth engine: segment revenue rose 8.6% to $53.6B and segment income rose 19.7% to $13.3B, with 85.1M wireless customers at year-end.
- Wireline segment revenue fell 6.0% to $65.7B and segment operating income fell 29.2%, as voice revenue dropped 13.4% amid access-line losses (switched access lines down 11.2%).
- U-verse grew to about 2.07M video customers, and IP data revenue rose 17.8%, partly offsetting legacy voice declines.
- Operating cash flow was $34.4B, funding $16.6B of capex and $9.7B of dividends, while total debt declined to $72.1B and the debt ratio improved to 41.3%.
- The quarterly dividend was raised 2.4% to $0.42 per share; full-year 2009 dividends declared were $1.65 per share.
- Management guided 2010 revenues to be stable, capex to $18-19B, and operating margins to be stable, with a focus on debt reduction.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, AT&T Inc. kept $0.16.
- Revenue$124.28B100.0%
- Cost of revenue−$50.26B40.4%
- Gross profit$74.02B59.6%
- Operating costs−$54.45B43.8%
- Operating income$19.57B15.7%
- Interest, other & tax$291.0M0.2%
- Net income$19.86B16.0%
Where FY2010 revenue went
$124.28B- Cost of revenue: $50.26B, 40% of revenue
- SG&A: $34.99B, 28% of revenue
- Operating income: $19.57B, 16% of revenue
- Other operating costs: $19.46B, 16% of revenue
Kept 16% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $124.28B$122.51B | +1.4% |
| Cost of Revenue | $50.26B$50.64B | −0.8% |
| Gross Profit | $74.02B$71.87B | +3.0% |
| SG&A Expenses | $34.99B$31.36B | +11.6% |
| Operating Expenses | $104.71B$101.51B | +3.1% |
| Operating Income | $19.57B$21.00B | −6.8% |
| Interest Expense | $2.99B$3.37B | −11.1% |
| Net Income | $19.86B$12.14B | +63.7% |
| EPS (Basic) | $3.36$2.06 | +63.1% |
| EPS (Diluted) | $3.35$2.05 | +63.4% |
| Shares Outstanding (Basic) | 5.91B5.90B | +0.2% |
| Shares Outstanding (Diluted) | 5.94B5.92B | +0.2% |
05—Questions
Frequently Asked Questions
Why did AT&T's operating income decline in 2009 despite wireless growth?
Operating income fell $1.6B (6.8%) mainly because wireline voice revenue declined $5.1B as customers disconnected landlines for wireless, cable, and VoIP, and because pension and OPEB expense rose $1.4B in the wireline segment due to investment losses in 2008. Higher equipment costs for devices like the iPhone also pressured wireless margins, though workforce reductions and wireless service growth partially offset these headwinds.
How strong is AT&T's cash flow and balance sheet position?
Operating cash flow was $34.4B, up from $33.7B in 2008, helped by $836M lower tax payments. After $16.6B of capex and $9.7B of dividends, free cash flow covered the dividend comfortably. Total debt declined by about $2.9B to $72.1B, and the debt-to-total-capital ratio improved to 41.3% from 43.7%. Management said it plans to concentrate on reducing debt in 2010.
What are the main risks to AT&T's dividend and growth outlook?
Key risks include continued wireline access-line erosion from competition, a prolonged economic recession that pressures both residential and business customers, regulatory uncertainty around U-verse video franchising and net neutrality, and rising pension and healthcare costs. Labor contracts covering roughly 120,000 wireline employees expired in 2009, and while most have been ratified, further work stoppages are possible. Wireless ARPU growth is also under pressure from declining voice revenue, and the Verizon wireless asset purchase adds integration and execution risk.
What is AT&T's wireless growth outlook?
Wireless is AT&T's fastest-growing revenue stream. Service revenue rose 9.6% in 2009, with data service revenue up 33.4%, and postpaid churn improved to 1.16%. The company expects continued data growth from smartphones, netbooks, and eReaders. It plans to deploy LTE beginning in 2011 and is acquiring about 1.5 million subscribers from Verizon Wireless (former Alltel assets) for roughly $2.35B, expected to close after regulatory approvals. Voice ARPU is expected to keep declining, so growth depends on data monetization.
Did AT&T change its dividend or capital return policy?
AT&T raised its quarterly dividend by 2.4%, from $0.41 to $0.42 per share, in December 2009, following a 2.5% increase in 2008. Total dividends paid were $9.7B in 2009. The company repurchased only 133 thousand shares in 2009 under its 400 million share program, which expired at year-end 2009, and management indicated that 2010 priorities will emphasize debt reduction over buybacks.
06—Continue