10-QPeriod: Q2 FY2018

AT&T INC. Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 2, 2018For Securities:TT-PCTBBT-PA

Summary

AT&T Inc. (T) reported its second-quarter and first-half 2018 financial results, marked by the significant acquisition of Time Warner Inc. (now WarnerMedia) on June 14, 2018. The company's revenue declined year-over-year for both periods, primarily due to the adoption of new revenue recognition accounting standards (ASC 606) and the ongoing shift away from legacy products. Despite revenue challenges, net income attributable to AT&T saw a substantial increase, driven by significant actuarial gains related to pension and postretirement benefit obligations and the positive impact of the Tax Cuts and Jobs Act, which lowered the corporate tax rate. The integration of WarnerMedia, though contributing minimal revenue in the short period, represents a strategic shift towards content and distribution. Investors should note the considerable increase in debt and interest expense associated with the Time Warner acquisition, alongside a higher debt ratio, while monitoring the company's progress in integrating the new media segment and managing its substantial debt.

Financial Highlights

49 data points
Beta

Revenue

$38.99B

Net Income

$5.13B

13.2% Net Margin

EPS (Diluted)

$0.81

Total Assets

$534.69B

Cash & Equivalents

$13.52B

Free Cash Flow

$10.23B

Financial Statements
Beta
Revenue$38.99B
SG&A Expenses$8.68B
Operating Expenses$32.52B
Operating Income$6.47B
Interest Expense$2.02B
Net Income$5.13B
EPS (Basic)$0.81
EPS (Diluted)$0.81
Shares Outstanding (Basic)6.35B
Shares Outstanding (Diluted)6.37B

Key Highlights

  • 1Acquisition of Time Warner (WarnerMedia) completed on June 14, 2018, with a total consideration of $79.1 billion, significantly increasing the company's asset base and debt.
  • 2Net income attributable to AT&T increased significantly by 31.1% for the quarter and 32.6% for the six-month period, driven by actuarial gains and lower tax expenses due to corporate tax reform.
  • 3Total operating revenues decreased by 2.1% for the quarter and 2.7% for the six months, primarily due to the adoption of new revenue recognition accounting standards (ASC 606) and declines in video and legacy wireline services.
  • 4Service revenues declined by 7.6% for both periods due to new accounting standards and shifts to unlimited plans, while equipment revenues increased significantly (23.7% quarterly, 36.5% year-to-date) due to accounting changes and higher-priced device sales.
  • 5Interest expense rose substantially by 45.0% for the quarter and 41.1% for the six months, mainly attributable to increased debt levels from the Time Warner acquisition.
  • 6The company's debt ratio increased to 50.8% at June 30, 2018, from 53.3% in the prior year, while the net debt ratio increased to 47.2% from 43.8%, reflecting the impact of the acquisition.
  • 7AT&T Wireless subscribers saw growth, with total wireless subscribers reaching 146.9 million at June 30, 2018, an increase of 7.9% year-over-year, driven by strong prepaid and connected device growth.

Frequently Asked Questions

The acquisition of Time Warner (now WarnerMedia) was completed on June 14, 2018. While it contributed only 16 days of revenue and expenses in the second quarter of 2018, it significantly impacted the balance sheet, increasing total assets to $534.7 billion and long-term debt to $168.5 billion. The acquisition also led to a substantial increase in interest expense and goodwill.

The decrease in revenue is primarily attributed to the adoption of new accounting standards (ASC 606) for revenue recognition, which changed how service and equipment revenues are recognized, and led to the netting of Universal Service Fund (USF) fees. Additionally, the company continues to experience declines in legacy video and wireline voice/data services, which offset growth in other areas.

The Tax Cuts and Jobs Act of 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21%, significantly lowered AT&T's income tax expense. This contributed to a substantial increase in net income attributable to AT&T for the period.

The acquisition of Time Warner added significant debt to AT&T's balance sheet. Long-term debt increased substantially, leading to higher interest expenses and an increase in the company's debt and net debt ratios. AT&T is managing its liquidity and capital resources, but the increased debt load remains a key factor for investors to monitor.