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T > SEC Filings for T > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for AT&T INC.

Form 10-Q for AT&T INC.


1-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry both in the United States and internationally, providing wireless and wireline telecommunication services and equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

Consolidated Results Our financial results in the third quarter and for the first nine months of 2013 and 2012 are summarized as follows:

                                    Third Quarter                            Nine-Month Period
                                                     Percent                                    Percent
                          2013          2012          Change         2013          2012          Change
Operating Revenues      $  32,158     $  31,459            2.2 %   $  95,589     $  94,856            0.8 %
Operating expenses
  Cost of services
and sales                  13,403        12,602            6.4        39,227        37,673            4.1
  Selling, general
and administrative          7,952         8,308           (4.3 )      24,406        24,657           (1.0 )
  Depreciation and
amortization                4,615         4,512            2.3        13,715        13,571            1.1
Total Operating
Expenses                   25,970        25,422            2.2        77,348        75,901            1.9
Operating Income            6,188         6,037            2.5        18,241        18,955           (3.8 )
Income Before Income
Taxes                       5,500         5,442            1.1        16,624        16,990           (2.2 )
Net Income                  3,905         3,701            5.5        11,558        11,318            2.1
Net Income
Attributable to AT&T    $   3,814     $   3,635            4.9 %   $  11,336     $  11,121            1.9 %

Overview
Operating income increased $151, or 2.5%, in the third quarter and decreased $714, or 3.8%, for the first nine months of 2013. Both operating revenues and expenses in the first nine months of 2012 include results for our sold Advertising Solutions segment, which had a negative impact on comparisons to operating income for the first nine months of 2013. Operating income increased in the third quarter reflecting continued growth in wireless data and equipment revenues, increased revenues from AT&T U-verse® (U-verse) and strategic services, and gains realized on spectrum transactions. These increases were partially offset by continued declines in our traditional voice and data services, higher wireless equipment costs, increased expenses for new product development as well as increased expenses supporting U-verse subscriber growth. Operating income for the first nine months was driven by the same factors as for the quarter; however it was also impacted by higher wireless commission expenses and the sale of our Advertising Solutions segment. Our operating income margin in the third quarter was 19.2% in both 2012 and 2013 and for the first nine months decreased from 20.0% in 2012 to 19.1% in 2013.

Operating revenues increased $699, or 2.2%, in the third quarter and $733, or 0.8%, for the first nine months of 2013. Wireless data and equipment revenues increased, reflecting the increasing percentage of wireless subscribers choosing smartphones. Continued growth in U-verse services from residential customers and strategic services also contributed to higher operating revenues. The revenue increases were partially offset by continued declines in wireline voice and wireless voice and text revenues. The sale of our Advertising Solutions segment also contributed to lower revenues for the first nine months.

As the telecommunications industry continues to evolve from voice-oriented services into an industry driven by data-based services, technology, and efficiencies, our products, services and plans have also changed as we transition from traditional voice and basic data services to sophisticated, high-speed, IP-based alternatives. This transition of our offerings will result in continued growth in our wireless and wireline IP-based data revenues as we bundle and price plans with greater focus on the data services that our customers desire, provide new products and services, and transition customers from their current traditional services. We expect continued declines in voice revenues and our basic wireline data services as customers choose these next-generation services.


AT&T INC.
SEPTEMBER 30, 2013

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Cost of services and sales expenses increased $801, or 6.4%, in the third quarter and $1,554, or 4.1%, for the first nine months of 2013. The increases were primarily due to increased wireless equipment costs related to device sales, increased wireline costs attributable to U-verse subscriber growth and wireless network costs. The increases were partially offset by decreased wireless interconnect and long-distance costs, and lower costs associated with Universal Service Fund (USF) fees. For the first nine months offsets also included the sale of the Advertising Solutions segment.

Selling, general and administrative expenses decreased $356, or 4.3%, in the third quarter and $251, or 1.0%, for the first nine months of 2013. The decreases were primarily due to gains on spectrum transactions, decreased wireline employee related expenses and lower financing-related costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses) and, for the first nine months, the sale of the Advertising Solutions segment. These lower expenses were partially offset by increased commissions related to smartphone upgrades, wireless selling and administrative expenses and higher wireline contract service expenses.

Depreciation and amortization expenses increased $103, or 2.3%, in the third quarter and $144, or 1.1%, for the first nine months of 2013. Expenses increased due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets and lower amortization of intangibles for customer lists related to acquisitions. The sale of our Advertising Solutions segment also contributed to lower depreciation and amortization expenses for the first nine months.

Interest expense increased $5, or 0.6%, in the third quarter and decreased $143, or 5.4%, for the first nine months of 2013. The increase in the third quarter was due to higher average debt balances offset by lower average interest rates. The decrease for the first nine months reflects our prior-year debt refinancing activity, which contributed to lower average interest rates in 2013 and one-time charges associated with the early redemption of debt in 2012. These decreases were partially offset by higher average debt balances.

Equity in net income of affiliates decreased $91, or 50.0%, in the third quarter and $43, or 8.0% for the first nine months of 2013. Decreased equity in net income of affiliates in the third quarter was primarily due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil) and YP Holdings LLC (YP Holdings). Decreased equity in net income of affiliates for the first nine months was primarily due to foreign exchange impacts at América Móvil, partially offset by earnings from YP Holdings.

Other income (expense) - net We had other income of $50 in the third quarter and $370 for the first nine months of 2013, compared to other income of $47 in the third quarter and $122 for the first nine months of 2012. Results in the third quarter and for the first nine months of 2013 included interest and dividend income of $14 and $54 and leveraged lease income of $6 and $21, respectively. Income for the first nine months of 2013 also included a net gain on the sale of América Móvil shares and other investments of $272.

Other income in the third quarter and for the first nine months of 2012 included interest and dividend income of $17 and $51 and leveraged lease income of $5 and $46 and a net gain on the sale of investments of $83 and $82, respectively. This income was partially offset by a third-quarter investment impairment of $55.

Income taxes decreased $146, or 8.4%, in the third quarter and $606, or 10.7%, for the first nine months of 2013. Our effective tax rate was 29.0% for the third quarter and 30.5% for the first nine months of 2013, as compared to 32.0% for the third quarter and 33.4% for the first nine months of 2012. The decrease in effective tax rate for both the third quarter and the first nine months was primarily due to recognition of benefits related to tax audit settlements and prior-year asset sales.


AT&T INC.
SEPTEMBER 30, 2013

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts


Selected Financial and Operating Data
                                              September 30,
                                            2013       2012
Wireless subscribers (000)                 109,460    105,871
Network access lines in service (000)       25,680     30,443
Total wireline broadband connections (000)  16,427     16,392
Debt ratio1                                   46.9%      38.6%
Ratio of earnings to fixed charges2           5.43       5.36
Number of AT&T employees                   246,740    241,130

1 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.

2 See exhibit 12.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on the strategic needs of the business, needs of the network (wireless or wireline) provided services, and demands to provide emerging services to our customers. Actuarial gains and losses from pension and other postemployment benefits, interest expense and other income (expense) - net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have three reportable segments: (1) Wireless,
(2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions, which was previously a reportable segment.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment includes our portion of the results from our mobile payment joint venture marketed as the ISIS Mobile WalletTM (ISIS), which is accounted for as an equity method investment.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, U-verse high-speed broadband, video, voice services, and managed networking to business customers. Additionally, commissions on sales of satellite television services offered through our agency arrangements are included in the segment.

The Advertising Solutions segment included our directory operations, which published Yellow and White Pages directories and sold directory advertising, Internet-based advertising and local search through May 8, 2012.

The Other segment includes our portion of the results from our international equity investment, our equity interest in YP Holdings, and costs to support corporate-driven activities and operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

The following sections discuss our operating results by segment. Operations and support expenses include certain network planning and engineering expenses; information technology; our repair technicians and repair services; property taxes; bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement service costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with employees who perform these functions.

We discuss capital expenditures for each segment in "Liquidity and Capital Resources."


AT&T INC.
SEPTEMBER 30, 2013

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts


Wireless
Segment Results
                                    Third Quarter                            Nine-Month Period
                                                     Percent                                    Percent
                          2013          2012          Change         2013          2012         Change
Segment operating
revenues
  Data                  $   5,509     $   4,686           17.6 %   $  15,990     $  13,392          19.4 %
  Voice, text and
other service               9,951        10,220          (2.6)        29,902        30,845         (3.1)
  Equipment                 2,020         1,726           17.0         5,570         4,884          14.0
Total Segment
Operating Revenues         17,480        16,632            5.1        51,462        49,121           4.8
Segment operating
expenses
  Operations and
support                    10,982        10,432            5.3        31,932        30,000           6.4
  Depreciation and
amortization                1,875         1,730            8.4         5,553         5,092           9.1
Total Segment
Operating Expenses         12,857        12,162            5.7        37,485        35,092           6.8
Segment Operating
Income                      4,623         4,470            3.4        13,977        14,029         (0.4)
Equity in Net Income
(Loss) of
  Affiliates                 (18)          (17)          (5.9)          (55)          (45)        (22.2)
Segment Income          $   4,605     $   4,453            3.4 %   $  13,922     $  13,984         (0.4) %


AT&T INC.
SEPTEMBER 30, 2013

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts


The following table highlights other key measures of performance for the Wireless segment:

                                                      Third Quarter                                                       Nine-Month Period
                                                                                Percent                                                               Percent
(Subscribers in 000s)             2013                   2012                   Change                    2013                   2012                  Change
Wireless Subscribers1                                                                                      109,460                105,871                    3.4  %
     Gross Subscriber
    Additions2                       5,251                  4,914                       6.9 %               14,978                 15,162                  (1.2)
     Net Subscriber
    Additions2                         989                    678                      45.9                  1,912                  2,670                 (28.4)
     Total Churn3                     1.31 %                 1.34 %                  (3) BP                   1.35 %                 1.33 %                 2 BP

Postpaid Smartphone
Subscribers                                                                                                 50,637                 44,528                   13.7  %
Postpaid Data-Centric
Device and Other
  Phone Subscribers                                                                                         21,395                 25,219                 (15.2)
Total Postpaid
Subscribers                                                                                                 72,032                 69,747                    3.3
     Net Postpaid
    Subscriber
    Additions2                         363                    151                         -                  1,210                    658                   83.9
     Postpaid Churn3                  1.07 %                 1.08 %                  (1) BP                   1.04 %                 1.05 %               (1) BP

Prepaid Subscribers                                                                                          7,425                  7,545                  (1.6)  %
     Net Prepaid
    Subscriber
    Additions2                         192                     77                         -                     19                    294                 (93.5)

Reseller Subscribers                                                                                        14,089                 14,573                  (3.3)  %
     Net Reseller
    Subscriber
    Additions2                        (285 )                  137                         -                   (951 )                  793                      -

Connected Device
Subscribers4                                                                                                15,914                 14,006                   13.6  %
     Net Connected
    Device Subscriber
      Additions                        719                    313                         -                  1,634                    925                   76.6


1 Represents 100% of AT&T Mobility wireless subscribers.
2 Excludes merger and acquisition-related additions during the period. Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers 3 at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period. Includes data-centric devices such as eReaders, automobile monitoring systems, and fleet management - excludes tablet subscribers, which are primarily 4 reflected in our postpaid subscriber category, with the remainder in prepaid.

Wireless Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers. To attract and retain subscribers, we offer a broad handset line and a wide variety of service plans.

As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first nine months of 2013, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid phone subscriber base, 74.7% (or 50.6 million subscribers) use smartphones, up from 66.1% (or 44.5 million subscribers) a year earlier. As is common in the industry, most of our subscribers' phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device.


AT&T INC.
SEPTEMBER 30, 2013

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. About 90% of our postpaid smartphone subscribers are on FamilyTalk® Plans (family plans), Mobile Share plans or business plans, which provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. We offer our Mobile to Any Mobile feature, which enables our subscribers on these and other qualifying plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions. We also offer data plans at different price levels (usage-based data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 12.0% year over year. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with 72.0% (or 36.4 million) on these plans as of September 30, 2013, up from 63.9% (or 28.5 million) as of September 30, 2012. About 80% of subscribers on usage-based data plans have chosen the higher-priced plans. We recently expanded our Mobile Share data plans to include additional, larger usage levels, and we have introduced a program allowing subscribers to more frequently upgrade handsets using an installment payment plan. Participation in these plans continues to increase. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn.

As of September 30, 2013, about 70% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or LTE network), and about 42% of our postpaid smartphone subscribers use an LTE device. Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the Federal Communications Commission (FCC) make new or existing spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.

Wireless Metrics
Subscriber Additions As of September 30, 2013, we served 109.5 million wireless subscribers, an increase of 3.4% when compared to the prior year. Gross subscriber additions (gross additions) in the third quarter were 6.9% higher than in the third quarter of 2012, primarily due to increased smartphone sales and growth in the connected device subscriber base. Gross additions for the first nine months of 2013 were 1.2% lower than the comparable period of the prior year, reflecting competition in the wireless industry and market saturation, which we expect will continue to limit the rate of growth in the industry's subscriber base. Higher net subscriber additions (net additions) in the third quarter were primarily due to growth in smartphone sales and the connected device subscriber base. Lower net subscriber additions (net additions) for the first nine months of 2013 were primarily attributable to losses in reseller low-revenue accounts.

The increases in net postpaid additions reflect the migration of prepaid tablet subscribers to our postpaid plans, contributing to an increase in postpaid tablet subscribers of 388,000 in the third quarter and 1,151,000 for the first nine months of 2013. The introduction of LTE-capable GoPhones and new pricing plans contributed to the increase in net prepaid additions when compared to the third quarter of 2012.

Average service revenue per user (ARPU) - Postpaid increased 1.5% in the third quarter and 1.4% for the first nine months of 2013. Postpaid data services ARPU increased 16.6% in the third quarter and 17.4% for the first nine months of 2013, reflecting greater use of smartphones and data-centric devices by our subscribers.

The growth in postpaid data services ARPU was partially offset by a 5.1% decrease in postpaid voice, text and other service ARPU in the third quarter and 5.3% decrease for the first nine months of 2013. Voice, text and other service ARPU declined due to lower access and airtime charges, triggered in part by postpaid subscribers on our discount plans and lower roaming revenues.

ARPU - Total increased 0.9% in the third quarter and 0.7% for the first nine months of 2013, reflecting growth in data services as more subscribers are using smartphones and tablets and choosing higher-priced usage-based data plans. Data services ARPU increased 14.3% in the third quarter and 15.9% for the first nine months of 2013. Voice, text and other service ARPU declined 5.3% in the third quarter and 5.9% for the first nine months of 2013 primarily due to voice access and usage trends and a shift toward a greater percentage of data-centric devices, as well as lower regulatory fees. We expect continued growth in data services ARPU as more subscribers use smartphones and data-centric devices and continue to choose higher-priced usage-based data plans. As technology and devices evolve, we also expect continued pressure on voice, text and other service ARPU.


AT&T INC.
SEPTEMBER 30, 2013

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. The total churn rate was lower in the third quarter with higher net postpaid additions and improvements in net connected device additions. A higher total churn rate for the first nine months of 2013 was primarily associated with the disconnection of reseller low-revenue accounts. The postpaid churn rate was slightly lower in the third quarter and for the first nine months of 2013.

Operating Results . . .

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