01—Abstract
Summary
Summary of the 10-K filed February 20, 2015. Cited figures are marked; the original filing is the authoritative source.
AT&T's FY2014 10-K shows a year dominated by non-operating and one-time items rather than core growth.
Reported operating revenue rose 2.9% to $132.4 billiona, driven by a 47.5% jump in equipment revenue as customers shifted to AT&T Next installment plans, while service revenue slipped 0.7% to $118.4 billion. Operating income fell 61.5% to $11.7 billion, mainly because of a $7.9 billion noncash pension/postretirement actuarial loss (versus a $7.6 billion gain in 2013) and a $2.1 billion noncash charge for abandoning copper network assets. Net income attributable to AT&T dropped 65.9% to $6.2 billion, or $1.19 per diluted share, versus $3.39 in 2013.
Excluding these items, the underlying trend is more mixed: wireless segment income fell 4.7%, wireline segment income fell 10.2%, and postpaid phone-only ARPU declined 6.6%, reflecting heavier competition and the move to no-subsidy plans. Balance sheet leverage increased meaningfully. Total debt rose to $82.1 billionb and the debt ratio climbed to 48.6% from 45.0%, as AT&T issued $16.0 billion of long-term debt and bought spectrum.
Operating cash flow fell to $31.3 billionc from $34.8 billion. Dividends were raised to $0.47 per quarter, and buybacks were minimal at $1.6 billion. Subsequent events matter heavily for the outlook: the pending $48.5 billion DIRECTV acquisition, the $18.2 billion AWS-3 spectrum win (of which about $14.6 billion was still due in March 2015), and the GSF Telecom and NII Holdings Mexican wireless acquisitions.
Management has said free cash flow after dividends will go to debt paydown once DIRECTV closes, and it expects operating margins to expand in 2015. For investors, the key questions are whether the company can absorb a heavier debt load while still growing dividends, whether wireless ARPU and churn pressure stabilize as installment plans mature, and whether the DIRECTV and Mexico integrations deliver the projected synergies. Regulatory risk is also elevated, including the FCC's possible reclassification of broadband under Title II, an FTC suit over the Maximum Bit Rate program, and labor contracts covering about 41,000 non-Mobility employees expiring in 2015.
02—Key points
Key Highlights
- Operating revenue grew 2.9% to $132.4B, but equipment revenue rose 47.5% to $14.0B while service revenue fell 0.7% to $118.4B, reflecting the shift to AT&T Next installment plans and no-subsidy pricing.
- Operating income fell 61.5% to $11.7B; excluding a $7.9B noncash pension/OPEB actuarial loss and a $2.1B copper network abandonment charge, underlying results were weaker but far less severe.
- Diluted EPS fell to $1.19 from $3.39, and net income attributable to AT&T dropped 65.9% to $6.2B, largely due to the pension actuarial loss and lower 2013 comparatives.
- Wireless segment income fell 4.7% to $17.0B while subscribers grew 9.2% to 120.6M, and postpaid phone-only ARPU declined 6.6%, signaling pricing pressure.
- Wireline segment income fell 10.2% to $5.6B as legacy voice and DSL revenues declined, partly offset by growth in U-verse and strategic business services.
- Total debt rose to $82.1B, the debt ratio climbed to 48.6% from 45.0%, and operating cash flow declined to $31.3B from $34.8B, with about $14.6B of AWS-3 spectrum payments still due in 2015.
- Pending acquisitions of DIRECTV (~$48.5B), NII Holdings' Mexican business ($1.9B), and completed GSF Telecom ($2.5B) will raise debt and expand international exposure; management plans to direct free cash flow after dividends to debt reduction once DIRECTV closes.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, AT&T Inc. kept $0.05.
- Revenue$132.45B100.0%
- Cost of revenue−$60.61B45.8%
- Gross profit$71.84B54.2%
- Operating costs−$59.62B45.0%
- Operating income$12.21B9.2%
- Interest, other & tax−$5.77B4.4%
- Net income$6.44B4.9%
Where FY2014 revenue went
$132.45B- Cost of revenue: $60.61B, 46% of revenue
- SG&A: $39.70B, 30% of revenue
- Other operating costs: $19.93B, 15% of revenue
- Net income: $6.44B, 4.9% of revenue
- Interest, other & tax: $5.77B, 4.4% of revenue
Kept 4.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 20, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $132.45B$128.75B | +2.9% |
| Cost of Revenue | $60.61B$51.46B | +17.8% |
| Gross Profit | $71.84B$77.29B | −7.1% |
| SG&A Expenses | $39.70B$28.41B | +39.7% |
| Operating Expenses | $120.23B$98.27B | +22.3% |
| Operating Income | $12.21B$30.75B | −60.3% |
| Interest Expense | $3.61B$3.94B | −8.3% |
| Net Income | $6.44B$18.42B | −65.0% |
| EPS (Basic) | $1.24$3.42 | −63.7% |
| EPS (Diluted) | $1.24$3.42 | −63.7% |
| Shares Outstanding (Basic) | 5.21B5.37B | −3.0% |
| Shares Outstanding (Diluted) | 5.22B5.38B | −3.0% |
05—Questions
Frequently Asked Questions
Why did AT&T's operating income and EPS fall so sharply in 2014?
The decline was driven largely by non-cash items: a $7.9B actuarial loss on pension and postretirement plans (versus a $7.6B gain in 2013) and a $2.1B charge for abandoning copper network assets. Operating margin dropped to 8.9% from 23.7%. Excluding these, the decline was more modest, though wireless and wireline margins also compressed.
How is AT&T funding its large spectrum purchases and pending acquisitions?
Largely with debt. AT&T issued $16.0B of long-term debt in 2014 and signed a $9.2B term loan and $2.0B 18-month credit facility in January 2015. It also used asset sales, including América Móvil shares ($5.9B) and Connecticut wireline ($2.0B), and sold equipment installment receivables. The debt ratio rose to 48.6%, and management has set debt paydown as a priority after DIRECTV closes.
Is the dividend at risk given the higher leverage?
Management raised the quarterly dividend to $0.47 in December 2014 and declared $1.85 per share for 2014, and its stated intent is continued dividend growth. However, dividends paid ($9.6B) now consume a large share of operating cash flow ($31.3B) and free cash flow is being directed to debt reduction after DIRECTV closes, which may limit future increases. Dividends are subject to board approval each period.
What are the main risks to AT&T's wireless growth story?
Key risks include intensifying competition from Verizon, Sprint and T-Mobile that is pressuring pricing (postpaid phone-only ARPU fell 6.6%), spectrum and capacity constraints in certain markets, and the shift to installment plans and no-subsidy pricing that is changing revenue mix. Total churn rose to 1.45% from 1.37%. The FCC's possible reclassification of broadband under Title II could also affect the business.
What regulatory and legal matters could affect investors?
The FCC appears poised to reclassify fixed and mobile broadband under Title II and may assert jurisdiction over Internet interconnection, which the company says could materially affect its broadband operations. The FTC has filed suit over AT&T's Maximum Bit Rate program, which AT&T disputes. About 41,000 non-Mobility union contracts expire in 2015, creating potential work-stoppage risk, and the 600 MHz auction has been postponed to 2016.
06—Continue