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AT&T Reports First-Quarter Results
[April 25, 2018]

AT&T Reports First-Quarter Results


AT&T Inc.* (NYSE:T) reported solid wireless and international results in the first quarter. Highlights include solid prepaid phone gains, record-low first-quarter postpaid phone churn and continued DIRECTV NOW subscriber growth.

"We're off to a good start in 2018, both in growing our customer base and in building the world's premier gigabit network," said Randall Stephenson, AT&T Chairman and CEO. "Our investment in customer growth and our integrated service offerings helped drive solid first-quarter subscriber gains across our wireless, video and broadband businesses. We also moved quickly to deploy FirstNet, and we expect the buildout to accelerate as we go forward. Our fiber deployments for business and residential customers now pass more than 16 million customer locations. And we're set to launch our next-generation DIRECTV NOW platform, which will offer cloud DVR and an additional video stream."

Consolidated Financial Results

As noted in an 8-K filed last month, AT&T adopted new U.S. accounting standards that deal with revenue recognition (ASC 606), post-employment benefit costs and certain cash receipts on installment receivables. These changes impact the company's income statements and cash flows. With the adoption of ASC 606, the company made a policy decision to record Universal Service Fees (USF) and other regulatory fees on a net basis. The company is providing comparable results in addition to GAAP to help investors better understand the impact on financials from ASC 606 and the policy decision. Historical income statements and cash flows have been recast to show only the impact of the adoption of the other two accounting standards.

AT&T's consolidated revenues for the first quarter totaled $38.0 billion versus $39.4 billion in the year-ago quarter, primarily due to the impact of ASC 606 which included netting of USF with operating expenses. On a comparative basis, declines in legacy wireline services, domestic video, and wireless service revenues, were partially offset by growth in wireless equipment and strategic business services. On a comparative basis, revenues were $38.9 billion, a decrease of 1.1%.

Operating expenses were $31.8 billion versus $33.0 billion primarily due to the netting of USF and other regulatory fee revenues and the deferral of commissions under ASC 606. Excluding those impacts, operating expenses were $33.4 billion, an increase of about $350 million due to higher wireless equipment costs.

Versus results from the first quarter of 2017, operating income was $6.2 billion versus $6.4 billion; and operating income margin was 16.3% versus 16.1%. On a comparative basis, operating income was $5.6 billion and operating income margin was 14.3%. When adjusting for a non-cash actuarial gain on benefit plans, amortization, merger- and integration-related expenses and other items, operating income was $7.5 billion, or $6.9 billion on a comparative basis, versus $7.6 billion in the year-ago quarter and operating income margin was 19.7%, or 17.7% on a comparative basis, versus 19.4% in the year-ago quarter.

First-quarter net income attributable to AT&T was $4.7 billion, or $0.75 per diluted share, versus $3.5 billion, or $0.56 per diluted share, in the year-ago quarter. Adjusting for a $0.12 non-cash actuarial gain on benefit plans and $0.22 of costs for amortization, merger- and integration-related expenses and other items, earnings per diluted share was $0.85 compared to an adjusted $0.74 in the year-ago quarter, a 14.9% increase.

Cash from operating activities was $8.9 billion, and capital expenditures were $6.1 billion. Capital expenditures included about $140 million in FirstNet capital costs and no FirstNet reimbursements. Free cash flow - cash from operating activities minus capital expenditures - was $2.8 billion for the quarter.

*About AT&T

AT&T Inc. (NYSE:T) is a holding company. AT&T products and services are provided or offered by subsidiaries and affiliates of AT&T Inc. under the AT&T brand and not by AT&T Inc. Additional information about AT&T Inc. is available at about.att.com.

© 2018 AT&T Intellectual Property. All rights reserved. AT&T, the Globe logo and other marks are trademarks and service marks of AT&T Intellectual Property and/or AT&T affiliated companies. All other marks contained herein are the property of their respective owners.

Cautionary Language Concerning Forward-Looking Statements

Information set forth in this news release contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results might differ materially. A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update and revise statements contained in this news release based on new information or otherwise.

This news release may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on the company's website at https://investors.att.com.

Discussion and Reconciliation of Non-GAAP Measures

We believe the following measures are relevant and useful information to investors as they are part of AT&T's internal management reporting and planning processes and are important metrics that management uses to evaluate the operating performance of AT&T and its segments. Management also uses these measures as a method of comparing performance with that of many of our competitors.

Certain amounts have been conformed to the current period's presentation, including our adoption of new accounting standards; ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash; and our realignment of certain responsibilities and operations within our segments, the most significant of which is to report wireless accounts with employer discounts in our Consumer Mobility segment.

Free Cash Flow

Free cash flow is defined as cash from operations minus Capital expenditures. Free cash flow after dividends is defined as cash from operations minus Capital expenditures and dividends. Free cash flow dividend payout ratio is defined as the percentage of dividends paid to free cash flow. We believe these metrics provide useful information to our investors because management views free cash flow as an important indicator of how much cash is generated by routine business operations, including Capital expenditures, and makes decisions based on it. Management also views free cash flow as a measure of cash available to pay debt and return cash to shareowners.





 
Free Cash Flow and Free Cash Flow Dividend Payout Ratio
Dollars in millions   Three Months Ended
March 31,
      2018     2017
Net cash provided by operating activities $ 8,947   $ 8,965
Less: Capital expenditures     (6,118)     (6,015)
Free Cash Flow     2,829     2,950
 
Less: Dividends paid     (3,070)     (3,009)
Free Cash Flow after Dividends   $ (241)   $ (59)
Free Cash Flow Dividend Payout Ratio     108.5%     102.0%
 

EBITDA

Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies. For AT&T, EBITDA excludes other income (expense) - net, and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base or operations that are not under our control. Equity in net income (loss) of affiliates represents the proportionate share of the net income (loss) of affiliates in which we exercise significant influence, but do not control. Because we do not control these entities, management excludes these results when evaluating the performance of our primary operations. EBITDA also excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with our capital and tax structures. Finally, EBITDA excludes depreciation and amortization in order to eliminate the impact of capital investments. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with U.S. generally accepted accounting principles (GAAP).

EBITDA service margin is calculated as EBITDA divided by service revenues.

When discussing our segment results, EBITDA excludes equity in net income (loss) of affiliates, and depreciation and amortization from segment contribution. For our supplemental presentation of our combined domestic wireless operations (AT&T Mobility) and our supplemental presentation of the Mexico Wireless and Latin America operations of our International segment, EBITDA excludes depreciation and amortization from operating income.

These measures are used by management as a gauge of our success in acquiring, retaining and servicing subscribers because we believe these measures reflect AT&T's ability to generate and grow subscriber revenues while providing a high level of customer service in a cost-effective manner. Management also uses these measures as a method of comparing segment performance with that of many of its competitors. The financial and operating metrics which affect EBITDA include the key revenue and expense drivers for which segment managers are responsible and upon which we evaluate their performance. Management uses Mexico Wireless EBITDA in evaluating profitability trends after our two Mexico wireless acquisitions in 2015, and our investments in building a nationwide LTE network by end of 2018. Management uses Latin America EBITDA in evaluating the ability of our Latin America operations to generate cash to finance its own operations.

We believe EBITDA Service Margin (EBITDA as a percentage of service revenues) to be a more relevant measure than EBITDA Margin (EBITDA as a percentage of total revenue) for our Consumer Mobility segment operating margin and our supplemental AT&T Mobility operating margin. We also use wireless service revenues to calculate margin to facilitate comparison, both internally and externally with our wireless competitors, as they calculate their margins using wireless service revenues as well.

There are material limitations to using these non-GAAP financial measures. EBITDA, EBITDA margin and EBITDA service margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies. Furthermore, these performance measures do not take into account certain significant items, including depreciation and amortization, interest expense, tax expense and equity in net income (loss) of affiliates. Management compensates for these limitations by carefully analyzing how its competitors present performance measures that are similar in nature to EBITDA as we present it, and considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net income as calculated in accordance with GAAP. EBITDA, EBITDA margin and EBITDA service margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

 
EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions   Three Months Ended
March 31,
      2018     2017
Net Income $ 4,759   $ 3,574
Additions:
Income Tax (Benefit) Expense 1,382 1,804
Interest Expense 1,771 1,293
Equity in Net (Income) Loss of Affiliates (9) 173
Other (Income) Expense - Net (1,702) (488)
Depreciation and amortization     5,994     6,127
EBITDA     12,195     12,483
 
Total Operating Revenues 38,038 39,365
Service Revenues 33,646 36,456
 
EBITDA Margin 32.1% 31.7%
EBITDA Service Margin     36.2%     34.2%
 
Segment EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions   Three Months Ended
March 31,
      2018     2017
Consumer Mobility Segment            
Segment Contribution $ 4,655   $ 4,530
Additions:
Depreciation and amortization     1,807     1,716
EBITDA     6,462     6,246
 
Total Segment Operating Revenues 14,986 14,806
Service Revenues 11,612 12,465
 
Segment Operating Income Margin 31.1% 30.6%
EBITDA Margin 43.1% 42.2%
EBITDA Service Margin 55.6% 50.1%
             
Business Solutions Segment            
Segment Contribution $ 2,084 $ 2,187
Additions:
Equity in Net (Income) Loss of Affiliates 1 -
Depreciation and amortization     1,462     1,465
EBITDA     3,547     3,652
 
Total Segment Operating Revenues 9,185 9,692
 
Segment Operating Income Margin 22.7% 22.6%
EBITDA Margin 38.6% 37.7%
             
Entertainment Group Segment            
Segment Contribution $ 1,335 $ 1,570
Additions:
Equity in Net (Income) Loss of Affiliates (9) 6
Depreciation and amortization     1,312     1,420
EBITDA     2,638     2,996
 
Total Segment Operating Revenues 11,577 12,601
 
Segment Operating Income Margin 11.5% 12.5%
EBITDA Margin 22.8% 23.8%
             
International Segment            
Segment Contribution $ (111) $ (100)
Additions:
Equity in Net (Income) of Affiliates - (20)
Depreciation and amortization     332     290
EBITDA     221     170
 
Total Segment Operating Revenues 2,025 1,929
 
Segment Operating Income Margin -5.5% -6.2%
EBITDA Margin 10.9% 8.8%
 
Supplemental AT&T Mobility EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions   Three Months Ended
March 31,
      2018     2017
AT&T Mobility            
Operating Income $ 5,158   $ 5,220
Add: Depreciation and amortization     2,095     1,992
EBITDA     7,253     7,212
 
Total Operating Revenues 17,355 17,097
Service Revenues 13,403 14,468
 
Operating Income Margin 29.7% 30.5%
EBITDA Margin 41.8% 42.2%
EBITDA Service Margin     54.1%     49.8%
 
Supplemental Latin America EBITDA and EBITDA Margin
Dollars in millions   Three Months Ended
March 31,
      2018     2017
International - Latin America            
Operating Income $ 148   $ 77
Add: Depreciation and amortization     205     214
EBITDA     353     291
 
Total Operating Revenues 1,354 1,341
 
Operating Income Margin 10.9% 5.7%
EBITDA Margin     26.1%     21.7%
 
Supplemental Mexico EBITDA and EBITDA Margin
Dollars in millions   Three Months Ended
March 31,
      2018     2017
International - Mexico            
Operating Income (Loss) $ (259)   $ (197)
Add: Depreciation and amortization     127     76
EBITDA     (132)     (121)
 
Total Operating Revenues 671 588
 
Operating Income Margin -38.6% -33.5%
EBITDA Margin     -19.7%     -20.6%
 

Adjusting Items

Adjusting items include revenues and costs we consider nonoperational in nature, such as items arising from asset acquisitions or dispositions. We also adjust for net actuarial gains or losses associated with our pension and postemployment benefit plans due to the often significant impact on our fourth-quarter results, unless earlier remeasurement is required (we immediately recognize this gain or loss in the income statement, pursuant to our accounting policy for the recognition of actuarial gains and losses.) Consequently, our adjusted results reflect an expected return on plan assets rather than the actual return on plan assets, as included in the GAAP measure of income.

The tax impact of adjusting items is calculated using the effective tax rate during the quarter except for adjustments that, given their magnitude, can drive a change in the effective tax rate, reflect the actual tax expense or combined marginal rate of approximately 38% for transactions prior to tax reform and 25% for transactions after tax reform.

 
Adjusting Items
Dollars in millions   Three Months Ended
March 31,
      2018     2017
Operating Expenses  
Time Warner and other merger costs $ 67 $ 41
Employee separation costs 51 -
Natural disaster costs 104 -
DIRECTV merger integration costs - 127
Mexico merger integration costs - 39
(Gain) loss on transfer of wireless spectrum - (118)
Venezuela devaluation     25     -
Adjustments to Operations and Support Expenses     247     89
Amortization of intangible assets     1,062     1,202
Adjustments to Operating Expenses     1,309     1,291
Other
Merger-related interest and fees1 393 109
Actuarial (gain) loss (930) -
(Gain) loss on sale of assets, impairments and other adjustments     -     257
Adjustments to Income Before Income Taxes     772     1,657
Tax impact of adjustments     173     556
Adjustments to Net Income   $ 599   $ 1,101
1 Includes interest expense incurred on debt issued and interest income earned on cash held prior to the close of merger transactions.
 

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and Adjusted diluted EPS are non-GAAP financial measures calculated by excluding from operating revenues, operating expenses and income tax expense certain significant items that are non-operational or non-recurring in nature, including dispositions and merger integration and transaction costs. Management believes that these measures provide relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends.

Adjusted Operating Revenues, Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and Adjusted diluted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. AT&T's calculation of Adjusted items, as presented, may differ from similarly titled measures reported by other companies.

 
Adjusted Operating Income, Adjusted Operating Income Margin,

Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA Service Margin

Dollars in millions   Three Months Ended
March 31,
      2018     2017
Operating Income $ 6,201   $ 6,356
Adjustments to Operating Expenses     1,309     1,291
Adjusted Operating Income     7,510     7,647
             
EBITDA 12,195 12,483
Adjustments to Operations and Support Expenses     247     89
Adjusted EBITDA     12,442     12,572
 
Total Operating Revenues 38,038 39,365
Service Revenues 33,646 36,456
 
Operating Income Margin 16.3% 16.1%
Adjusted Operating Income Margin 19.7% 19.4%
Adjusted EBITDA Margin 32.7% 31.9%
Adjusted EBITDA Service Margin     37.0%     34.5%
Supplemental Operating Income under Historical Accounting Method 5,564
Adjustments to Operating Expenses     1,309
Adjusted Supplemental Operating Income under Historical Accounting Method     6,873
 
Supplemental Operating Revenues under Historical Accounting Method 38,930
 
Adjusted Supplemental Operating Income Margin under Historical

Accounting Method

17.7%      
 
Adjusted Diluted EPS
  Three Months Ended
March 31,
      2018     2017
Diluted Earnings Per Share (EPS) $ 0.75   $ 0.56
Amortization of intangible assets 0.13 0.13
Merger integration items1 0.06 0.03

(Gain) loss of sale of assets, impairments and other adjustments2

0.03 0.02
Actuarial (gain) loss3     (0.12)     -
Adjusted EPS   $ 0.85   $ 0.74
Year-over-year growth - Adjusted     14.9%      

Weighted Average Common Shares Outstanding with Dilution (000,000)

    6,180     6,186
1Includes combined merger integration items and merger-related interest income and expense.
2Includes natural disaster, employee-related and other costs.
3Includes adjustments for actuarial gains or losses ($930 million in the first quarter of 2018) associated with our postemployment benefit plan, which we immediately recognize in the income statement, pursuant to our accounting policy for the recognition of actuarial gains/losses. As a result, adjusted EPS reflects an expected return on plan assets of $77 million (based on an average expected return on plan assets of 5.75% for our VEBA trusts), rather than the actual return on plan assets of $31 million loss (VEBA return of (3.08)%), included in the GAAP measure of income.
 

Net Debt to Adjusted EBITDA

Net Debt to EBITDA ratios are non-GAAP financial measures frequently used by investors and credit rating agencies and management believes these measures provide relevant and useful information to investors and other users of our financial data. The Net Debt to Adjusted EBITDA ratio is calculated by dividing the Net Debt by Annualized Adjusted EBITDA. Net Debt is calculated by subtracting cash and cash equivalents and certificates of deposit and time deposits that are greater than 90 days, from the sum of debt maturing within one year and long-term debt. Annualized Adjusted EBITDA is calculated by annualizing the year-to-date Adjusted EBITDA.

 
Net Debt to Adjusted EBITDA
Dollars in millions   Three Months Ended  
Mar. 31, YTD
      2018     2018
Adjusted EBITDA $ 12,442 $ 12,442
Add back severance (51) (51)
Net Debt Adjusted EBITDA 12,391 12,391
Annualized Adjusted EBITDA 49,564
End-of-period current debt 29,322
End-of-period long-term debt 133,724
Total End-of-Period Debt 163,046
Less: Cash and Cash Equivalents 48,872
Net Debt Balance           114,174
Annualized Net Debt to Adjusted EBITDA Ratio           2.30
 

Supplemental Operational Measures

We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.

 
Supplemental Operational Measure
  Three Months Ended
  March 31, 2018       March 31, 2017
     

Consumer

Mobility

   

Business

Solutions

    Adjustments1     AT&T Mobility  

Consumer

Mobility

   

Business

Solutions

    Adjustments1     AT&T Mobility
Operating Revenues            
Wireless service $ 11,612 $ 1,791 $ - $ 13,403 $ 12,465 $ 2,003 $ - $ 14,468
Strategic services - 3,138 (3,138) - - 2,974 (2,974) -
Legacy voice and data services - 2,839 (2,839) - - 3,549 (3,549) -
Other service and equipment - 839 (839) - - 878 (878) -
Wireless equipment     3,374     578     -     3,952   2,341     288     -     2,629
Total Operating Revenues     14,986     9,185     (6,816)     17,355   14,806     9,692     (7,401)     17,097
 
Operating Expenses
Operations and support 8,524 5,638 (4,060) 10,102 8,560 6,040 (4,715) 9,885
EBITDA 6,462 3,547 (2,756) 7,253 6,246 3,652 (2,686) 7,212
Depreciation and amortization     1,807     1,462     (1,174)     2,095   1,716     1,465     (1,189)     1,992
Total Operating Expenses     10,331     7,100     (5,234)     12,197   10,276     7,505     (5,904)     11,877
Operating Income   $ 4,655   $ 2,085   $ (1,582)   $ 5,158   $ 4,530   $ 2,187   $ (1,497)   $ 5,220
1 Business wireline operations reported in Business Solutions segment.
 

Supplemental International

We provide a supplemental presentation of the Mexico Wireless and Latin America operations within our International segment. The following table presents a reconciliation of our International segment.

 
Supplemental International
  Three Months Ended
  March 31, 2018       March 31, 2017
      Latin America     Mexico     International   Latin America     Mexico     International
Operating Revenues    
Video service $ 1,354 $ - $ 1,354 $ 1,341 $ - $ 1,341
Wireless service - 404 404 - 475 475
Wireless equipment     -     267     267   -     113     113
Total Operating Revenues     1,354     671     2,025   1,341     588     1,929
 
Operating Expenses
Operations and support 1,001 803 1,804 1,050 709 1,759
Depreciation and amortization     205     127     332   214     76     290
Total Operating Expenses     1,206     930     2,136   1,264     785     2,049
Operating Income (Loss)     148     (259)     (111)   77     (197)     (120)
Equity in Net Income of Affiliates     -     -     -   20     -     20
Segment Contribution   $ 148   $ (259)   $ (111) $ 97   $ (197)   $ (100)


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