Note: AT&T’s second-quarter earnings conference call will be webcast at 8:30 a.m. ET on Thursday, July 21, 2022. The webcast and related materials, including financial highlights, will be available on AT&T’s Investor Relations website at https://investors.att.com.
With the closing of the WarnerMedia transaction in April 2022, historical financial results have been recast to present WarnerMedia and other divested businesses, including Vrio, Xandr and Playdemic, as discontinued operations. Consolidated results reflect AT&T’s remaining continuing operations, which include U.S. video and certain other dispositions in the prior year.
“We’re expanding our customer base at an accelerated pace across our twin engines of growth – 5G and fiber,” said John Stankey, AT&T CEO. “We’re rapidly building out our best-in-class networks on the heels of record-level connectivity investment. We’ve already added nearly 2 million AT&T Fiber locations this year and just reached our target of covering 70 million people with mid-band 5G spectrum two quarters early, with expectations to now approach the 100 million mark by the end of year.”
“As a result of our higher-than-forecasted customer growth, we’re increasing our Mobility service revenue guidance to 4.5-5% growth for the full year. We’re also decreasing full-year free cash flow guidance to the $14 billion range to reflect heavy investment in growth and working capital impacts related to timing of collections. Our results the last eight quarters demonstrate that our deliberate strategy of focusing on growth is helping us gain valuable customer relationships, and we’re confident in our ability to maintain this momentum while also continuing to reduce debt and deliver an attractive dividend.”
Consolidated Financial Results
Revenues from continuing operations for the second quarter totaled $29.6 billion versus $35.7 billion in the year-ago quarter, down 17.1% reflecting the impact of the U.S. Video separation in the third quarter of 2021 and certain other divested businesses. Excluding the impact of these divestitures, operating revenues for standalone AT&T* were up 2.2%, from $29.0 billion in the year-ago quarter. This increase reflects higher Mobility revenues and, to a lesser extent, higher Mexico and Consumer Wireline revenues, partially offset by lower Business Wireline revenues.
Operating expenses from continuing operations were $24.7 billion versus $28.2 billion in the year-ago quarter. Expenses declined due to the separation of the U.S. Video operations and impacts of other divested businesses. These declines were partially offset by increased Mobility costs, including wireless equipment, as well as the impact of non-cash restructuring and impairment charges and higher bad debt expense.
Operating income from continuing operations was $5.0 billion versus $7.6 billion in the year-ago quarter. When adjusting for non-cash restructuring and impairment charges and other items, adjusted operating income* from continuing operations was $5.9 billion versus $7.5 billion in the year-ago quarter. When excluding the impacts of the U.S. Video separation and other divested businesses from the prior year quarter, standalone AT&T* adjusted operating income totaled $5.7 billion in the year-ago quarter.
Equity in net income (loss) of affiliates of $0.5 billion includes $0.5 billion from the DIRECTV investment. With adjustment for the proportionate share of intangible amortization, adjusted equity in net income from the DIRECTV investment was $0.9 billion.*
Income from continuing operations was $4.8 billion versus $6.0 billion in the year-ago quarter. Diluted earnings per common share from continuing operations was $0.59, versus $0.76, in the year-ago quarter. Adjusting for $0.06, which includes non-cash restructuring and impairment charges, a proportionate share of intangible amortization from the DIRECTV equity method investment, an actuarial gain on benefit plans and other items, earnings per diluted common share from continuing operations was $0.65. Adjusted earnings per diluted common share from continuing operations was $0.73 in the year-ago quarter. On a standalone AT&T* comparative basis, adjusted earnings per diluted common share was $0.64 in the year-ago quarter.
Cash from operating activities from continuing operations was $7.7 billion, down $2.4 billion year over year. Capital expenditures from continuing operations were $4.9 billion in the quarter, up $1.2 billion year over year. Capital investment* from continuing operations totaled $6.7 billion, which includes $1.8 billion of cash payments for vendor financing.
Free cash flow* from continuing operations, including $0.3 billion of distributions from DIRECTV classified as investing activities, was $1.4 billion for the quarter compared to $5.2 billion a year ago. At the end of the second quarter, net debt was $131.9 billion, which reflects the proceeds from the WarnerMedia transaction, with net debt-to-adjusted EBITDA of 3.23x.*
Communications Operational Highlights
Second-quarter revenues were $28.7 billion, up 2.0% year over year primarily due to increases in Mobility and, to a lesser extent, Consumer Wireline, more than offsetting a decline in Business Wireline. Operating income was $7.2 billion, down 2.1% year over year, with operating income margin of 25.2%, compared to 26.3% in the year-ago quarter.
- Revenues were up 5.2% year over year, to $19.9 billion due to higher service and equipment revenues. Service revenues were $15.0 billion, up 4.6% year over year, primarily driven by subscriber growth. Equipment revenues were $4.9 billion, up 7.2% year over year, driven by increased sales of higher priced smartphones.
- Operating expenses were $13.7 billion, up 6.1% year over year due to higher equipment costs, network costs, bad debt expense, amortization of customer acquisition costs, HBO Max content costs, FirstNet costs and the elimination of CAFII government credits.
- Operating income was $6.2 billion, up 3.4% year over year. Operating income margin was 31.2%, compared to 31.7% in the year-ago quarter.
- EBITDA* was $8.2 billion, up 2.5% year over year with EBITDA margin* of 41.3%, down from 42.4% a year ago. EBITDA service margin* was 54.8%, compared to 56.0% in the year-ago quarter.
- Total net adds were 6.6 million including:
- 1,058,000 postpaid net adds with:
- 813,000 postpaid phone net adds
- 7,000 postpaid tablet and other branded computing device net adds
- 238,000 other net adds
- 196,000 prepaid phone net adds
- Postpaid churn was 0.93% versus 0.87% in the year-ago quarter.
- Postpaid phone churn was 0.75% versus 0.69% in the year-ago quarter.
- Prepaid churn was less than 3%, with Cricket substantially lower.
- Postpaid phone-only ARPU was $54.81, up 1.1% versus the year-ago quarter, due to improved international roaming and a mix shift to higher-priced unlimited plans.
- FirstNet® connections reached approximately 3.7 million across more than 21,800 agencies. FirstNet is the nationwide communications platform dedicated to public safety. The AT&T and FirstNet networks cover 2.81 million square miles and more than 99% of the U.S. population. FirstNet covers more first responders than any other network in America.
- Revenues were $5.6 billion, down 7.6% year over year due to lower demand for legacy voice and data services, a strategic decision to deemphasize non-core services and lower revenues from the government sector.
- Operating expenses were $4.9 billion, down 2.0% year over year due to ongoing operational cost efficiencies and lower amortization of deferred fulfillment costs, partially offset by higher wholesale network access costs and higher depreciation expense.
- Operating income was $710 million, down 33.6% with operating income margin of 12.7% compared to 17.7% in the year-ago quarter.
- EBITDA* was $2.0 billion, down 14.4% year over year with EBITDA margin* of 36.2%, compared to 39.0% in the year-ago quarter, driven by higher wholesale network access costs and decreased government sector spending.
- AT&T Business serves the largest global companies, government agencies and small businesses. More than 675,000 U.S. business buildings are lit with fiber from AT&T, enabling high-speed fiber connections to approximately 3 million U.S. business customer locations. Nationwide, more than 9.5 million business customer locations are on or within 1,000 feet of our fiber.2
- Revenues were $3.2 billion, up 1.1% year over year due to gains in broadband more than offsetting declines in legacy voice and data services and other services. Broadband revenues increased 5.6% due to fiber growth of nearly 28%, partially offset by non-fiber revenue declines of 9.8%.
- Operating expenses were $2.9 billion, up 1.3% year over year largely driven by higher network and technology costs, the elimination of CAFII government credits, higher advertising costs, higher bad debt and higher depreciation expenses, partially offset by lower amortization of deferred fulfillment costs.
- Operating income was $304 million, down 1.3% year over year with operating income margin of 9.6%, compared to 9.8% in the year-ago quarter.
- EBITDA* was $1.1 billion, up 1.1% year over year with EBITDA margin* of 34.3%, consistent with 34.3% in the year-ago quarter.
- Total broadband losses, excluding DSL, were 25,000, reflecting AT&T Fiber net adds of 316,000, more than offset by losses in non-fiber services. AT&T Fiber now has the ability to serve 18 million customer locations, and offers symmetrical speeds up to 5-Gigs across parts of its entire footprint of more than 100 metro areas.
Latin America – Mexico Operational Highlights
Latin America segment results have been recast to classify Vrio as a discontinued operation. Segment results consist solely of AT&T Mexico operations.
Revenues were $808 million, up 17.4% year over year primarily due to increased growth in service revenues. Service revenues were $534 million, up 19.5% year over year, driven by growth in other services and subscribers. Equipment revenues were $274 million, up 13.7% year over year due to higher sales.
Operating loss was ($82) million compared to ($129) million in the year-ago quarter. EBITDA* was $87 million compared to $21 million in the year-ago quarter.
Total wireless net adds were 197,000, including 187,000 prepaid net adds, 25,000 postpaid net adds and 15,000 reseller net losses.
Free Cash Flow Outlook Update
The company is updating its 2022 free cash flow outlook. Free cash flow from continuing operations was $1.4 billion for the second quarter and $4.2 billion year to date. Factors affecting second-quarter free cash flow include $1.7 billion higher capital investment year over year, an impact of approximately $1 billion due to timing of customer collections, incremental success-based investment tied to higher subscriber growth and lower Business Wireline operating income.
Given these factors, the company is lowering full-year free cash flow guidance from the $16 billion range to the $14 billion range. Accordingly, the company expects to generate approximately $10 billion of free cash flow in the second half of the year.
Compared to the first half of the year, this outlook reflects the expectation of lower vendor device payments by more than $3.0 billion, approximately $2.0 billion in lower capital investment, benefits from first half of the year customer growth, which include recent price increases, and lower cash interest payments. We expect these benefits to be partially offset by reduced distributions from DIRECTV and our expectations for some incremental pressure on cash collections.
Remaining 2022 financial guidance elements remain broadly consistent with previously stated expectations.