AT&T’s Revenue Jumps on DIRECTV Acquisition

Growth in video and IP-based services offset by declines in wireless and legacy services

a1AT&T Inc. (NYSE: T), the largest phone company in the U.S., announced its Q3 FY16 financial results on October 22nd, 2016.

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

The Consumer Mobility segment will provide triple-play (voice, video and high-speed Internet) wireless service to consumer, wholesale and resale subscribers located in the U.S. AT&T’s home monitoring service will be a part of this segment. Finally, the International segment will consist 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.

Financial highlights: During Q3 FY16, AT&T posted consolidated revenue growth of 4.6%   Y-o-Y to $40.89 billion, missing estimates of $41.14 billion, primarily due to the acquisition of DirecTV, which AT&T closed in July 2015. a2Excluding the impact of the DIRECTV acquisition and foreign exchange, revenues were essentially flat, as growth in video and IP-based services mostly offset pressures from declines in wireless and legacy services.

During Q3 FY16, AT&T’s operating expenses increased to $34.5 billion versus $33.2 billion in the year-ago period; operating income was $6.4 billion versus $5.9 billion; and operating income margin was 15.7% versus 15.2%. When adjusting for $0.14 of amortization, $0.03 in merger-and integration-related costs and $0.03 of employee-separation costs, operating income during Q3 FY16 rose to $8.3 billion versus $7.9 billion; and operating income margin was 20.3%, consistent with the year-ago quarter.

AT&T’s Q3 FY16 net income jumped 11% to $3.3 billion, or $0.54 per diluted share, compared to $3.0 billion, or $0.50 per diluted share, in the year-ago quarter. Adjusting for $0.20 of amortization, merger-and integration-related costs and other expenses, diluted EPS was $0.74 compared to an adjusted $0.74 in the year-ago quarter.

Segmental highlights

Business Solutions: AT&T’s Q3 FY16 revenues from this segment inched up 0.4% Y-o-Y to $17.8 billion, driven by growth in mobility and strategic business services, offset by declines in legacy services and a continuing low-growth economy. Business Solutions service revenues were $15.6 billion, essentially stable Y-o-Y. Operating expenses grew 0.5% to $13.5 billion versus the prior year period, while operating income totaled $4.3 billion, up 0.1% Y-o-Y. Operating income margin was 24.2%, remaining almost flat, with declines in higher-margin legacy services offsetting growth in wireless and IP revenue and cost efficiencies.

Subscriber metrics: At the end of Q3 FY16, AT&T had 79.4 million business wireless subscribers. The company added 191,000 postpaid subscribers and 1.3 million connected devices during Q3 FY16. Postpaid business wireless subscriber churn was 0.97% versus 1.05% in the year-ago quarter. During Q3 FY16, AT&T also added nearly 15,000 high-speed IP broadband business subscribers. Total business broadband had a loss of 18,000 subscribers in Q3 FY16.a3

Entertainment Group: AT&T’s Q3 FY16 revenues from this segment jumped 17.1% Y-o-Y to $12.7 billion mainly due to the acquisition of DIRECTV and continued growth in consumer IP services. With this segment, Broadband revenues were up 5% during the reporting quarter, with IP broadband growing by 12%. AdWorks has grown to a $1.5 billion annualized revenue stream with double-digit revenue growth year to date and strong margins.

During Q3 FY16, operating expenses in this segment jumped 14.2% Y-o-Y to $11.2 billion, due to the acquisition of DIRECTV and higher content costs. Operating income grew to $1.5 billion from $1.0 billion in the year-ago period. Operating income margin was 11.7%, up from 9.4% in the year-earlier quarter with satellite and IP revenue growth and cost efficiencies offsetting TV content cost pressure and declines in legacy services. During Q4 FY16, on a sequential basis, margins will be pressured by a full quarter of NFL Sunday Ticket costs, annual content cost increases and start-up costs for DIRECTV NOW.

Subscriber metrics: Total video subscribers remained flat during Q3 FY16, while AT&T added 323,000 satellite subscribers. U-verse TV subscribers declined 326,000 as the company continued to focus on profitability and increasingly emphasized satellite sales. For the second 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 25.3 million video subscribers. At the end of Q3 FY16, about 100,000 pending video customers had the capability to watch TV on their mobile devices. The Entertainment Group had a net gain of 156,000 IP broadband subscribers in Q3 FY16; however, total Entertainment Group broadband subscribers decreased 5,000 in the quarter. IP broadband subscribers at the end of Q3 FY16 totaled 12.8 million.a4

Consumer Mobility: AT&T’s Q3 FY16 revenues from this segment fell 5.9% Y-o-Y to $8.3 billion due to declines in equipment revenues from lower handset sales and in postpaid service revenues. Operating expenses fell 5.7% Y-o-Y to $5.7 billion, reflecting lower equipment and commission costs as well as increased operational efficiencies.a5

AT&T’s U.S. mobility operations are divided between the Business Solutions and Consumer Mobility segments. Under U.S. mobility, Q3 FY16 wireless revenues fell 0.7% to $18.2 billion, due to lower service and equipment revenues.

During the reporting quarter, wireless operating expenses grew 0.8% Y-o-Y to $12.8 billion, reflecting operating efficiencies and lower sales volumes, which offset higher promotional costs. Wireless operating income was down 0.5% Y-o-Y to $5.4 billion due to continued adoption of Mobile Share plans and increased promotional activity. AT&T’s Q3 FY16 wireless operating income margin was 29.6%, consistent with the year-earlier quarter. Wireless EBITDA margin was 41.2%, compared to 40.7% in the year-ago period. Wireless EBITDA service margin was a best-ever 50.1%, up from 49.4% in the year-ago quarter.

Subscriber metrics: At the end of Q3 FY16, AT&T had 53.9 million Consumer Mobility subscribers. In Q3 FY16, Consumer Mobility gained 50,000 total subscribers with 21,000 postpaid, 304,000 prepaid and 41,000 connected device net adds offsetting a loss of 316,000 reseller subscribers. Consumer Mobility postpaid churn was 1.19% in Q3 FY16 compared to 1.33% in the year-ago quarter.

International: AT&T’s Q3 FY16 revenues from this segment totaled $1.9 billion, while operating expenses were $1.9 billion. AT&T’s International operating loss totaled $54 million. AT&T owns and operates a wireless network in Mexico, covering about 74 million people with 4G LTE at the end of Q3 FY16 and expects to cover 100 million POPs by the end of 2018.

AT&T’s Q3 FY16 total wireless revenues from Mexico grew 0.2% Y-o-Y to $582 million, largely due to subscriber growth offset by foreign exchange and competitive pressures. Despite the revenue growth, operating loss widened to $148 million compared to a loss of $134 million in the year-ago quarter, reflecting continued investment in operations, network and subscriber acquisition.

Subscriber metrics: During Q3 FY16, AT&T added 163,000 postpaid subscribers and 606,000 prepaid subscribers to reach 10.7 million total wireless subscribers in Mexico, a 32% increase from a year ago.a6

Other highlights

Cash flow: During Q3 FY16, AT&T’s cash from operating activities grew 1.8% to $11.0 billion and capital investment totaled $5.9 billion. Free cash flow fell 6.5% to $5.2 billion, while it increased 3.7% on a year-to-date basis to $13.3 billion.

Dividend: AT&T’s board of directors approved a 2.1% increase in quarterly dividend from $0.48 to $0.49 per share. The annual dividend will increase from $1.92 to $1.96 per share. The dividend will be payable on February 1st, 2017, to stockholders of record on January 10th, 2017.

Agreement with Amazon Web Services: AT&T announced a multi-year agreement with Amazon Web Services (AWS) to deliver integrated solutions that combine the companies’ leading cloud and networking capabilities. The collaboration will help customers migrate to and use the AWS Cloud with the AT&T network. The solutions are intended to span cloud networking, mobility, Internet of Things (IoT), security, and analytics.

Agreement with IBM: AT&T teamed up with International Business Machines Corp. (NYSE: IBM) to help businesses manage their networking services. AT&T will also be able to run applications on IBM’s cloud, cognitive, analytics and security infrastructure. In addition to making AT&T FlexWare available to clients, IBM is rolling out the solution in its own sites.

Collaboration with VeloCloud: AT&T collaborated with VeloCloud to deliver AT&T Software-defined Wide Area Network (AT&T SD-WAN) to help businesses evolve their networks from hardware to software. The AT&T SD-WAN portfolio will include a network-based solution combining hybrid networking with multiple types of network access. The network-based solution will be available in 2017. The AT&T SD-WAN premises-based, over-the-top solution will be available later this year.

Stock Performance

a7AT&T’s stock stood at $36.86, slipping 1.68%, at the close on Monday, October 24th, 2016, having vacillated between an intraday high of $37.33 and a low of $36.30 during the session. The stock’s trading volume was at 100,554,067 for the day. The Company’s market cap was at $233.78 billion as of Monday’s close.

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