AT&T’s FY16 Revenue Plumped by DIRECTV Gains

Consolidated revenues jumped 11.6% to $163.8 billion versus $146.8 billion in the prior year

AT&T Inc. (NYSE: T), the largest phone company in the US, announced its Q4 FY16 and full-year FY16 financial results on January 25th, 2017.

The Company is a provider of communications and digital entertainment services in the US and the world. It operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility, and International. The Business Solutions segment provides both wireless and wireline services to business customers and individual subscribers who purchase wireless services through employer-sponsored plans. The Entertainment Group provides video, high-speed broadband and voice services to US residential customers. Following its acquisition of DIRECTV, DIRECTV’s US operations will be a part of this segment.

The Consumer Mobility segment provides triple-play (voice, video and high-speed Internet) wireless service to consumer, wholesale and resale subscribers located in the US. Finally, the International segment consists of DIRECTV’s Latin American operations and AT&T’s business in Mexico. Notably, AT&T is currently expanding its operations in Mexico after its twin acquisitions of Grupo Iusacell and Nextel Mexico.

Q4 FY16 financial highlights

During Q4 FY16, AT&T’s consolidated revenues declined to $41.8 billion versus $42.1 billion in the year ago same quarter. Operating expenses were higher at $37.6 billion in Q4 FY16 versus $34.6 billion in the year ago comparable period; as a result, operating income plunged to $4.2 billion versus $7.5 billion. Operating income margin fell to 10.2% in Q4 FY16 versus 17.9% in Q4 FY15. When adjusted for amortization, merger- and integration-related and other items, operating income was higher at $7.3 billion versus $7.1 billion; and operating income margin was 17.5%, up 70 basis points versus the year ago same quarter.

AT&T reported a loss of 268,000 postpaid phone accounts, amid price competition with Verizon Communications Inc. (NYSE: VZ) and T-Mobile US Inc. (NASDAQ: TMUS).

Hurt by lower revenues and operating income, AT&T’s Q4 FY16 net income tumbled to $2.4 billion, or $0.39 per diluted share, compared to $4.0 billion, or $0.65 per diluted share, in the year-ago comparable quarter. Adjusting for the $0.10 non-cash actuarial loss on benefit plans from the annual remeasurement process and $0.17 of costs for amortization, merger-and integration-related and other items, diluted EPS was $0.66 compared to $0.63 in the year-ago corresponding quarter.

FY16 financial highlights

During FY16, AT&T’s consolidated revenues jumped 11.6% to $163.8 billion versus $146.8 billion in the prior year, driven by its 2015 $49-billion acquisition of DIRECTV and gains in IP services and video. Operating expenses reflect actuarial gains and losses on benefit plans and grew 14.3% to $139.4 billion compared to $122.0 billion. As a result, net income fell 2.8% to $13.0 billion, or $2.10 per diluted share, versus $13.3 billion, or $2.37 per diluted share, in the prior year. With adjustments for both years, operating income was $31.8 billion versus $27.7 billion; operating income margin was 19.4% versus 18.8%; and EPS was $2.84 compared to $2.71, an increase of 4.8% Y-o-Y.

Segmental highlights

Business Solutions: AT&T’s Q4 FY16 revenues from this segment declined 1% Y-o-Y to $18 billion, but up 1.5% sequentially, driven by growth in mobility and strategic business services, offset by declines in legacy services and a continuing low-growth economy. Operating expenses fell 3.3% Y-o-Y to $14 billion, while operating income grew 8.1% to $4 billion. During Q4 FY16, operating income margin was 22.3%, up 190 basis points Y-o-Y with growth in wireless and IP revenues and cost efficiencies offsetting declines in higher-margin legacy services.

Business wireless revenues were up 1.9% Y-o-Y to $10.3 billion driven by wireless service revenue growth, which more than offset lower equipment revenues due to lower sales and upgrades. Total business wireline revenues were $7.7 billion, down 4.6% Y-o-Y. Strategic business services revenues grew by $226 million, or 8.3%, versus the year ago comparable quarter. These services represent 38% of total business wireline revenues and an annualized revenue stream of nearly $12 billion. Growth in strategic business services helped offset about $2 billion of annual revenue pressure in 2016 from declines in legacy services.

Subscriber metrics: At the end of Q4 FY16, AT&T had more than 81 million business wireless subscribers. Business Solutions added 250,000 postpaid subscribers and 1.3 million connected devices in Q4 FY16. Postpaid business wireless subscriber churn was 1.11% versus 1.10% in the year-ago quarter. During Q4 FY16, AT&T also added nearly 14,000 high-speed IP broadband business subscribers. Total business broadband had a loss of 15,000 subscribers in Q4 FY16.

Entertainment Group: AT&T’s Q4 FY16 revenues from this segment jumped 1.6% Y-o-Y to $13.2 billion, due to gains in video and IP broadband services. Total video revenues rose 3.5% with satellite gains more than offsetting declines in IPTV. AdWorks accounted for $1.5 billion in annual revenues for FY16. Ad revenues totaled $1.9 billion in 2016, while broadband revenues grew 4% with IP broadband growing 10%.

During Q4 FY16, operating expenses grew 2.6% Y-o-Y to $11.8 billion due to annual content-cost increases, including NFL SUNDAY TICKET, and start-up costs for DIRECTV NOW. Operating income fell 5.7% Y-o-Y to $1.4 billion. Operating income margin fell to 10.3% from 11.1% in the year earlier same quarter with video and IP revenue growth and cost efficiencies offset by TV content cost pressure, DIRECTV NOW launch costs, and decline in legacy services.

Subscriber metrics: Total linear video subscribers were down slightly in Q4 FY16; however, total video subscribers increased as the company launched its first over-the-top video service. The company added 235,000 satellite subscribers in the fourth quarter. IPTV subscribers declined by 262,000 as the company continued to focus on profitability and emphasized satellite sales. For the third straight quarter, gross additions increased on a Y-o-Y basis even when excluding IPTV customers transitioning to DIRECTV.

The Entertainment Group ended the quarter with 25.5 million total video subscribers when including DIRECTV NOW subscribers and 25.3 million linear video subscribers. The Entertainment Group had a net gain of 136,000 IP broadband subscribers with DSL losses of 133,000, for total broadband subscriber growth of 3,000. IP broadband subscribers at the end of the quarter totaled 12.9 million.

Consumer Mobility: AT&T’s Q4 FY16 revenues from this segment fell 3.8% Y-o-Y to $8.4 billion due to declines from lower postpaid service revenues due to the success of Mobile Share® plans and migrations to business plans. Operating expenses fell 5.7% Y-o-Y to $6.2 billion, reflecting lower equipment and commission costs as well as increased operational efficiencies.

AT&T’s Consumer Mobility operating income grew 2.1% to $2.2 billion versus the year ago comparable period. Operating income margin was 26.0%, up 150 basis points from the year earlier same quarter with lower volumes, fewer subsidized sales and cost efficiencies more than offsetting service-revenue pressure. Service EBITDA margin was up 46.1% from 43.2% in Q4 FY15.

Subscriber metrics: At the end of Q4 FY16, AT&T had 53.5 million Consumer Mobility subscribers. In Q4 FY16, Consumer Mobility gained 8,000 total subscribers with 270,000 postpaid, 406,000 prepaid and 5,000 connected devices net adds offsetting a loss of 673,000 reseller subscribers.

International: AT&T’s Q4 FY16 revenues from this segment totaled $1.9 billion, while operating expenses were $2.2 billion. AT&T’s International operating loss totaled $268 million. AT&T owns and operates a wireless network in Mexico, covering about 78 million people with 4G LTE at the end of Q4 FY16 and expects to cover 100 million POPs by the end of 2018.

AT&T’s Q4 FY16 total wireless revenues from Mexico grew 0.8% Y-o-Y to $648 million, largely due to subscriber growth offset by foreign exchange and competitive pressures. Despite the revenue growth, operating loss widened to $317 million compared to a loss of $258 million in the year-ago same quarter, reflecting continued investment in operations, network and subscriber acquisition.

Subscriber metrics: During Q4 FY16, AT&T added 233,000 postpaid subscribers and 1.1 million prepaid subscribers to reach 12 million total wireless subscribers in Mexico, a 38% increase from a year ago. For full-year FY16, the company added 3.3 million subscribers in Mexico.

Other highlights

Cash flow and capital investment: During Q4 FY16, AT&T’s cash from operating activities was $10.1 billion and capital expenditures were $6.5 billion. Capital investment for the reporting quarter totaled $6.7 billion. Free cash flow jumped 19.2% to $3.7 billion for the quarter versus the year ago same period despite higher capital spending.

AT&T’s FY16 cash from operating activities was a record $39.3 billion, up from $35.9 billion in 2015. Capital expenditures, including capitalized interest, totaled $22.4 billion, versus $20.0 billion in 2015. Capital investment rose to $22.9 billion versus $20.7 billion in 2015. Full-year free cash flow was $16.9 billion compared to $15.9 billion in 2015. The company’s free cash flow dividend payout ratio for the full year FY16 was 70%.

Dividend: AT&T raised its quarterly dividend to $0.49 a share from $0.48 in Q4 FY16.

Acquisition of Time Warner: AT&T reached an agreement to buy Time Warner Inc. (NYSE: TWX) for $85.4 billion on October 23rd, 2016. The Dallas-based wireless carrier will pay $107.50 per Time Warner share, part in cash and stock, in a bold move to acquire content to stream over its network and thereby attract a growing number of online viewers. AT&T said it expected to close the deal by the end of 2017. The AT&T-Time deal, the biggest so far in 2016, would give AT&T control of cable TV channels HBO and CNN, film studio Warner Bros and other coveted media assets, if approved by regulators. The potential deal will likely attract intense scrutiny by US antitrust enforcers on the grounds that AT&T might try to limit distribution of Time Warner content over its channels.

Financial highlights of the deal

AT&T stated that it would finance the cash portion of the deal with new debt and cash on its balance sheet. AT&T also said it has an 18-month commitment for an unsecured bridge term facility for $40 billion, with $25 billion coming from J.P. Morgan Chase & Co. (NYSE: JPM) and $15 billion from Bank of America Corp. (NYSE: BAC). AT&T has only $7.2 billion in cash on hand and already had $120 billion in net debt as of June 30th, 2016. The carrier said it is committed to maintaining its investment-grade credit ratings and forecast that the deal will lead to about $1 billion in cost savings within the three years.

AT&T said the deal would add to its EPS in the first year after closing. It said it expected $1 billion in annual run-rate cost savings within three years of closing, driven by lower corporate and procurement spending. For AT&T, the potential deal would eclipse the nearly $50 billion DirecTV deal in 2015 and may be its biggest acquisition since its $85-billion takeover of BellSouth in 2006. Time Warner has agreed to pay a $1.7 billion breakup fee if another company outbids AT&T’s offer. On the other hand, AT&T will pay $500 million if the deal fails.

Perella Weinberg Partners LP, Bank of America and JPMorgan Chase were financial advisers to AT&T, while Sullivan & Cromwell LLP and Arnold & Porter LLP provided legal advice. Allen & Co LLC, Citigroup Inc. (NYSE: C) and Morgan Stanley (NYSE: MS) acted as financial advisers to Time Warner, while Cravath, Swaine & Moore LLP was its legal adviser.

Guidance for FY17

On a business-as-usual basis without the impact of Time Warner, AT&T expects consolidated revenue growth in the low-single digits, adjusted EPS growth in the mid-single digit range, and adjusted operating margin expansion in FY17. Capital expenditures are forecasted to be around $22 billion and free cash flow to be approximately $18 billion.

Stock Performance

AT&T’s stock stood at $41.82, slipping 0.45%, at the close on Monday, January 30th, 2017, having vacillated between an intraday high of $42.13 and a low of $41.66 during the session. The stock’s trading volume was at 15,871,460 for the day. The Company’s market cap was at $256.82 billion as of Monday’s close.

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