AT&T puts major acquisitions on hold for three years after mixed Q3

Comms giant AT&T’s third-quarter results, whereby growth in strategic and managed business services, US wireless and IP broadband, were offset by declines in revenues from legacy wireline services, recently acquired WarnerMedia assets and domestic video business.

For the quarter ending 30 September 2019, the company reported consolidated revenues totalling $44.6bn, slipping back $1.1bn versus the year-ago quarter. Operating expenses were $36.7bn, down 4.6% annually due to lower intangible asset amortisation, lower Entertainment Group costs, lower Warner Bros film and TV production costs, and cost efficiencies.

Operating income was $7.9bn, up $600m on the third quarter of 2018, due to lower expenses outpacing revenue declines, with operating income margin of 17.7% as opposed to 15.9%.

When adjusting for amortisation, merger and integration-related expenses and other items, operating income was $9.9bn compared with $10.0bn in the year-ago quarter, and operating income margin was 22.2% versus 21.9% in the same quarter in 2018.

Third-quarter net income attributable to AT&T fell 21% on an annual basis to $3.7bn, or $0.50 per diluted share, 15 cents a share lower than in the same quarter a year ago.

Capital investment – which consists of capital expenditures plus cash payments for supplier financing – totalled $6.0bn, which includes about $800m of cash payments for supplier financing. Free cash flow – cash from operating activities minus capital expenditures – was $6.2bn for the quarter. Net debt was reduced by $3.6bn in the quarter and reduced by $12.7bn year to date.

Quarter-three highlights included mobility service revenues rising 0.7% annually in the quarter and up 1.9% year to date, with 780,000 phone net adds year to date. There were 255,000 phone net adds in the quarter, 101,000 post-paid, 154,000 prepaid.

Entertainment group operating income was up 4.8% year to date with what were claimed as “solid” video and broadband average revenue per user (ARPU) gains. IP broadband revenue grew 3.5% and there were 318,000 AT&T Fiber gains.

Reacting to the results the company has put forward a three-year plan from which it expects to drive significant growth in earnings before interest, tax, depreciation and amortisation (EBITDA) margins and earnings per share (EPS), and allow the company to invest in growth areas, retire shares and continue to pay down debt.

The plan forecast only modest annual dividend growth and dividends as percent of free cash flow of less than 50% in 2022. It projects retiring 100% of the acquisition debt from its Time Warner deal and what the company calls a “disciplined” review of its portfolio. Pointedly, no major acquisitions are planned.

“The strategic investments we’ve made over the past several years have given us the essential elements to meet growing demand for content and connectivity,” said Randall Stephenson, AT&T chairman and CEO.

“Our three-year plan delivers both substantial and consistent financial improvements over the next few years. We grow revenues, EBITDA and EPS every single year, and free cash flow is stable next year, but then grows in both of the next two years, as well. All of this is inclusive of our investment in HBO Max.”