REG - AT & T Inc. - 1st Quarter Results - 8k <Origin Href="QuoteRef">T.N</Origin> - Part 1
RNS Number : 3838YAT & T Inc.16 May 2016UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of report (Date of earliest event reported) April 26, 2016
AT&T INC.
(Exact Name of Registrant as Specified in Charter)
Delaware
1-8610
43-1301883
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(IRS Employer Identification No.)
208 S. Akard St., Dallas, Texas
75202
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code (210) 821-4105
__________________________________
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240-14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition.
The registrant announced on April 26, 2016, its results of operations for the first quarter of 2016. The text of the press release and accompanying financial information are attached as exhibits and incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
The following exhibits are furnished as part of this report:
(d)Exhibits
99.1
Press release dated April 26, 2016 reporting financial results for the first quarter ended March 31, 2016.
99.2
AT&T Inc. selected financial statements and operating data.
99.3
Discussion of EBITDA, Free Cash Flow, Free Cash Flow Yield, Free Cash Flow after Dividends and Adjusting Items.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
AT&T INC.
Date: April 26, 2016
By: /s/ Debra L. Dial______________
Debra L. Dial
Senior Vice President and Controller
AT&T Reports Strong Revenue and Adjusted Earnings Growth
with Solid Margin Expansion in First-Quarter Results
Fourth Straight Quarter of Double-Digit Adjusted EPS Growth;
Best-Ever U.S. Wireless EBITDA Service Margins;
Full-Year Guidance on Track
Highlights
Consolidated revenues of $40.5 billion, up 24% versus the year-earlier period primarily due to DIRECTV acquisition
Diluted EPS of $0.61 as reported; $0.72 diluted adjusted EPS, a 10.8% increase
Cash from operations of $7.9 billion; free cash flow of $3.2 billion, up 17% year over year
Adjusted margins expand in every domestic segment
2.3 million North American wireless net adds driven by connected devices, Mexico and Cricket; 712,000 branded (postpaid and prepaid) phone net adds
Total churn of 1.42% in U.S., stable year over year; postpaid churn of 1.10%
Business Solutions revenues up 0.3% year over year; wireless revenues up 2.3%
o
Strategic business services revenues of $2.8 billion, up nearly $250 million
328,000 U.S. DIRECTV net adds; total video subscribers decline slightly
Entertainment Group broadband grew with 186,000 IP broadband net adds
Note: AT&T's first-quarter earnings conference call will be webcast at 4:30 p.m. ET on Tuesday, April 26, 2016. The webcast and related materials will be available on AT&T's Investor Relations website at www.att.com/investor.relations.
DALLAS, April 26, 2016 - AT&T Inc. (NYSE:T) today reported strong revenue, adjusted operating margin, adjusted EPS and free cash flow growth for the first quarter.
"It was a good start to the year. We had solid financial results and executed well on our strategy to be the premier integrated communications provider for businesses and consumers," said Randall Stephenson, AT&T chairman and CEO. "We're seeing good momentum with our initial integrated wireless, video and broadband offers. And we'll expand the integrated choices for customers in the fourth quarter when we launch our new video streaming services.
April 26, 2016
2016 AT&T Intellectual Property. All rights reserved. AT&T and the Globe logo are registered trademarks of AT&T Intellectual Property.
"Our consolidated revenues, adjusted earnings and free cash flow continue to grow as margins continue to expand. And we're putting up these numbers even as we invest in building our Mexico wireless business. In addition, DIRECTV merger synergies are on track to reach $1.5 billion or better by the end of the year."
Consolidated Financial Results
AT&T's consolidated revenues for the first quarter totaled $40.5 billion, up more than 24% versus the year-earlier period largely due to the July 24, 2015 acquisition of DIRECTV. Compared with results for the first quarter of 2015, operating expenses were $33.4 billion versus $27.0 billion; operating income was $7.1 billion versus $5.6 billion; and operating income margin was 17.6% versus 17.1%. When adjusting for amortization, merger- and integration-related costs and other expenses and a gain on spectrum transfers, operating income was $8.1 billion versus $6.1 billion; and operating income margin was 19.9%, up 110 basis points from a year ago.
First-quarter net income attributable to AT&T totaled $3.8 billion, or $0.61 per diluted share, compared to $3.3 billion, or $0.63 per diluted share, in the year-ago quarter. Adjusting for the $0.17 of costs for merger- and integration-related expenses and amortization, $0.02 of other costs and the $0.08 gain on spectrum transfers, earnings per diluted share was $0.72 compared to an adjusted $0.65 in the year-ago quarter, an increase of 10.8%.
Cash from operating activities was $7.9 billion in the first quarter, and capital investment1 totaled $4.7 billion. Free cash flow - cash from operating activities minus capital expenditures - was $3.2 billion, up 17% year over year.
For detailed segment results, please go to the Investor Briefing and Financial and Operational Results on the AT&T Investor Relations website.
11Q16 includes $43 million in capital purchases in Mexico with favorable vendor payment terms.
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.
April 26, 2016
2016 AT&T Intellectual Property. All rights reserved. AT&T and the Globe logo are registered trademarks of AT&T Intellectual Property. Page 2
About AT&T
AT&T Inc. (NYSE:T) helps millions around the globe connect with leading entertainment, mobile, high-speed Internet and voice services. We're the world's largest provider of pay TV. We have TV customers in the U.S. and 11 Latin American countries. We offer the best global coverage of any U.S. wireless provider*. And we help businesses worldwide serve their customers better with our mobility and highly secure cloud solutions.
Additional information about AT&T products and services is available at http://about.att.com. Follow our news on Twitter at @ATT, on Facebook at http://www.facebook.com/attand YouTube athttp://www.youtube.com/att.
2016 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.
*Global coverage claim based on offering discounted voice and data roaming; LTE roaming; voice roaming; and world-capable smartphone and tablets in more countries than any other U.S. based carrier. International service required. Coverage not available in all areas. Coverage may vary per country and be limited/restricted in some countries.
Cautionary Language Concerning Forward-Looking Statements
Information set forth in this news releasecontains 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 www.att.com/investor.relations.
The "quiet period" for FCC Spectrum Auction 1000 (also known as the 600 MHz incentive auction) is now in effect. During the quiet period, auction applicants are required to avoid discussions of bids, bidding strategy and post-auction market structure with other auction applicants.
EBITDA Discussion
For AT&T, EBITDA is defined as operating income before depreciation and amortization. EBITDA service margin is calculated as EBITDA divided by service revenues. EBITDA differs from Segment Operating Income (Loss), as calculated in accordance with U.S. generally accepted accounting principles (GAAP), in that it excludes depreciation and amortization. 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 GAAP. Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.
We believe these measures are relevant and useful information to our 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 its segments. 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.
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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 excludes other income (expense) - net, net income attributable to noncontrolling interest and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base and national footprint that we utilize to obtain and service our customers. 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, our management excludes these results when evaluating the performance of our primary operations. EBITDA excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with its capitalization and tax structures. Finally, EBITDA excludes depreciation and amortization, in order to eliminate the impact of capital investments.
We believe EBITDA as a percentage of service revenues to be a more relevant measure than EBITDA as a percentage of total revenue for our Consumer Mobility segment operating margin and our supplemental AT&T Mobility operating margin. For the periods covered by this report, we subsidized a portion of some of our wireless handset sales, all of which are recognized in the period in which we sell the handset. Management views this equipment subsidy as a cost to acquire or retain a subscriber, which is recovered through the ongoing service revenue that is generated by the subscriber. 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 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, which directly affect our segment income. 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 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.
Free Cash Flow Discussion
Free cash flow is defined as cash from operations minus construction and capital expenditures. Free cash flow after dividends is defined as cash from operations minus construction, capital expenditures and dividends. Free cash flow yield is defined as cash from continuing operations less construction and capital expenditures as a percentage of market capitalization computed on the last trading day of the quarter. Market capitalization is computed by multiplying the end of period stock price by the end of period shares outstanding. We believe these metrics provide useful information to our investors because management reviews free cash flow as an important indicator of how much cash is generated by normal business operations, including capital expenditures, and makes decisions based on it. Management also views it as a measure of cash available to pay debt and return cash to shareowners.
April 26, 2016
2016 AT&T Intellectual Property. All rights reserved. AT&T and the Globe logo are registered trademarks of AT&T Intellectual Property. Page 4
Net Debt to EBITDA Discussion
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 EBITDA ratio is calculated by dividing the Net Debt by annualized 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 EBITDA is calculated by annualizing the year-to-date EBITDA.
Adjusted EBITDA excludes costs which are non-recurring in nature. Adjusted EBITDA also excludes net actuarial gains or losses associated with our pension and postemployment benefit plans, which we immediately recognize in the income statement, pursuant to our accounting policy for the recognition of actuarial gains/losses. As a result, the Adjusted EBITDA reflects an expected return on plan assets rather than the actual return on plan assets, as included in the GAAP measure of income. This measure is consistent with metrics under our existing credit agreements.
Adjusting Items Discussion
Adjusted Operating Revenues, 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.
Capital Investment is a non-GAAP financial measure calculated by including vendor financing arrangements for capital improvements of the wireless network in Mexico. These favorable payment terms are considered vendor financing arrangements and are reported as repayments of debt instead of capital expenditures. Management believes that Capital Investment provides relevant and useful information to investors and other users of our financial data in evaluating the investment in our business.
Adjusted Operating Revenues, Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin, Adjusted diluted EPS and Capital Investment should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculations of Adjusted diluted EPS, as presented, may differ from similarly titled measures reported by other companies.
Entertainment Group Segment Adjusted Operating Revenues includes the external operating revenues from DIRECTV U.S. as reported in the DIRECTV Form 10-Q dated March 31, 2015 adjusted to (1) include operations reported in other DIRECTV operating segments that AT&T has chosen to manage in our Entertainment Group segment, (2) conform DIRECTV's practice of recognizing revenue to be received under contractual commitments on a straight line basis over the minimum contract period to AT&T's method of limiting the revenue recognized to the monthly amounts billed and (3) to eliminate intercompany transactions from DIRECTV U.S. and the Entertainment Group segment. Adjusting Entertainment Group segment operating revenues provides for comparability between periods.
April 26, 2016
2016 AT&T Intellectual Property. All rights reserved. AT&T and the Globe logo are registered trademarks of AT&T Intellectual Property. Page 5
For more information, contact:
Name: Fletcher Cook
AT&T Corporate Communications
Phone: (214) 757-7629
Email: fletcher.cook@att.com
Name: Jaquelyn Scharnick
For AT&T Corporate Communications
Phone: (214) 254-3790
Email: jscharnick@brunswickgroup.com
April 26, 2016
2016 AT&T Intellectual Property. All rights reserved. AT&T and the Globe logo are registered trademarks of AT&T Intellectual Property. Page 6
Financial Data
AT&T Inc.
Consolidated Statements of Income
Dollars in millions except per share amounts
Unaudited
Three Months Ended
3/31/2016
3/31/2015
% Chg
Operating Revenues
Service
$
37,101
$
28,962
28.1
%
Equipment
3,434
3,614
-5.0
%
Total Operating Revenues
40,535
32,576
24.4
%
Operating Expenses
Cost of services and sales
Equipment
4,375
4,546
-3.8
%
Broadcast, programming and operations
4,629
1,122
-
Other cost of services (exclusive of depreciation
and amortization shown separately below)
9,396
8,812
6.6
%
Selling, general and administrative
8,441
7,961
6.0
%
Depreciation and amortization
6,563
4,578
43.4
%
Total Operating Expenses
33,404
27,019
23.6
%
Operating Income
7,131
5,557
28.3
%
Interest Expense
1,207
899
34.3
%
Equity in Net Income of Affiliates
13
-
-
Other Income (Expense) - Net
70
70
-
Income Before Income Taxes
6,007
4,728
27.1
%
Income Tax Expense
2,122
1,389
52.8
%
Net Income
3,885
3,339
16.4
%
Less: Net Income Attributable to Noncontrolling Interest
(82
)
(76
)
-7.9
%
Net Income Attributable to AT&T
$
3,803
$
3,263
16.5
%
Basic Earnings Per Share Attributable to AT&T
$
0.62
$
0.63
-1.6
%
Weighted Average Common
Shares Outstanding (000,000)
6,172
5,203
18.6
%
Diluted Earnings Per Share Attributable to AT&T
$
0.61
$
0.63
-3.2
%
Weighted Average Common
Shares Outstanding with Dilution (000,000)
6,190
5,219
18.6
%
Financial Data
AT&T Inc.
Statements of Segment Income
Dollars in millions
Unaudited
Three Months Ended
3/31/2016
3/31/2015
% Chg
Business Solutions
Segment Operating Revenues
Wireless service
$
7,855
$
7,515
4.5
%
Fixed strategic services
2,786
2,549
9.3
%
Legacy voice and data services
4,338
4,754
-8.8
%
Other service and equipment
859
846
1.5
%
Wireless Equipment
1,771
1,893
-6.4
%
Total Segment Operating Revenues
17,609
17,557
0.3
%
Segment Operating Expenses
Operations and Support Expenses
10,802
11,073
-2.4
%
Depreciation and amortization
2,508
2,342
7.1
%
Total Segment Operating Expenses
13,310
13,415
-0.8
%
Segment Operating Income
4,299
4,142
3.8
%
Equity in Net Income of Affiliates
-
-
-
Segment Contribution
$
4,299
$
4,142
3.8
%
Segment Operating Income Margin
24.4
%
23.6
%
Entertainment Group
Segment Operating Revenues
Video entertainment
$
8,904
$
1,871
-
High-speed internet
1,803
1,553
16.1
%
Legacy voice and data services
1,313
1,612
-18.5
%
Other service and equipment
638
624
2.2
%
Total Segment Operating Revenues
12,658
5,660
-
Segment Operating Expenses
Operations and Support Expenses
9,578
4,859
97.1
%
Depreciation and amortization
1,488
1,065
39.7
%
Total Segment Operating Expenses
11,066
5,924
86.8
%
Segment Operating Income (Loss)
1,592
(264
)
-
Equity in Net Income (Loss) of Affiliates
3
(6
)
-
Segment Contribution
$
1,595
$
(270
)
-
Segment Operating Income Margin
12.6
%
-4.7
%
Consumer Mobility
Segment Operating Revenues
Service
$
6,943
$
7,297
-4.9
%
Equipment
1,385
1,481
-6.5
%
Total Segment Operating Revenues
8,328
8,778
-5.1
%
Segment Operating Expenses
Operations and Support Expenses
4,912
5,541
-11.4
%
Depreciation and amortization
922
1,002
-8.0
%
Total Segment Operating Expenses
5,834
6,543
-10.8
%
Segment Operating Income
2,494
2,235
11.6
%
Equity in Net Income of Affiliates
-
-
-
Segment Contribution
$
2,494
$
2,235
11.6
%
Segment Operating Income Margin
29.9
%
25.5
%
International
Segment Operating Revenues
Video entertainment
$
1,130
$
-
-
Wireless service
455
215
-
Wireless Equipment
82
21
-
Total Segment Operating Revenues
1,667
236
-
Segment Operating Expenses
Operations and Support Expenses
1,588
218
-
Depreciation and amortization
277
28
-
Total Segment Operating Expenses
1,865
246
-
Segment Operating Income (Loss)
(198
)
(10
)
-
Equity in Net Income of Affiliates
14
-
-
Segment Contribution
$
(184
)
$
(10
)
-
Segment Operating Income Margin
-11.9
%
-4.2
%
Financial Data
AT&T Inc.
Consolidated Balance Sheets
Dollars in millions
3/31/2016
12/31/2015
Unaudited
Assets
Current Assets
Cash and cash equivalents
$
10,008
$
5,121
Accounts receivable - net of allowances for doubtful accounts of $697 and $704
16,070
16,532
Prepaid expenses
1,378
1,072
Other current assets
10,545
13,267
Total current assets
38,001
35,992
Property, Plant and Equipment - Net
123,454
124,450
Goodwill
104,651
104,568
Licenses
94,130
93,093
Customer Lists and Relationships - Net
17,197
18,208
Other Intangible Assets - Net
9,108
9,409
Investments in Equity Affiliates
1,594
1,606
Other Assets
15,503
15,346
Total Assets
$
403,638
$
402,672
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year
$
8,399
$
7,636
Accounts payable and accrued liabilities
26,169
30,372
Advanced billing and customer deposits
4,550
4,682
Accrued taxes
2,455
2,176
Dividends payable
2,955
2,950
Total current liabilities
44,528
47,816
Long-Term Debt
122,104
118,515
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes
57,489
56,181
Postemployment benefit obligation
34,114
34,262
Other noncurrent liabilities
20,998
22,258
Total deferred credits and other noncurrent liabilities
112,601
112,701
Stockholders' Equity
Common stock
6,495
6,495
Additional paid-in capital
89,414
89,763
Retained earnings
34,506
33,671
Treasury stock
(12,163
)
(12,592
)
Accumulated other comprehensive income
5,180
5,334
Noncontrolling interest
973
969
Total stockholders' equity
124,405
123,640
Total Liabilities and Stockholders' Equity
$
403,638
$
402,672
Financial Data
AT&T Inc.
Consolidated Statements of Cash Flows
Dollars in millions
(Unaudited)
Three Months Ended
3/31/2016
3/31/2015
Operating Activities
Net income
$
3,885
$
3,339
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization
6,563
4,578
Undistributed earnings from investments in equity affiliates
(13
)
-
Provision for uncollectible accounts
374
285
Deferred income tax expense
1,346
252
Net gain from sale of investments, net of impairments
(44
)
(33
)
Changes in operating assets and liabilities:
Accounts receivable
627
739
Other current assets
612
408
Accounts payable and accrued liabilities
(4,006
)
(1,817
)
Retirement benefit funding
(140
)
(140
)
Other - net
(1,304
)
(873
)
Total adjustments
4,015
3,399
Net Cash Provided by Operating Activities
7,900
6,738
Investing Activities
Construction and capital expenditures:
Capital expenditures
(4,451
)
(3,848
)
Interest during construction
(218
)
(123
)
Acquisitions, net of cash acquired
(165
)
(19,514
)
Dispositions
81
8
Sales of securities, net
445
1,890
Net Cash Used in Investing Activities
(4,308
)
(21,587
)
Financing Activities
Issuance of long-term debt
5,978
16,572
Repayment of long-term debt
(2,296
)
(596
)
Issuance of treasury stock
89
8
Dividends paid
(2,947
)
(2,434
)
Other
471
(2,860
)
Net Cash Provided by Financing Activities
1,295
10,690
Net increase (decrease) in cash and cash equivalents
4,887
(4,159
)
Cash and cash equivalents beginning of year
5,121
8,603
Cash and Cash Equivalents End of Period
$
10,008
$
4,444
Financial Data
AT&T Inc.
Supplementary Operating and Financial Data
Dollars in millions except per share amounts, subscribers and connections in (000s)
Unaudited
Three Months Ended
3/31/2016
3/31/2015
% Chg
Business Solutions Wireless Subscribers
75,771
66,945
13.2
%
Postpaid
48,844
45,959
6.3
%
Reseller
64
14
-
Connected Devices
26,863
20,972
28.1
%
Business Solutions Wireless Net Adds
1,689
1,324
27.6
%
Postpaid
133
297
-55.2
%
Reseller
(22
)
3
-
Connected Devices
1,578
1,024
54.1
%
Business Wireless Postpaid Churn
1.02
%
0.90
%
12
BP
Consumer Mobility Subscribers
54,674
54,827
-0.3
%
Postpaid
28,294
30,216
-6.4
%
Prepaid
12,171
10,037
21.3
%
Reseller
13,313
13,581
-2.0
%
Connected Devices
896
993
-9.8
%
Consumer Mobility Net Adds
92
(106
)
-
Postpaid
(4
)
144
-
Prepaid
500
98
-
Reseller
(378
)
(269
)
-40.5
%
Connected Devices
(26
)
(79
)
67.1
%
Consumer Mobility Postpaid Churn
1.24
%
1.20
%
4
BP
Total Consumer Mobility Churn
2.11
%
2.04
%
7
BP
Entertainment Group
51,748
34,175
51.4
%
Video Connections
25,344
5,969
-
Satellite
20,112
-
-
U-verse
5,232
5,969
-12.3
%
Video Net Adds
(54
)
49
-
Satellite
328
-
-
U-verse
(382
)
49
-
Broadband Connections
14,291
14,537
-1.7
%
IP
12,542
11,796
6.3
%
DSL
1,749
2,741
-36.2
%
Broadband Net Adds
5
93
-94.6
%
IP
186
413
-55.0
%
DSL
(181
)
(320
)
43.4
%
Total Wireline Voice Connections
12,113
13,669
-11.4
%
AT&T International
Mexican Wireless Subscribers and Connections
Subscribers
9,213
5,728
60.8
%
Net Adds
529
-
-
Total Churn
5.45
%
-
-
Video Subscribers and Connections
Latin America Video Subscribers
12,436
-
-
Pan Americana
7,094
-
-
Brazil
5,342
-
-
Video Subscribers and Connections Net Adds
Latin America Video Subscribers
(73
)
-
-
Pan Americana
28
-
-
Brazil
(101
)
-
-
Financial Data
AT&T Inc.
Supplementary Operating and Financial Data
Dollars in millions except per share amounts, subscribers and connections in (000s)
Unaudited
Three Months Ended
3/31/2016
3/31/2015
% Chg
AT&T Total Subscribers and Connections
AT&T Mobility Subscribers
130,445
121,772
7.1
%
Postpaid
77,138
76,175
1.3
%
Prepaid
12,171
10,037
21.3
%
Branded
89,309
86,212
3.6
%
Reseller
13,378
13,595
-1.6
%
Connected Devices
27,758
21,965
26.4
%
AT&T Mobility Net Adds
1,781
1,218
46.2
%
Postpaid
129
441
-70.7
%
Prepaid
500
98
-
Branded
629
539
16.7
%
Reseller
(400
)
(266
)
-50.4
%
Connected Devices
1,552
945
64.2
%
M&A Activity, Partitioned Customers and Other Adjs.
24
-
-
AT&T Mobility Churn
Postpaid Churn
1.10
%
1.02
%
8
BP
Total Churn
1.42
%
1.40
%
2
BP
Other
Domestic Licensed POPs (000,000)
322
321
0.3
%
Total Video Subscribers
37,808
5,993
-
Domestic
25,372
5,993
-
Pan Americana
7,094
-
-
Brazil
5,342
-
-
Total Video Net Adds
(125
)
50
-
Domestic
(52
)
50
-
Pan Americana
28
-
-
Brazil
(101
)
-
-
Total Broadband Connections
15,764
16,097
-2.1
%
IP
13,470
12,644
6.5
%
DSL
2,294
3,453
-33.6
%
Broadband Net Adds
(14
)
69
-
IP
202
439
-54.0
%
DSL
(216
)
(370
)
41.6
%
Total Wireline Voice Connections
21,459
24,149
-11.1
%
Total Wireless Subscribers
139,658
127,500
9.5
%
Domestic Wireless Subscribers
130,445
121,772
7.1
%
Mexican Wireless Subscribers
9,213
5,728
60.8
%
Branded Subscribers
98,158
91,448
7.3
%
Branded Net Adds
1,195
539
-
AT&T Inc.
Construction and capital expenditures:
Capital expenditures
$
4,451
$
3,848
15.7
%
Interest during construction
$
218
$
123
77.2
%
Dividends Declared per Share
$
0.48
$
0.47
2.1
%
End of Period Common Shares Outstanding (000,000)
6,156
5,193
18.5
%
Debt Ratio1,2
51.2
%
51.5
%
-30
BP
Total Employees
280,870
250,790
12.0
%
1
Prior year amounts restated to conform to current period reporting methodology.
2
Total long-term debt plus debt maturing within one year divided by total debt plus total stockholders' equity.
Note: For the end of 1Q16, total switched access lines were 15,975.
Business Solutions and Consumer Mobility may not total to AT&T Mobility due to rounding.
Financial Data
AT&T Inc.
Supplemental AT&T Mobility Results
Dollars in millions
Unaudited
Three Months Ended
3/31/2016
3/31/2015
% Chg
AT&T Mobility
Operating Revenues
Service
$
14,798
$
14,812
-0.1
%
Equipment
3,156
3,374
-6.5
%
Total Operating Revenues
17,954
18,186
-1.3
%
Operating Expenses
Operations and support expenses
10,624
11,472
-7.4
%
Depreciation and amortization
2,056
2,005
2.5
%
Total Operating Expenses
12,680
13,477
-5.9
%
Operating Income
$
5,274
$
4,709
12.0
%
Operating Income Margin
29.4
%
25.9
%
Financial Data
AT&T Inc.
Segment Supplemental
Dollars in millions except per share amounts
For the three months ended March 31, 2016
Revenues
Operations and Support Expenses
EBITDA
Depreciation and Amortization
Operating Income (Loss)
Equity in Net Income of Affiliates
Segment Contribution
Business Solutions
$
17,609
$
10,802
$
6,807
$
2,508
$
4,299
$
-
$
4,299
Entertainment Group
12,658
9,578
3,080
1,488
1,592
3
1,595
Consumer Mobility
8,328
4,912
3,416
922
2,494
-
2,494
International
1,667
1,588
79
277
(198
)
14
(184
)
Segment Total
$
40,262
$
26,880
$
13,382
$
5,195
$
8,187
$
17
$
8,204
Corporate and Other
273
377
(104
)
17
(121
)
Acquisition-related items
-
295
(295
)
1,351
(1,646
)
Certain Significant items
-
(711
)
711
-
711
AT&T Inc.
$
40,535
$
26,841
$
13,694
$
6,563
$
7,131
For the three months ended March 31, 2015
Revenues
Operations and Support Expenses
EBITDA
Depreciation and Amortization
Operating Income (Loss)
Equity in Net Income of Affiliates
Segment Contribution
Business Solutions
$
17,557
$
11,073
$
6,484
$
2,342
$
4,142
$
-
$
4,142
Entertainment Group
5,660
4,859
801
1,065
(264
)
(6
)
(270
)
Consumer Mobility
8,778
5,541
3,237
1,002
2,235
-
2,235
International
236
218
18
28
(10
)
-
(10
)
Segment Total
$
32,231
$
21,691
$
10,540
$
4,437
$
6,103
$
(6
)
$
6,097
Corporate and Other
345
234
111
20
91
Acquisition-related items
-
299
(299
)
121
(420
)
Certain Significant items
-
217
(217
)
-
(217
)
AT&T Inc.
$
32,576
$
22,441
$
10,135
$
4,578
$
5,557
Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Adjusted EBITDA and Margin1
Dollars in millions
Unaudited
Three Months Ended
March 31,
2015
2016
Reported Operating Revenues
$
32,576
$
40,535
Reported Operating Income
$
5,557
$
7,131
Plus: Depreciation and Amortization
4,578
6,563
EBITDA2
$
10,135
$
13,694
Adjustments:
Wireless merger integration costs3
209
42
DIRECTV/Mexico merger integration costs4
89
254
Employee separation costs
217
25
Gain on transfer of wireless spectrum
-
(736
)
Adjusted EBITDA
$
10,650
$
13,279
Adjusted EBITDA Margin*
32.7
%
32.8
%
1 2015 Adjusted EBITDA has been restated to reflect the change in accounting for customer set-up and installation costs.
2 EBITDA is defined as operating income before depreciation and amortization.
3 Adjustments include Operations and Support expenses for domestic wireless integration costs.
4 Adjustments include DIRECTV merger integration costs and Operations and Support expenses for international wireless integration costs.
Adjusted EBITDA and Margin are non-GAAP financial measures calculated by excluding from operating revenues and operating expenses 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 EBITDA should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculation of Adjusted EBITDA, as presented, may differ from similarly titled measures reported by other companies.
*Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by Operating Revenues.
Financial Data
AT&T Inc.
Non-GAAP Segment Reconciliation
Business Solutions Segment EBITDA
Dollars in millions
Unaudited
Three Months Ended
3/31/15
6/30/15
9/30/15
12/31/15
3/31/16
Segment Operating Revenues
Total Segment Operating Revenues
$
17,557
$
17,664
$
17,692
$
18,214
$
17,609
Segment Operating Income
4,142
4,232
4,297
3,721
4,299
Segment Operating Income Margin
23.6
%
24.0
%
24.3
%
20.4
%
24.4
%
Plus: Depreciation and amortization
2,342
2,460
2,474
2,513
2,508
EBITDA1
$
6,484
$
6,692
$
6,771
$
6,234
$
6,807
EBITDA as a % of Revenues
36.9
%
37.9
%
38.3
%
34.2
%
38.7
%
Entertainment Group Segment EBITDA
Three Months Ended
3/31/15
6/30/15
9/30/15
12/31/15
3/31/16
Segment Operating Revenues
Total Segment Operating Revenues
$
5,660
$
5,782
$
10,858
$
12,994
$
12,658
Segment Operating Income
(264
)
(196
)
1,019
1,445
1,592
Segment Operating Income Margin
-4.7
%
-3.4
%
9.4
%
11.1
%
12.6
%
Plus: Depreciation and amortization
1,065
1,065
1,389
1,426
1,488
EBITDA1
$
801
$
869
$
2,408
$
2,871
$
3,080
EBITDA as a % of Revenues
14.2
%
15.0
%
22.2
%
22.1
%
24.3
%
Entertainment Group Segment Adjusted Operating Revenues
Three Months Ended
3/31/15
3/31/16
Segment Operating Revenues
$
5,660
$
12,658
DIRECTV Operating Revenues2
6,456
Adjustments:
Other DIRECTV operations
88
Revenue recognition
95
Intercompany eliminations
(16
)
Adjusted Total Segment Operating Revenues
$
12,283
$
12,658
YoY Growth
3.1
%
1 For AT&T, EBITDA is defined as operating income before depreciation and amortization. EBITDA differs from Segment Operating Income (Loss), as calculated in accordance with U.S. generally accepted accounting principles (GAAP), in that it excludes depreciation and amortization. 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 GAAP. Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.
2 Includes operating revenues for DIRECTV, as reported in DIRECTV's Form 10-Q for the period ended 3/31/15.
3 Includes certain adjustments to conform to AT&T methodology and presentation and eliminate intercompany transactions. Revenue recognition adjustment conforms DIRECTV's practice of recognizing revenue to be received under contractual commitments on a straight line basis over the minimum contract period to AT&T's method of limiting the revenue recognized to the monthly amounts billed.
Financial Data
AT&T Inc.
Non-GAAP Segment Reconciliation
Consumer Mobility Segment EBITDA
Dollars in millions
Unaudited
Three Months Ended
3/31/15
6/30/15
9/30/15
12/31/15
3/31/16
Segment Operating Revenues
Total Segment Operating Revenues
$
8,778
$
8,755
$
8,784
$
8,749
$
8,328
Segment Operating Income
2,235
2,619
2,743
2,141
2,494
Segment Operating Income Margin
25.5
%
29.9
%
31.2
%
24.5
%
29.9
%
Plus: Depreciation and amortization
1,002
934
976
939
922
EBITDA1
$
3,237
$
3,553
$
3,719
$
3,080
$
3,416
EBITDA as a % of Revenues
36.9
%
40.6
%
42.3
%
35.2
%
41.0
%
International Segment EBITDA
Three Months Ended
3/31/15
6/30/15
9/30/15
12/31/15
3/31/16
Segment Operating Revenues
Total Segment Operating Revenues
$
236
$
491
$
1,526
$
1,849
$
1,667
Segment Operating Income
(10
)
(131
)
(83
)
(259
)
(198
)
Segment Operating Income Margin
-4.2
%
-26.7
%
-5.4
%
-14.0
%
-11.9
%
Plus: Depreciation and amortization
28
93
225
309
277
EBITDA1
$
18
$
(38
)
$
142
$
50
$
79
EBITDA as a % of Revenues
7.6
%
-7.7
%
9.3
%
2.7
%
4.7
%
1 For AT&T, EBITDA is defined as operating income before depreciation and amortization. EBITDA differs from Segment Operating Income (Loss), as calculated in accordance with U.S. generally accepted accounting principles (GAAP), in that it excludes depreciation and amortization. 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 GAAP. Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.
Financial Data
AT&T Inc.
Non-GAAP Reconciliation - Supplemental
AT&T Mobility EBITDA
Dollars in millions
Unaudited
Three Months Ended
3/31/15
6/30/15
9/30/15
12/31/15
3/31/16
Operating Revenues
Service Revenues
$
14,812
$
15,115
$
15,095
$
14,815
$
14,798
Equipment Revenues
3,374
3,189
3,234
4,071
3,156
Total Operating Revenues
$
18,186
$
18,304
$
18,329
$
18,886
$
17,954
Operating Income
4,709
5,300
5,418
4,376
5,274
Operating Income Margin
25.9
%
29.0
%
29.6
%
23.2
%
29.4
%
Plus: Depreciation and amortization
2,005
2,031
2,046
2,031
2,056
EBITDA1
$
6,714
$
7,331
$
7,464
$
6,407
$
7,330
YoY Growth
9.2
%
EBITDA as a % of Revenues
36.9
%
40.1
%
40.7
%
33.9
%
40.8
%
EBITDA as a % of Service Revenues
45.3
%
48.5
%
49.4
%
43.2
%
49.5
%
Mexico EBITDA
Dollars in millions
Unaudited
Three Months Ended
3/31/15
6/30/15
9/30/15
12/31/15
3/31/16
Operating Revenues
Total Operating Revenues
$
236
$
491
$
581
$
643
$
537
Operating Income
(10
)
(131
)
(134
)
(258
)
(251
)
Operating Income Margin
-4.2
%
-26.7
%
-23.1
%
-40.1
%
-46.7
%
Plus: Depreciation and amortization
28
93
67
89
81
EBITDA1
$
18
$
(38
)
$
(67
)
$
(169
)
$
(170
)
EBITDA as a % of Revenues
7.6
%
-7.7
%
-11.5
%
-26.3
%
-31.7
%
1 For AT&T, EBITDA is defined as operating income before depreciation and amortization. EBITDA service margin is calculated as EBITDA divided by service revenues. EBITDA differs from Segment Operating Income (Loss), as calculated in accordance with U.S. generally accepted accounting principles (GAAP), in that it excludes depreciation and amortization. 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 GAAP. Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.
Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Adjusted Diluted EPS1
Unaudited
Three Months Ended
March 31,
2015
2016
Reported Diluted EPS
$
0.63
$
0.61
Adjustments:
Amortization of intangible assets
0.01
0.14
Merger and integration costs2
0.04
0.03
Tax-related item
(0.05
)
-
Gain on transfer of wireless spectrum
-
(0.08
)
Other3
0.02
0.02
Adjusted Diluted EPS
$
0.65
$
0.72
Year-over-year growth - Adjusted
10.8
%
Weighted Average Common Shares Outstanding
with Dilution (000,000)
5,219
6,190
1 2015 Adjusted Diluted EPS has been restated to reflect the change in accounting for customer set-up and installation costs.
2 Adjustments include DIRECTV merger and integration costs, domestic and international wireless merger and integration costs.
3 Other adjustments include employee separation costs and other costs.
Adjusted Diluted EPS is a non-GAAP financial measure 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 this measure provides 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 Diluted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculation of Adjusted Diluted EPS, as presented, may differ from similarly titled measures reported by other companies.
Sum of components may not tie due to rounding.
Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Capital Investment
Dollars in millions
Unaudited
Three Months
Ended
March 31,
2016
Reported construction and capital expenditures
$
4,669
Add: Vendor financing for capital investments in Mexico
43
Capital Investment
$
4,712
Free Cash Flow
Dollars in millions
Unaudited
Three Months Ended
March 31,
2015
2016
Net cash provided by operating activities
$
6,738
$
7,900
Less: Construction and capital expenditures
(3,971
)
(4,669
)
Free Cash Flow
$
2,767
$
3,231
Free Cash Flow after Dividends
Dollars in millions
Unaudited
Three Months Ended
March 31,
2015
2016
Net cash provided by operating activities
$
6,738
$
7,900
Less: Construction and capital expenditures
(3,971
)
(4,669
)
Free Cash Flow
2,767
3,231
Less: Dividends paid
(2,434
)
(2,947
)
Free Cash Flow after Dividends
$
333
$
284
Capital Investment is a non-GAAP financial measure calculated by including financing arrangements for capital improvements of the wireless network in Mexico. These favorable payment terms are considered vendor financing arrangements and are reported as repayments of debt instead of capital expenditures. Management believes that Capital Investment provides relevant and useful information to investors and other users of our financial data in evaluating the investment in our business.
Free cash flow includes reimbursements of certain postretirement benefits paid.
Free cash flow is defined as cash from operations minus construction and capital expenditures. Free cash flow after dividends is defined as cash from operations minus construction, capital expenditures and dividends. We believe these metrics provide useful information to our investors because management regularly reviews free cash flow as an important indicator of the cash generated by normal 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.
Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Annualized Net-Debt-to-Adjusted-EBITDA Ratio
Dollars in millions
Unaudited
Three Months Ended
3/31/16
YTD 2016
Operating Revenues
40,535
40,535
Operating Expenses
33,404
33,404
Total Operating Income
7,131
7,131
Add Back Depreciation and Amortization
6,563
6,563
Consolidated EBITDA
13,694
13,694
Add Back:
Wireless merger integration costs1
42
42
DIRECTV/Mexico merger integration costs2
254
254
Gain on transfer of wireless spectrum
(736
)
(736
)
Total Adjusted Consolidated EBITDA
13,254
13,254
Annualized Adjusted Consolidated EBITDA
$
53,016
End-of-period current debt
8,399
End-of-period long-term debt
122,104
Total End-of-Period Debt
130,503
Less Cash and Cash Equivalents
10,008
Net Debt Balance
$
120,495
Annualized Net-Debt-to-Adjusted-EBITDA Ratio
2.27
1 Adjustments include Operations and Support expenses for domestic wireless integration costs.
2 Adjustments include DIRECTV merger and integration costs and Operations and Support expenses for international wireless integration costs.
Net-Debt-to-EBITDA ratios are non-GAAP financial measures frequently used by investors and credit rating agencies. Management believes these measures provide relevant and useful information to investors and other users of our financial data. 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. The Net-Debt-to-EBITDA ratio is calculated by dividing the Net Debt by annualized EBITDA. Annualized EBITDA is calculated by annualizing the year-to-date EBITDA.
Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.
Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Adjusted Operating Income and Margin1
Dollars in millions
Unaudited
Three Months Ended
March 31,
2015
2016
Operating Revenues
$
32,576
$
40,535
Reported Operating Income
$
5,557
$
7,131
Adjustments:
Amortization of intangible assets
50
1,351
Wireless merger integration costs2
209
42
DIRECTV/Mexico merger integration costs3
89
254
Employee separation costs
217
25
Gain on transfer of wireless spectrum
-
(736
)
Adjusted Operating Income
$
6,122
$
8,067
Adjusted Operating Income Margin*
18.8
%
19.9
%
1 2015 Adjusted Operating Income and Margin have been restated to reflect the change in accounting for customer set-up and installation costs.
2 Adjustments include Operations and Support expenses for domestic wireless integration costs.
3 Adjustments include DIRECTV merger integration costs and Operations and Support expenses for international wireless integration costs.
Adjusted Operating Income and Margin are non-GAAP financial measures calculated by excluding from operating revenues and operating expenses 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 Income and Margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculation of Adjusted Operating Income and Margin, as presented, may differ from similarly titled measures reported by other companies.
*Adjusted Operating Income Margin is calculated by dividing Adjusted Operating Income by Operating Revenues.
Exhibit 99.3
EBITDA DISCUSSION
For AT&T, EBITDA is defined as operating income before depreciation and amortization. EBITDA service margin is calculated as EBITDA divided by service revenues. EBITDA differs from Segment Operating Income (Loss), as calculated in accordance with U.S. generally accepted accounting principles (GAAP), in that it excludes depreciation and amortization. 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 GAAP. Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.
We believe these measures are relevant and useful information to our 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 its segments. 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.
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 excludes other income (expense) - net, net income attributable to noncontrolling interest and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base and national footprint that we utilize to obtain and service our customers. 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, our management excludes these results when evaluating the performance of our primary operations. EBITDA excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with its capitalization and tax structures. Finally, EBITDA excludes depreciation and amortization, in order to eliminate the impact of capital investments.
We believe EBITDA as a percentage of service revenues to be a more relevant measure than EBITDA as a percentage of total revenue for our Consumer Mobility segment operating margin and our supplemental AT&T Mobility operating margin. For the periods covered by this report, we subsidized a portion of some of our wireless handset sales, all of which are recognized in the period in which we sell the handset. Management views this equipment subsidy as a cost to acquire or retain a subscriber, which is recovered through the ongoing service revenue that is generated by the subscriber. 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 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, which directly affect our segment income. 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 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.
FREE CASH FLOW DISCUSSION
Free cash flow is defined as cash from operations minus construction and capital expenditures. Free cash flow after dividends is defined as cash from operations minus construction, capital expenditures and dividends. Free cash flow yield is defined as cash from continuing operations less construction and capital expenditures as a percentage of market capitalization computed on the last trading day of the quarter. Market capitalization is computed by multiplying the end of period stock price by the end of period shares outstanding. We believe these metrics provide useful information to our investors because management reviews free cash flow as an important indicator of how much cash is generated by normal business operations, including capital expenditures, and makes decisions based on it. Management also views it as a measure of cash available to pay debt and return cash to shareowners.
NET DEBT TO EBITDA DISCUSSION
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 EBITDA ratio is calculated by dividing the Net Debt by annualized 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 EBITDA is calculated by annualizing the year-to-date EBITDA.
Adjusted EBITDA excludes costs which are non-recurring in nature. Adjusted EBITDA also excludes net actuarial gains or losses associated with our pension and postemployment benefit plans, which we immediately recognize in the income statement, pursuant to our accounting policy for the recognition of actuarial gains/losses. As a result, the Adjusted EBITDA reflects an expected return on plan assets rather than the actual return on plan assets, as included in the GAAP measure of income. This measure is consistent with metrics under our existing credit agreements.
ADJUSTING ITEMS DISCUSSION
Adjusted Operating Revenues, 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.
Capital Investment is a non-GAAP financial measure calculated by including vendor financing arrangements for capital improvements of the wireless network in Mexico. These favorable payment terms are considered vendor financing arrangements and are reported as repayments of debt instead of capital expenditures. Management believes that Capital Investment provides relevant and useful information to investors and other users of our financial data in evaluating the investment in our business.
Adjusted Operating Revenues, Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin, Adjusted diluted EPS and Capital Investment should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculations of Adjusted diluted EPS, as presented, may differ from similarly titled measures reported by other companies.
Entertainment Group Segment Adjusted Operating Revenues includes the external operating revenues from DIRECTV U.S. as reported in the DIRECTV Form 10-Q dated March 31, 2015 adjusted to (1) include operations reported in other DIRECTV operating segments that AT&T has chosen to manage in our Entertainment Group segment, (2) conform DIRECTV's practice of recognizing revenue to be received under contractual commitments on a straight line basis over the minimum contract period to AT&T's method of limiting the revenue recognized to the monthly amounts billed and (3) to eliminate intercompany transactions from DIRECTV U.S. and the Entertainment Group segment. Adjusting Entertainment Group segment operating revenues provides for comparability between periods.
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