- Part 3: For the preceding part double click ID:nRSQ5061Pb
$17,268
in the first quarter of 2015.
19
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months
and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have
the remaining unpaid balance satisfied. As of September 30, 2016 and December 31, 2015, gross equipment installment
receivables of $5,015 and $5,719 were included on our consolidated balance sheets, of which $3,053 and $3,239 are notes
receivable that are included in "Accounts receivable - net."
In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related
security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this
agreement, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the
receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect
the payments from our customers on behalf of the Purchasers. To date, cash proceeds received, net of remittances (excluding
amounts returned as deferred purchase price), were $3,496.
The following table sets forth a summary of equipment installment receivables sold during the three months and nine months
ended September 30, 2016 and 2015:
Three months ended Nine months ended
September 30, September 30,
2016 2015 2016 2015
Gross receivables sold $ 1,485 $ 1,601 $ 5,812 $ 5,964
Net receivables sold1 1,336 1,431 5,263 5,367
Cash proceeds received 891 980 3,538 3,553
Deferred purchase price recorded 463 456 1,745 1,819
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments
expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the
lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by
independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements
used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
The following table shows the equipment installment receivables, previously sold to the Purchasers, that we repurchased in
exchange for the associated deferred purchase price during the three months and nine months ended September 30, 2016 and
2015:
Three months ended Nine months ended
September 30, September 30,
2016 2015 2016 2015
Fair value of repurchased receivables $ 749 $ 412 $ 1,281 $ 412
Carrying value of deferred purchase price 722 314 1,261 314
Gain on repurchases1 $ 27 $ 98 $ 20 $ 98
1 These gains are included in "Selling, general and administrative" in the consolidated statements of income.
At September 30, 2016 and December 31, 2015, our deferred purchase price receivable was $3,022 and $2,961, respectively, of
which $1,561 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder in
"Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to
the amount of our deferred purchase price at any point in time.
20
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or
to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as
operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both
the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate
risk.
NOTE 9. SUBSEQUENT EVENT
Pending Acquisition
On October 22, 2016, we announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50%
cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of
the announcement (Merger). Combined with Time Warner's net debt at September 30, 2016, the total transaction value is
approximately $108,700. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number
of shares (exchange ratio) of AT&T common stock based on the average stock price at the time of closing the Merger. If the
average stock price is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of
$53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be
1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner
shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares
outstanding. The cash portion of the purchase price will be financed with new debt and cash. As further discussed below, we
have an 18-month commitment for an unsecured bridge term facility (Bridge Loan) for $40,000.
Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected
and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium
content that connects with audiences around the world, with our extensive customer relationships, world's largest pay TV
subscriber base and leading scale in TV, mobile and broadband distribution.
The Merger Agreement must be adopted by Time Warner shareholders and is subject to review by the U.S. Department of Justice
and if certain FCC licenses remain with Time Warner at closing, those are subject to FCC review and approval. It is also a
condition to closing that necessary consents from certain public utility commissions and foreign governmental entities must
be obtained. The transaction is expected to close before year end 2017. If the Merger is terminated as a result of reaching
the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been
satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications
laws, utilities laws or foreign regulatory laws, then under certain circumstances we would be obligated to pay Time Warner
$500.
Bridge Loan
On October 22, 2016, in connection with entering into the Merger Agreement, AT&T entered into the Bridge Loan with JPMorgan
Chase Bank, N.A., as agent, and JPMorgan Chase Bank, N.A. and Bank of America, N.A., as lenders.
In the event advances are made under the Bridge Loan, those advances would be used solely to finance a portion of the cash
consideration to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of
related fees and expenses. We have not drawn on this facility.
The obligations of the lenders under the Bridge Loan to provide advances will terminate on the earliest of (i) the
Termination Date (as defined in the Merger Agreement), (ii) the consummation of the transactions contemplated by the Merger
Agreement without the borrowing of advances under the Bridge Loan and (iii) the termination of the Merger Agreement.
21
AT&T INC.
SEPTEMBER 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Advances would bear interest, at the Company's option, either:
• at a variable annual rate equal to: (1) the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) 0.5% per annum above the federal funds rate, and (c) the London Interbank Offered Rate (LIBOR) rate applicable to dollars for a period of one month plus 1.00%, plus (2) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Base Advances"); or
• at a rate equal to: (i) LIBOR (adjusted upwards to reflect any bank reserve costs) for a period of one, two, three or six months, as applicable, plus (ii) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Eurodollar Rate Advances").
The Applicable Margin for Eurodollar Rate Advances will be equal to 0.750%, 1.000%, 1.125%, 1.250% or 1.500% per annum
depending on the Company's unsecured long-term debt ratings. The Applicable Margin for Base Advances will be equal to the
greater of (x) 0.00% and (y) the relevant Applicable Margin for Eurodollar Rate Advances minus 1.00% per annum, depending
on the Company's unsecured long-term debt ratings.
The Applicable Margin for Eurodollar Rate Advances and the Applicable Margin for Base Advances are scheduled to increase by
an additional 0.25% on the 90th day after the closing of the Merger and another 0.25% every 90 days thereafter.
The Company will also pay a commitment fee (Commitment Fee) of 0.070%, 0.090%, 0.100%, 0.125% or 0.175% of the commitment
amount per annum, depending on the Company's unsecured long-term debt ratings.
The Company is scheduled to pay a duration fee of 0.50%, 0.75% and 1.00% on the amount of advances outstanding as of the
90th, 180th and 270th day after advances are made.
The Bridge Loan contains provisions requiring the reduction of the commitments of the lenders and the prepayment of
outstanding advances by the amount of net cash proceeds resulting from the incurrence of certain indebtedness by the
Company or its subsidiaries, the issuance of certain capital stock by the Company or its subsidiaries and non-ordinary
course sales or dispositions of assets by the Company or its subsidiaries, in each case subject to exceptions set forth in
the Bridge Loan.
Advances under the Bridge Loan are conditioned on the absence of a material adverse effect on Time Warner and certain
customary events, and repayment of all advances must be made no later than 364 days after the date on which the advances
are made.
The Bridge Loan contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as
well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications
described in the Bridge Loan) financial ratio covenant that the Company will maintain, as of the last day of each fiscal
quarter of not more than 3.5-to-1.
The events of default contained in the Bridge Loan are customary for an agreement of this type and such events would result
in the acceleration of, or would permit the lenders to accelerate, as applicable, required payments and would increase the
Applicable Margin by 2.00% per annum.
Prior to the closing date of the Merger, only a payment or bankruptcy event of default would permit the lenders to
terminate their commitments under the Bridge Loan.
22
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber 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 and digital entertainment services industry. Our
subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both
domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico,
and the following discussion of changes in our operating revenues and expenses is affected by the timing of these
acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), our third-quarter 2015 results
include 68 days of DIRECTV-related operations compared with a full quarter in 2016.You should read this discussion in
conjunction with the consolidated financial statements and accompanying notes. 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 2016 and 2015 are
summarized as follows:
Third Quarter Nine-Month Period
2016 2015 PercentChange 2016 2015 PercentChange
Operating Revenues
Service $ 37,272 $ 35,539 4.9 % $ 111,515 $ 94,042 18.6 %
Equipment 3,618 3,552 1.9 10,430 10,640 (2.0 )
Total Operating Revenues 40,890 39,091 4.6 121,945 104,682 16.5
Operating expenses
Cost of services and sales
Equipment 4,455 4,501 (1.0 ) 13,090 13,400 (2.3 )
Broadcast, programming and operations 4,909 4,081 20.3 14,239 6,351 -
Other cost of services 9,526 9,214 3.4 28,436 27,604 3.0
Selling, general and administrative 9,013 9,107 (1.0 ) 26,363 24,535 7.5
Depreciation and amortization 6,579 6,265 5.0 19,718 15,539 26.9
Total Operating Expenses 34,482 33,168 4.0 101,846 87,429 16.5
Operating Income 6,408 5,923 8.2 20,099 17,253 16.5
Income Before Income Taxes 5,193 4,735 9.7 16,621 14,385 15.5
Net Income 3,418 3,078 11.0 10,818 9,601 12.7
Net Income Attributable to AT&T $ 3,328 $ 2,994 11.2 % $ 10,539 $ 9,339 12.8 %
Overview
Operating revenues increased $1,799, or 4.6%, in the third quarter and $17,263, or 16.5%, for the first nine months of
2016.
Service revenues increased $1,733, or 4.9%, in the third quarter and $17,473, or 18.6%, for the first nine months of 2016.
The increases were primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic
business service revenues. These were partially offset by continued declines in our legacy wireline voice and data products
and lower wireless revenues resulting from more customers choosing to purchase devices through installment payment
agreements, which entitle them to lower monthly service rates under our wireless Mobile Share plans.
23
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Equipment revenues increased $66, or 1.9%, in the third quarter and decreased $210, or 2.0%, for the first nine months of
2016. The increase in the third quarter was primarily due to nonrecurring customer premises equipment contracts within our
Business Solutions segment. The decline for the first nine months reflects additional promotional offers and fewer wireless
handset sales during 2016, partially offset by the sale of higher priced devices and an increase in customers purchasing
devices on installment.
Operating expenses increased $1,314, or 4.0%, in the third quarter and $14,417, or 16.5%, for the first nine months of
2016.
Equipment expenses decreased $46, or 1.0%, in the third quarter and $310, or 2.3%, for the first nine months of 2016. The
decreases were primarily driven by lower domestic wireless sales volumes. The decrease for the first nine months was also
impacted by promotional offers and vendor incentives, partially offset by increased sales volumes to our international
wireless customers.
Broadcast, programming and operations expenses increased $828, or 20.3%, in the third quarter and $7,888 for the first nine
months of 2016 due to our acquisition of DIRECTV and higher content costs. These increases were slightly offset by fewer
AT&T U-verse ® (U-verse) subscribers.
Other cost of services expenses increased $312, or 3.4%, in the third quarter and increased $832, or 3.0%, for the first
nine months of 2016. The increase in the third quarter was primarily due to our acquisition of DIRECTV, lower federal
Connect America and High Cost Funds' receipts in 2016 and an increase in noncash financing-related costs associated with
our pension and postretirement benefits. These increases were partially offset by prior year network rationalization
charges, lower net expenses associated with our deferral and amortization of customer fulfillment costs and a decline in
network and access charges.
The increase for the first nine months was primarily due to our acquisitions of DIRECTV and Mexican wireless properties.
Also contributing to higher expenses were costs associated with Universal Service Fund (USF) fees and financing-related
benefit costs. These increases were partially offset by prior year network rationalization charges, lower net expenses
associated with fulfillment cost deferrals and a decline in network and access charges.
Selling, general and administrative expenses decreased $94, or 1.0%, in the third quarter and increased $1,828, or 7.5%,
for the first nine months of 2016. The decrease in the third quarter was primarily due to lower customer support costs and
bad debt reserves related to our wireless operations, partially offset by higher employee separation charges.
The increase for the first nine months was primarily due to our acquisitions in 2015 and increased advertising activity
throughout 2016, partially offset by lower wireless commission expenses. The increase for the first nine months was also
offset by noncash net gains of $714 on wireless spectrum transactions.
Depreciation and amortization expense increased $314, or 5.0%, in the third quarter and $4,179, or 26.9%, for the first
nine months of 2016. Amortization expense increased $85, or 7.1%, in the third quarter and $2,510 for the first nine months
of 2016 due to the amortization of intangibles from recent acquisitions.
Depreciation expense increased $229, or 4.5%, in the third quarter and $1,669, or 11.8%, for the first nine months of 2016.
The increase was primarily due to previously mentioned acquisitions and ongoing capital spending for network upgrades and
accelerating depreciation related to the expected year-end 2016 shutdown of our U.S. 2G network.
Operating income increased $485, or 8.2%, in the third quarter and $2,846, or 16.5%, for the first nine months of 2016. Our
operating income margin in the third quarter increased from 15.2% in 2015 to 15.7% in 2016, and the first nine months was
flat at 16.5% in 2015 and 2016.
Interest expense increased $78, or 6.8%, in the third quarter and $712, or 23.9%, for the first nine months of 2016. The
increases were primarily due to higher average debt balances, including debt issued and debt acquired in connection with
our acquisition of DIRECTV. The increase for the first nine months was slightly offset by higher capitalized interest
resulting from the spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 7).
24
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Equity in net income of affiliates increased $1, or 6.7%, in the third quarter and $9, or 18.8%, for the first nine months
of 2016. Equity in net income of affiliates is primarily attributable to the results from our investments in the Game Show
Network, SKY Mexico, YP Holdings LLC and Otter Media Holdings.
Other income (expense) - net We had other expense of $7 in the third quarter and other income of $154 for the first nine
months of 2016, compared to other expense of $57 in the third quarter and other income of $61 for the first nine months of
2015. Results in the third quarter and for the first nine months of 2016 included net gains on the sale of non-strategic
assets and investments of $3 and $88 and interest and dividend income of $24 and $91.
Other income (expense) in the third quarter and for the first nine months of 2015 included net (losses) gains on the sale
of non-strategic assets and investments of $(4) and $46, interest and dividend income of $29 and $74 and foreign exchange
losses of $73 and $68.
Income taxes increased $118, or 7.1%, in the third quarter and $1,019, or 21.3%, for the first nine months of 2016. Our
effective tax rate was 34.2% for the third quarter and 34.9% for the first nine months of 2016, as compared to 35.0% for
the third quarter and 33.3% for the first nine months of 2015. The increases in income tax expense for the third quarter
and the first nine months of 2016 were primarily due to higher income before income taxes in 2016. In 2015, we recognized
tax benefits related to the restructuring of a portion of our Business Solutions segment, which contributed to lower tax
expense and a lower effective tax rate for the first nine months of 2015.
25
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Selected Financial and Operating Data
September 30,
Subscribers and connections in (000s) 2016 2015
Domestic wireless subscribers 133,338 126,406
Mexican wireless subscribers 10,698 8,091
North American wireless subscribers 144,036 134,497
North American branded subscribers 100,821 95,305
North American branded net additions 3,881 1,405
Domestic satellite video subscribers 20,777 19,570
U-verse video subscribers 4,544 5,880
Latin America satellite video subscribers1 12,476 12,544
Total video subscribers 37,797 37,994
Total domestic broadband connections 15,618 15,832
Network access lines in service 14,603 17,352
U-verse VoIP connections 5,707 5,443
Debt ratio2 50.1 % 50.8 %
Net Debt ratio3 47.8 % 48.3 %
Ratio of earnings to fixed charges4 3.91 3.85
Number of AT&T employees 273,140 281,240
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At June
30, 2016, SKY Mexico had 7.8 million subscribers.
2 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.
3 Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash
available by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms
and/or in different geographies that 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 Contribution, which consists of operating income, excluding acquisition-related costs and other significant items,
and equity in net income (loss) of affiliate for investments managed within each operating segment. We have four reportable
segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.
We also evaluate segment performance based on Segment Contribution, excluding equity in net income (loss) of affiliates and
depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. We believe EBITDA to be a relevant and
useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an
important metric that management uses to evaluate operating 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 margin is EBITDA divided by total revenues.
26
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The Business Solutions segment provides services to business customers, including multinational companies; governmental and
wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide
advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively
referred to as strategic business services; as well as traditional data and voice products. We utilize our wireless and
wired networks (referred to as "wired" or "wireline") to provide a complete communications solution to our business
customers.
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising
services to customers located in the U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or
our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers and wholesale and resale wireless
subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide voice and data
services, including high-speed internet, video, and home monitoring services.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video
entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional
and national wireless networks in Mexico to provide consumer and business customers with wireless data and voice
communication services. Our international subsidiaries conduct business in their local currency, and operating results are
converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency
fluctuations.
Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an
international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to
our customers, not by operating segment, and therefore asset information and capital expenditures by operating segment are
not presented. Depreciation is allocated based on network usage or asset utilization by segment.
We discuss capital expenditures in "Liquidity and Capital Resources."
27
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Business Solutions
Segment Results
Third Quarter Nine-Month Period
2016 2015 PercentChange 2016 2015 PercentChange
Segment operating revenues
Wireless service $ 8,049 $ 7,732 4.1 % $ 23,867 $ 23,003 3.8 %
Fixed strategic services 2,888 2,646 9.1 8,447 7,745 9.1
Legacy voice and data services 4,046 4,616 (12.3 ) 12,567 14,081 (10.8 )
Other service and equipment 908 885 2.6 2,652 2,585 2.6
Wireless equipment 1,876 1,813 3.5 5,422 5,499 (1.4 )
Total Segment Operating Revenues 17,767 17,692 0.4 52,955 52,913 0.1
Segment operating expenses
Operations and support 10,925 10,921 - 32,584 32,966 (1.2 )
Depreciation and amortization 2,539 2,474 2.6 7,568 7,276 4.0
Total Segment Operating Expenses 13,464 13,395 0.5 40,152 40,242 (0.2 )
Segment Operating Income 4,303 4,297 0.1 12,803 12,671 1.0
Equity in Net Income of Affiliates - - - - - -
Segment Contribution $ 4,303 $ 4,297 0.1 % $ 12,803 $ 12,671 1.0 %
The following table highlights other key measures of performance for the Business Solutions segment:
September 30, Percent
(in 000s) 2016 2015 Change
Business Wireless Subscribers
Postpaid/Branded 50,014 47,414 5.5 %
Reseller 58 83 (30.1 )
Connected devices1 29,355 24,064 22.0
Total Business Wireless Subscribers 79,427 71,561 11.0
Business IP Broadband Connections 963 891 8.1 %
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
28
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Third Quarter Nine-Month Period
2016 2015 Percent 2016 2015 Percent
(in 000s) Change Change
Business Wireless Net Additions 1,4
Postpaid/Branded 191 265 (27.9 )% 509 850 (40.1 )%
Reseller 1 8 (87.5 ) (34 ) 14 -
Connected devices2 1,290 1,602 (19.5 ) 4,067 4,104 (0.9 )
Business Wireless Net Subscriber Additions 1,482 1,875 (21.0 ) 4,542 4,968 (8.6 )
Business Wireless Postpaid Churn 1, 3, 4 0.97% 1.05% (8) BP 0.97% 0.95% 2 BP
Business IP Broadband Net Additions 15 20 (25.0 )% 52 70 (25.7 )%
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers 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.
4 Includes the impacts of the expected shutdown of our U.S. 2G network.
Operating Revenues increased $75, or 0.4%, in the third quarter and $42, or 0.1%, for the first nine months of 2016.
Revenue growth was driven by wireless service revenues and increased fixed strategic services. These increases were
partially offset by continued declines in our legacy voice and data services revenues.
Wireless service revenues increased $317, or 4.1%, in the third quarter and $864, or 3.8%, for the first nine months of
2016. The revenue increase is primarily due to customer migrations from our Consumer Mobility segment and reflects
smartphone and tablet gains.
At September 30, 2016, we served 79.4 million subscribers, an increase of 11.0% from the prior year. Postpaid subscribers
increased 5.5% from the prior year reflecting the addition of new customers as well as migrations from our Consumer
Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower
average revenue per average subscriber (ARPU) and churn, increased 22.0% from the prior year reflecting growth in connected
cars and business customers using tracking, monitoring and other sensor-embedded devices on their equipment.
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and
improve margins. Total churn could be negatively impacted in the future by the loss of 2G postpaid subscribers and
connected devices on our 2G network. In the third quarter, business wireless postpaid churn decreased to 0.97% in 2016 from
1.05% in 2015, including 2 basis points of pressure related to the 2G network shutdown, and for the first nine months
increased to 0.97% in 2016 from 0.95% in 2015, including 3 basis points of pressure related to the 2G network shutdown.
Fixed strategic services revenues increased $242, or 9.1%, in the third quarter and $702, or 9.1%, for the first nine
months of 2016. Our revenues, which were negatively impacted by foreign exchange rates, increased in the third quarter and
for the first nine months of 2016 due to: AT&T Dedicated Internet (formally known as Ethernet access to Managed Internet
Services) of $58 and $173, Ethernet of $45 and $144, U-verse services of $42 and $132, and VPN of $32 and $88.
Legacy wired voice and data service revenues decreased $570, or 12.3%, in the third quarter and $1,514, or 10.8%, for the
first nine months of 2016. Traditional data revenues in the third quarter and for the first nine months of 2016 decreased
$336 and $895 and long-distance and local voice revenues decreased $224 and $600. The decreases were primarily due to lower
demand, as customers continue to shift to our more advanced IP-based offerings or to competitors, and the sale of certain
hosting operations.
29
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Other service and equipment revenues increased $23, or 2.6%, in the third quarter and $67, or 2.6%, for the first nine
months of 2016. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues
from other managed services, outsourcing, government professional service and customer premises equipment.
Wireless equipment revenues increased $63, or 3.5%, in the third quarter and decreased $77, or 1.4%, for the first nine
months of 2016. The increase in the third quarter was primarily due to an increase in purchases of devices on installment
payment agreements rather than the device subsidy model partially offset by a decrease in handsets sold to postpaid
customers. Additionally, fewer customers upgraded their handsets during the period. The decrease for the first nine months
resulted from a decrease in handsets sold to postpaid customers and increased promotional offers. The nine-month decrease
was partially offset by an increase in purchases of devices on installment payment agreements rather than the device
subsidy model.
Operations and support expenses increased $4 in the third quarter and decreased $382, or 1.2%, for the first nine months of
2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of
operating and maintaining our networks and personnel costs, such as compensation and benefits.
The third quarter increase was primarily due to lower Connect America and High Cost Funds' receipts in 2016, wireless
handset insurance claims due to an increase in the volume and cost of replacement phones, and wireless equipment expense.
Offsetting these increases were lower employee-related costs, amortization of customer fulfillment costs (see Note 1),
declines in access and advertising costs, as well as the sale of certain hosting operations.
The decrease for the first nine months was primarily due to declines of $115 in wireless equipment and $223 in wireless
commissions costs, primarily reflecting a decrease in sales volumes. Also contributing to the decrease were lower
employee-related costs and amortization of customer fulfillment costs, as well as the sale of certain hosting operations.
Partially offsetting these decreases were higher wireless handset insurance claims due to an increase in the volume and
cost of replacement phones, USF fees, advertising expenses, and bad debt expense driven by a higher AT&T Next SM (AT&T
Next) subscriber base.
Depreciation expense increased $65, or 2.6%, in the third quarter and $292, or 4.0%, for the first nine months of 2016. The
increases were primarily due to ongoing capital spending for network upgrades and expansion and accelerating depreciation
related to the expected year-end 2016 shutdown of our U.S. 2G network, partially offset by fully depreciated assets.
Operating income increased $6, or 0.1%, in the third quarter and $132, or 1.0%, for the first nine months of 2016. Our
Business Solutions segment operating income margin in the third quarter decreased from 24.3% in 2015 to 24.2% in 2016, and
for the first nine months increased from 23.9% in 2015 to 24.2%. Our Business Solutions EBITDA margin in the third quarter
increased from 38.3% in 2015 to 38.5% in 2016, and for the first nine months increased from 37.7% in 2015 to 38.5% in
2016.
30
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Entertainment Group
Segment Results
Third Quarter Nine-Month Period
2016 2015 PercentChange 2016 2015 PercentChange
Segment operating revenues
Video entertainment $ 9,026 $ 7,162 26.0 % $ 26,893 $ 11,024 - %
High-speed internet 1,892 1,685 12.3 5,562 4,861 14.4
Legacy voice and data services 1,168 1,419 (17.7 ) 3,725 4,547 (18.1 )
Other service and equipment 634 592 7.1 1,909 1,868 2.2
Total Segment Operating Revenues 12,720 10,858 17.1 38,089 22,300 70.8
Segment operating expenses
Operations and support 9,728 8,450 15.1 28,875 18,222 58.5
Depreciation and amortization 1,504 1,389 8.3 4,481 3,519 27.3
Total Segment Operating Expenses 11,232 9,839 14.2 33,356 21,741 53.4
Segment Operating Income 1,488 1,019 46.0 4,733 559 -
Equity in Net Income (Loss) of Affiliates - 2 - 1 (16) -
Segment Contribution $ 1,488 $ 1,021 45.7 % $ 4,734 $ 543 - %
The following tables highlight other key measures of performance for the Entertainment Group segment:
September 30, Percent
(in 000s) 2016 2015 Change
Video Connections
Satellite 20,777 19,570 6.2 %
U-verse 4,515 5,854 (22.9 )
Total Video Connections 25,292 25,424 (0.5 )
Broadband Connections
IP 12,752 12,185 4.7
DSL 1,424 2,137 (33.4 )
Total Broadband Connections 14,176 14,322 (1.0 )
Retail Consumer Switched Access Lines 6,155 7,675 (19.8 )
U-verse Consumer VoIP Connections 5,378 5,216 3.1
Total Retail Consumer Voice Connections 11,533 12,891 (10.5 )%
31
AT&T INC.
SEPTEMBER 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Third Quarter Nine-Month Period
2016 2015 PercentChange 2016 2015 PercentChange
(in 000s)
Video Net Additions
Satellite1 323 26 - % 993 26 - %
U-verse (326 ) (92) - (1,099 ) (66) -
Net Video Additions (3 ) (66) 95.5 (106 ) (40) -
Broadband Net Additions
IP 156
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