REG - AT & T Inc. - 3rd Quarter Results 2017 <Origin Href="QuoteRef">T.N</Origin> - Part 3
11/12/2017 07:05
- Part 3: For the preceding part double click ID:nRSK8888Yb
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses
on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments
designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into
interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is
recognized as "Other income (expense) - net" in the consolidated statements of income in each period. We evaluate the
effectiveness of our cross-currency swaps each quarter. In the nine months ended September 30, 2017 and September 30, 2016,
no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of
fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest
rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be
ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of
income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated
transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at
a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are
amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be
ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of
income. In the nine months ended September 30, 2017 and September 30, 2016, no ineffectiveness was measured on foreign
exchange contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2017, we had posted
collateral of $837 (a deposit asset) and held collateral of $338 (a receipt liability). Under the agreements, if AT&T's
credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September, we
would have been required to post additional collateral of $141. If DIRECTV Holdings LLC's credit rating had been downgraded
below BBB- (S&P), we would have been required to post additional collateral of $221. At December 31, 2016, we had posted
collateral of $3,242 (a deposit asset) and held no collateral. We do not offset the fair value of collateral, whether the
right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the
fair value of the derivative instruments.
Following are the notional amounts of our outstanding derivative positions:
September 30, December 31,
2017 2016
Interest rate swaps $ 10,775 $ 9,650
Cross-currency swaps 38,694 29,642
Total $ 49,469 $ 39,292
Following are the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (3) $ (54) $ (51) $ 17
Gain (Loss) on long-term debt 3 54 51 (17)
In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were offset against
interest expense.
Cash Flow Hedging Relationships Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ 429 $ 686 $ (268) $ 282
Interest rate locks:
Gain (Loss) recognized in accumulated OCI 79 - - -
Interest income (expense) reclassified from accumulated OCI into income (15) (15) (44) (44)
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Auction 1000 On April 13, 2017, the Federal Communications Commission (FCC) announced that we were the successful bidder
for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of
$1,438 in April 2017, which was recorded as cash from investing activities on our consolidated statements of cash flows.
Dispositions
YP Holdings LLC In June 2017, YP Holdings LLC was acquired by Dex Media. Our results include a gain of $36 for our portion
of the proceeds.
Pending Acquisitions
Time Warner Inc. On October 22, 2016, we entered into and 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, 2017,
the total transaction value is approximately $105,834. Each share of Time Warner common stock will be exchanged for $53.75
per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as
defined in the Merger Agreement) at the time of closing the Merger 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.
Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some 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 for audiences around the world with our extensive customer relationships and distribution, one of the
world's largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution.
The Merger Agreement was approved by Time Warner shareholders on February 15, 2017. The transaction has been approved by
all requisite foreign jurisdictions and remains subject to review by the U.S. Department of Justice. 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. On October 20,
2017, to facilitate obtaining final regulatory approval required to close the merger, AT&T and Time Warner elected to
extend the October 22, 2017 termination date of the agreement for a short period of time.
Other Events
FirstNet On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and
manage the first nationwide broadband network dedicated to America's first responders. FirstNet will provide 20 MHz of
valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network
buildout. We expect to spend about $40,000, in part recoverable from FirstNet, over the life of the 25-year contract to
build, operate and maintain the network. AT&T will construct and operate the network and provide sustainability payments to
FirstNet. Sustainability payments are required to be used for the operating expenses of FirstNet and to fund network
improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to be in the $75-$100 range
annually, and when adjusted for inflation, we expect to be in the $3,000 range over the life of the 25-year contract. After
FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will
be reinvested into the network. As of November 2, 2017, 30 states and territories have opted-in to the program,
representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network
and our investment over the 25-year period will be determined by the number of individual states and territories electing
to participate in FirstNet.
States have until December 28, 2017 to elect to opt-out of the federally funded program, after which any state that did not
formally make an election will automatically be opted-in. We do not expect FirstNet to materially impact our 2017 results.
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, 2017 and December 31, 2016, gross equipment installment
receivables of $4,176 and $5,665 were included on our consolidated balance sheets, of which $2,485 and $3,425 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 transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the
receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the
agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such
that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers.
Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to
make a payment to the Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record
a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the
terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since
inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were
$4,019.
The following table sets forth a summary of equipment installment receivables sold during the three and nine months ended
September 30, 2017 and 2016:
Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Gross receivables sold $ 1,619 $ 1,485 $ 6,217 $ 5,812
Net receivables sold 1 1,478 1,336 5,698 5,263
Cash proceeds received 1,292 891 4,139 3,538
Deferred purchase price recorded 285 463 1,767 1,745
Guarantee obligation recorded 65 - 139 -
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently
carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment
payments expected to be collected and the expected timing and value of device trade-ins. 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 for the deferred purchase price and the guarantee obligation 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, which we repurchased in
exchange for the associated deferred purchase price during the three months and nine months ended September 30, 2017 and
2016:
Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Fair value of repurchased receivables $ 567 $ 749 $ 1,281 $ 1,281
Carrying value of deferred purchase price 507 722 1,147 1,261
Gain (loss) on repurchases 1 $ 60 $ 27 $ 134 $ 20
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.
At September 30, 2017 and December 31, 2016, our deferred purchase price receivable was $3,170 and $3,090, respectively, of
which $2,023 and $1,606 are 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 total amount of our deferred purchase price and guarantee obligation.
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.
Derecognized Installment Receivables
The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no
longer considered our assets.
2017
Outstanding derecognized receivables at January 1, $ 7,232
Gross receivables sold 6,217
Collections on cash purchase price (3,556)
Collections on deferred purchase price (665)
Trade ins and other (295)
Fair value of repurchased receivables (1,281)
Outstanding derecognized receivables at September 30, $ 7,652
AT&T INC.
SEPTEMBER 30, 2017
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
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. 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.
Consolidated Results Our financial results in the third quarter and for the first nine months of 2017 and 2016 are
summarized as follows:
Third Quarter Nine-Month Period
Percent Percent
2017 2016 Change 2017 2016 Change
Operating Revenues
Service $ 36,378 $ 37,272 (2.4) % $ 109,372 $ 111,515 (1.9) %
Equipment 3,290 3,618 (9.1) 9,498 10,430 (8.9)
Total Operating Revenues 39,668 40,890 (3.0) 118,870 121,945 (2.5)
Operating expenses
Cost of services and sales
Equipment 4,191 4,455 (5.9) 12,177 13,090 (7.0)
Broadcast, programming and operations 5,284 4,909 7.6 15,156 14,239 6.4
Other cost of services 9,431 9,526 (1.0) 27,714 28,436 (2.5)
Selling, general and administrative 8,317 9,013 (7.7) 24,917 26,363 (5.5)
Depreciation and amortization 6,042 6,579 (8.2) 18,316 19,718 (7.1)
Total Operating Expenses 33,265 34,482 (3.5) 98,280 101,846 (3.5)
Operating Income 6,403 6,408 (0.1) 20,590 20,099 2.4
Income Before Income Taxes 4,974 5,193 (4.2) 16,422 16,621 (1.2)
Net Income 3,123 3,418 (8.6) 10,711 10,818 (1.0)
Net Income Attributable to AT&T $ 3,029 $ 3,328 (9.0) % $ 10,413 $ 10,539 (1.2) %
Overview
Operating revenues decreased $1,222, or 3.0%, in the third quarter and $3,075, or 2.5%, for the first nine months of 2017.
Service revenues decreased $894, or 2.4%, in the third quarter and $2,143, or 1.9%, for the first nine months of 2017. The
decreases were primarily due to continued declines in legacy wireline voice and data products and lower wireless service
revenues reflecting increased adoption of unlimited plans. Additionally, we waived $89 in service revenues for customers in
areas affected by natural disasters during the third quarter of 2017. These were partially offset by increased revenues
from strategic business services.
Equipment revenues decreased $328, or 9.1%, in the third quarter and $932, or 8.9%, for the first nine months of 2017. The
decreases were primarily due to lower wireless handset sales and upgrades. Equipment revenue is becoming increasingly
unpredictable as many customers are choosing to upgrade devices less frequently or are bringing their own devices.
Operatingexpenses decreased $1,217, or 3.5%, in the third quarter and $3,566, or 3.5%, for the first nine months of 2017.
Equipment expenses decreased $264, or 5.9%, in the third quarter and $913, or 7.0%, for the first nine months of 2017. The
decreases were driven by a decline in devices sold reflecting a change in customer buying habits.
Broadcast, programming and operations expenses increased $375, or 7.6%, in the third quarter and $917, or 6.4%, for the
first nine months of 2017, reflecting annual content cost increases and additional programming costs for DIRECTV NOW.
Other cost of services expenses decreased $95, or 1.0%, in the third quarter and $722, or 2.5%, for the first nine months
of 2017. The decreases reflect our continued focus on cost management and the utilization of automation and digitalization
where appropriate, as well as lower Federal Universal Service Fund (USF) rates and fees. The decrease for the first nine
months also includes an actuarial gain from the second-quarter 2017 remeasurement of our postretirement benefit obligation.
These expense declines were partially offset by an increase in amortization of deferred customer fulfillment cost.
Selling, general and administrative expenses decreased $696, or 7.7%, in the third quarter and $1,446, or 5.5%, for the
first nine months of 2017. The decreases were attributable to our disciplined cost management, lower selling and wireless
commission costs from reduced volumes, fewer advertising costs, and, for the nine month period, the actuarial gain
resulting from the second-quarter remeasurement of our postretirement benefit obligation. The decreases in the third
quarter were partially offset by costs arising from natural disasters, and, for the first nine months, lower gains on
wireless spectrum transactions during 2017 than in the comparable period of 2016. We are continuing to assess network
damage from the natural disasters that occurred in the third quarter as well as the recent fires in California, and expect
additional pressure in the fourth quarter.
Depreciation and amortization expense decreased $537, or 8.2%, in the third quarter and $1,402, or 7.1%, for the first nine
months of 2017. Depreciation expense decreased $393, or 7.4%, in the third quarter and $962, or 6.1%, for the first nine
months of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage
values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease in
the third quarter and $980 of the decrease for the first nine months. Also contributing to lower depreciation expenses were
network assets becoming fully depreciated. These decreases were partially offset by increases resulting from ongoing
capital spending for upgrades and expansion.
Amortization expense decreased $144, or 11.2%, in the third quarter and $440, or 11.1%, for the first nine months of 2017
due to lower amortization of intangibles for the customer lists associated with acquisitions.
Operatingincome decreased $5, or 0.1%, in the third quarter and increased $491, or 2.4%, for the first nine months of 2017.
Our operating income margin in the third quarter increased from 15.7% in 2016 to 16.1% in 2017, and for the first nine
months increased from 16.5% in 2016 to 17.3% in 2017.
Interest expense increased $462, or 37.7%, in the third quarter and $685, or 18.6%, for the first nine months of 2017. The
increases were primarily due to higher debt balances in anticipation of closing our acquisition of Time Warner Inc. (Time
Warner) and an increase in average interest rates when compared to the prior year. Financing fees related to pending
acquisitions also contributed to higher interest expense in 2017.
Equity in net income (loss) of affiliates decreased $5, or 31.3%, in the third quarter and $205 for the first nine months
of 2017, predominantly from losses from our legacy publishing business (which we sold in June 2017), partially offset by
income from our investments in video-related businesses.
Other income (expense) - net increased $253 in the third quarter and $200 for the first nine months. The increases were
primarily due to higher net gains from the sale of non-strategic assets and investments of $123 and $26, respectively, and
growth in interest and dividend income of $91 and $146, including interest on cash held in anticipation of closing our
acquisition of Time Warner.
Income taxes increased $76, or 4.3%, in the third quarter and decreased $92, or 1.6%, for the first nine months of 2017.
Our effective tax rate was 37.2% in the third quarter and 34.8% for the first nine months of 2017, as compared to 34.2% in
the third quarter and 34.9% for the first nine months of 2016. The increase in the third quarter was primarily due to
state-level legislation changes that resulted in a remeasurement of our deferred tax liabilities offset by lower income
before income taxes. The decrease for the first nine months of 2017 was primarily due to lower income before income taxes
and the recognition of tax benefits related to the restructuring of a portion of our wireless business offset by
state-level legislation changes.
Selected Financial and Operating Data
September 30,
Subscribers and connections in (000s) 2017 2016
Domestic wireless subscribers 138,826 133,338
Mexican wireless subscribers 13,779 10,698
North American wireless subscribers 152,605 144,036
North American branded subscribers 106,098 100,821
North American branded net additions 2,782 3,881
Domestic satellite and over-the-top video subscribers 21,392 20,777
AT&T U-verse (U-verse) video subscribers 3,718 4,544
Latin America satellite video subscribers 1 13,490 12,476
Total video subscribers 38,600 37,797
Total domestic broadband connections 15,715 15,618
Network access lines in service 12,249 14,603
U-verse VoIP connections 5,774 5,707
Debt ratio 2 56.4% 50.1%
Net debt ratio 3 39.7% 47.8%
Ratio of earnings to fixed charges 4 3.55 3.91
Number of AT&T employees 256,800 273,140
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. At
June 30, 2017, SKY Mexico had 8.0 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 segment results presented in Note 4 and discussed below
for each segment follow our internal management reporting. We analyze our 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 affiliates for investments managed within each 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 EBITDA and/or EBITDA margin, which is defined as Segment Contribution,
excluding equity in net income (loss) of affiliates and depreciation and amortization. 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.
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 fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired
networks to provide a complete integrated 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 United States or in U.S. territories. We utilize our copper and IP-based wired network
and our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers
located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including
high-speed internet, video and home monitoring services over wireless devices.
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 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. Our domestic communications business strategies reflect bundled product offerings that
increasingly cut across product lines and utilize our asset base. Therefore asset information and capital expenditures by
segment are not presented. Depreciation is allocated based on asset utilization by segment. In expectation of the close of
our acquisition of Time Warner, we are beginning to realign our operations and strategies. We are pushing down
administrative activities into the business units to better manage costs and serve our customers.
Business Solutions
Segment Results
Third Quarter Nine-Month Period
2017 2016 Percent Change 2017 2016 Percent Change
Segment operating revenues
Wireless service $ 8,034 $ 8,050 (0.2) % $ 23,969 $ 23,868 0.4 %
Fixed strategic services 3,087 2,913 6.0 9,089 8,469 7.3
Legacy voice and data services 3,434 4,042 (15.0) 10,572 12,577 (15.9)
Other service and equipment 852 886 (3.8) 2,513 2,619 (4.0)
Wireless equipment 1,654 1,876 (11.8) 4,873 5,422 (10.1)
Total Segment Operating Revenues 17,061 17,767 (4.0) 51,016 52,955 (3.7)
Segment operating expenses
Operations and support 10,233 10,925 (6.3) 30,722 32,584 (5.7)
Depreciation and amortization 2,325 2,539 (8.4) 6,972 7,568 (7.9)
Total Segment Operating Expenses 12,558 13,464 (6.7) 37,694 40,152 (6.1)
Segment Operating Income 4,503 4,303 4.6 13,322 12,803 4.1
Equity in Net Income of Affiliates - - - - - -
Segment Contribution $ 4,503 $ 4,303 4.6 % $ 13,322 $ 12,803 4.1 %
The following tables highlight other key measures of performance for the Business Solutions segment:
September 30, Percent
(in 000s) 2017 2016 Change
Business Wireless Subscribers
Postpaid/Branded 51,412 50,014 2.8 %
Reseller 77 58 32.8
Connected devices 1 35,909 29,355 22.3
Total Business Wireless Subscribers 87,398 79,427 10.0
Business IP Broadband Connections 1,017 963 5.6 %
1 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems.
Excludes postpaid tablets.
Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2017 2016 Change 2017 2016 Change
Business Wireless Net Additions 1, 4
Postpaid/Branded 15 191 (92.1) % (74) 509 - %
Reseller 2 1 - 3 (34) -
Connected devices 2 2,292 1,290 77.7 7,015 4,067 72.5
Business Wireless Net Subscriber Additions 2,309 1,482 55.8 6,944 4,542 52.9
Business Wireless Postpaid Churn 1, 3, 4 1.01% 0.97% 4 BP 1.02% 0.97% 5 BP
Business IP Broadband Net Additions 25 15 66.7 % 41 52 (21.2) %
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 primarily wholesale 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 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.
Operating Revenues decreased $706, or 4.0%, in the third quarter and $1,939, or 3.7%, for the first nine months of 2017.
Revenue declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues
resulting from changes in customer buying habits. These decreases were partially offset by fixed strategic services, which
represent 41% of non-wireless revenues. Our revenues continue to be pressured by slower fixed business investment.
Wireless service revenues decreased $16, or 0.2%, in the third quarter and increased $101, or 0.4%, for the first nine
months of 2017. The decrease in the third quarter was primarily due to customers shifting to our unlimited plans as well as
fewer migrations from our Consumer Mobility segment during the quarter. The increase in the first nine months was primarily
due to the migration of customers from our Consumer Mobility segment.
At September 30, 2017, we served 87.4 million subscribers, an increase of 10.0% from the prior year. Postpaid subscribers
increased 2.8% 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 22.3% from the prior year reflecting growth in our
connected car business and other data centric devices that utilize the network to connect and control physical devices
using embedded computing systems and/or software, commonly called the Internet of Things (IoT).
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and
improve margins. In the third quarter, business wireless postpaid churn increased to 1.01% in 2017 from 0.97% in 2016, and
for the first nine months increased to 1.02% in 2017 from 0.97% in 2016.
Fixed strategic services revenues increased $174, or 6.0%, in the third quarter and $620, or 7.3%, for the first nine
months of 2017. Our revenues increased in the third quarter and first nine months of 2017 primarily due to: Ethernet of $77
and $243; Dedicated Internet services of $46 and $150; and VoIP of $41 and $159, respectively.
Legacy wired voice and data service revenues decreased $608, or 15.0%, in the third quarter and $2,005, or 15.9%, for the
first nine months of 2017. In the third quarter and first nine months of 2017, legacy voice billings decreased $324 and
$1,068 and traditional data billings decreased $284 and $937, respectively. These decreases were primarily due to lower
demand, as customers continue to shift to our more advanced IP-based offerings or to competitors.
Wireless equipment revenues decreased $222, or 11.8%, in the third quarter and $549, or 10.1%, for the first nine months of
2017. The decreases were primarily due to decreases in device upgrades reflecting a change in customer buying habits.
Operations and support expenses decreased $692, or 6.3%, in the third quarter and $1,862, or 5.7%, for the first nine
months of 2017. 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.
Decreased operations and support expenses in the third quarter and first nine months were primarily due to lower equipment
sales and wireless upgrade transactions, which decreased equipment costs by $336 and $732, and efforts to automate and
digitize our support activities improved results $146 and $543, respectively. As of September 30, 2017, approximately 45%
of our network functions have been moved to software-based systems. Expense reductions also reflect lower administrative
costs, contributing to a reduction in expenses of $49 and $213, and fewer traffic compensation and wireless interconnect
costs, resulting in declines of $44 and $155, respectively, in access and interconnect costs. Lower selling and wireless
commission costs also contributed to decreased expenses for the first nine months.
Depreciation expense decreased $214, or 8.4%, in the third quarter and $596, or 7.9%, for the first nine months of 2017.
The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain
network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially
offset by ongoing capital spending for network upgrades and expansion.
Operating income increased $200, or 4.6%, in the third quarter and $519, or 4.1%, for the first nine months of 2017. Our
Business Solutions segment operating income margin in the third quarter increased from 24.2% in 2016 to 26.4% in 2017, and
for the first nine months increased from 24.2% in 2016 to 26.1% in 2017. Our Business Solutions EBITDA margin in the third
quarter increased from 38.5% in 2016 to 40.0% in 2017, and for the first nine months increased from 38.5% in 2016 to 39.8%
in 2017.
Entertainment Group
Segment Results
Third Quarter Nine-Month Period
2017 2016 Percent Change 2017 2016 Percent Change
Segment operating revenues
Video entertainment $ 9,200 $ 9,026 1.9 % $ 27,373 $ 26,893 1.8 %
High-speed internet 1,916 1,892 1.3 5,784 5,562 4.0
Legacy voice and data services 949 1,168 (18.8) 3,010 3,725 (19.2)
Other service and equipment 583 634 (8.0) 1,786 1,909 (6.4)
Total Segment Operating Revenues 12,648 12,720 (0.6) 37,953 38,089 (0.4)
Segment operating expenses
Operations and support 9,953 9,728 2.3 29,112 28,875 0.8
Depreciation and amortization 1,379 1,504 (8.3) 4,256 4,481 (5.0)
Total Segment Operating Expenses 11,332 11,232 0.9 33,368 33,356 -
Segment Operating Income 1,316 1,488 (11.6) 4,585 4,733 (3.1)
Equity in Net Income (Loss) of Affiliates (6) - - (23) 1 -
Segment Contribution $ 1,310 $ 1,488 (12.0) % $ 4,562 $ 4,734 (3.6) %
The following tables highlight other key measures of performance for the Entertainment Group segment:
September 30, Percent Change
(in 000s) 2017 2016
Video Connections
Satellite 20,605 20,777 (0.8) %
U-verse 3,691 4,515 (18.3)
DIRECTV NOW 1 787 - -
Total Video Connections 25,083 25,292 (0.8)
Broadband Connections
IP 13,367 12,752 4.8
DSL 964 1,424 (32.3)
Total Broadband Connections 14,331 14,176 1.1
Retail Consumer Switched Access Lines 4,996 6,155 (18.8)
U-verse Consumer VoIP Connections 5,337 5,378 (0.8)
Total Retail Consumer Voice Connections 10,333 11,533 (10.4) %
1 Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial.
Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2017 2016 Change 2017 2016 Change
Video Net Additions
Satellite 1 (251) 323 - %
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