AT&T INC. Dollars, subscribers and connections in millions, except per share and per subscriber amounts
OVERVIEWAT&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 worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We have three reportable segments: (1) Communications, (2) WarnerMedia and (3)Latin America . Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating 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. Percentage increases and decreases that are not considered meaningful are denoted with a dash.
We have recast our segment results for all prior periods to include our prior Xandr segment within our WarnerMedia segment.
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating Revenues
Communications $ 33,592 $ 35,267 (4.7) % $ 67,841 $ 70,436 (3.7) %
WarnerMedia 6,814 8,835 (22.9) 14,662 17,640 (16.9)
Latin America 1,232 1,757 (29.9) 2,822 3,475 (18.8)
Corporate and other 437 420 4.0 825 811 1.7
Eliminations and consolidation (1,125) (1,322) 14.9 (2,421) (2,578) 6.1
AT&T Operating Revenues 40,950 44,957 (8.9) 83,729 89,784 (6.7)
Operating Contribution
Communications 8,112 8,671 (6.4) 16,315 16,682 (2.2)
WarnerMedia 1,917 2,350 (18.4) 3,930 4,913 (20.0)
Latin America (201) (209) 3.8
(385) (382) (0.8)
Segment Operating Contribution
The Communications segment provides services to businesses and consumers located in theU.S. and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units:
?Mobility provides nationwide wireless service and equipment.
?
?Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content in various physical and digital formats globally. Historical financial results from Xandr, previously a separate reportable segment, have been combined with the WarnerMedia segment within Eliminations and other. This segment contains the following business units:
?Turner primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.
?
?Warner Bros. primarily consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.
The
?Vrio provides video services primarily to residential customers using satellite
technology in
?
COVID-19 Update
InMarch 2020 , theWorld Health Organization designated the coronavirus (COVID-19) a pandemic and the President ofthe United States declared a national emergency. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns. Disruptions caused by COVID-19 and measures taken to prevent its spread or mitigate its effects both domestically and internationally have impacted our results of operations. We recorded approximately$320 , or$0.03 per diluted share, in the second quarter and$750 , or$0.08 per diluted share, for the first six months of 2020, of incremental costs associated with voluntary corporate actions taken primarily to protect and compensate front-line employees and contractors, and WarnerMedia production disruption costs. In addition to these incremental costs, we estimate that our operations and comparability were impacted by approximately$510 , or$0.06 per diluted share, in the second quarter and$470 , or$0.05 per diluted share, for the first six months of 2020, for the following COVID-19 related pressures: (1) the cancellation and postponement of televised sporting events, resulting in lower advertising revenues and associated expenses, (2) the closure of movie theaters and postponement of theatrical releases, leading to lower content revenues and associated expenses, (3) the imposition of travel restrictions, driving significantly lower international wireless roaming services that do not have a directly correlated expense reduction and most significantly impact profitability and (4) closures of retail stores, contributing to lower wireless equipment sales, with a corresponding reduction in equipment expense.
All subscriber counts at and for the period ended
?Postpaid subscribers totaling 466,0000 (including 338,000 postpaid phone) in the second quarter and 521,000 (including 382,000 postpaid phone) for the first six months;
?Premium TV connections totaling 91,000 in the second quarter and 157,000 for the first six months; and
?Broadband connections totaling 159,000 (including 48,000 fiber) in the second quarter and 194,000 (including 58,000 fiber) for the first six months.
The economic effects of the pandemic and resulting societal changes are
currently not predictable. There are a number of uncertainties that could impact
our future results of operations, including the effectiveness of COVID-19
mitigation measures; the duration of the pandemic; global economic conditions;
changes to our operations; changes in consumer confidence, behaviors and
spending; work from home trends; and the sustainability of supply chains. We
expect operating results and cash flows to continue to be adversely impacted by
COVID-19 for at least the duration of the pandemic. We expect our third-quarter
results to be impacted by the following:
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
?The shift in timing of advertising revenues from the postponement, restarting or cancellation of sporting events and the related timing of the sports costs;
?Lower revenues from the closure of movie theaters and postponement of theatrical releases, partially offset by lower production and marketing costs, and other programming expenses;
?The decline in revenues from international roaming wireless services due to reduced travel;
?Higher expenses to protect front-line employees, contractors and customers; and
?The continued transition of customers to our fiber broadband services and the acceleration of the disconnection of linear TV services due to the pandemic.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are summarized in the discussions
that follow. Additional analysis is discussed in our "Segment Results" section.
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating Revenues
Service $ 37,051 $ 41,023 (9.7) % $ 75,934 $ 81,707 (7.1) %
Equipment 3,899 3,934 (0.9) 7,795 8,077 (3.5)
Total Operating Revenues 40,950 44,957 (8.9) 83,729 89,784 (6.7)
Operating expenses
Operations and support 30,133 30,356 (0.7) 58,204 60,744 (4.2)
Depreciation and amortization 7,285 7,101 2.6 14,507 14,307 1.4
Total Operating Expenses 37,418 37,457 (0.1) 72,711 75,051 (3.1)
Operating Income 3,532 7,500 (52.9) 11,018 14,733 (25.2)
Interest expense 2,041 2,149 (5.0) 4,059 4,290 (5.4)
Equity in net income (loss)
of affiliates (10) 40 - (16) 33 -
Other income (expense) - net 1,017 (318) - 1,820 (32) -
Income Before Income Taxes 2,498 5,073 (50.8) 8,763 10,444 (16.1)
Net Income 1,563 3,974 (60.7) 6,526 8,322 (21.6)
Net Income Attributable to AT&T 1,281 3,713 (65.5) 5,891 7,809 (24.6)
Net Income Attributable to
Common Stock $ 1,229 $ 3,713 (66.9) % $ 5,807 $ 7,809 (25.6) %
Operating revenues decreased in the second quarter and in the first six months
of 2020, driven by declines in our WarnerMedia, Communications and Latin America
segments. Lower WarnerMedia segment revenues reflect lower advertising revenue
from cancelled and postponed live sports programming and lower revenue due to
postponed theatrical releases. Communications segment revenue declines were
driven by continued declines in video and legacy services, and lower wireless
revenues from the imposition of international travel restrictions and closure of
retail stores. Latin America segment revenue declines were primarily due to
foreign exchange rate pressure and store closures related to COVID-19. Partially
offsetting these decreases were revenue increases in strategic and managed
business service in our Communications segment.
Operations and support expenses decreased in the second quarter and in the first
six months of 2020. The decreases were driven by lower broadcast and programming
costs in our Communications and WarnerMedia segments. Expense declines in the
first six months were also driven by a noncash gain of $900 on a spectrum
transaction, reduced wireless equipment costs
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
resulting from lower device sales and our continued focus on cost management. Partially offsetting expense declines were charges for a goodwill impairment at our Vrio business unit, employee separation charges and incremental costs related to COVID-19, including increased first-quarter 2020 bad debt expense. As part of our cost and efficiency initiatives, we expect operations and support expense improvements to continue as we size our operations to reflect the new economic activity level.
Depreciation and amortization expense increased in the second quarter and for the first six months of 2020.
Depreciation expense increased$36 , or 0.7% in the second quarter and$65 , or 0.6% for the first six months of 2020, primarily due to ongoing capital spend for network upgrades and expansion in our Communications segment.
Amortization expense increased
Operating income decreased in the second quarter and the first six months of 2020. Our operating income margin for the second quarter decreased from 16.7% in 2019 to 8.6% in 2020 and for the first six months decreased from 16.4% in 2019 to 13.2% in 2020.
Interest expense decreased in the second quarter and first six months of 2020, primarily due to lower debt balances and interest rates.
Equity in net income of affiliates decreased in the second quarter and for the first six months of 2020, reflecting changes in our investment portfolio, including our second-quarter 2020 acquisition of the remaining interest inHBO Latin America Group (HBO LAG). Other income (expense) - net increased in the second quarter and for the first six months of 2020. The increases were primarily due to the recognition of actuarial losses in 2019, with no comparable interim remeasurement in 2020, totaling$1,699 and$2,131 in the second quarter and for the first six months of 2019, respectively, and higher prior service credit amortization in 2020 (see Note 6). The increase was partially offset by the write-off of certain investments in 2020 and the second-quarter 2019 gain on sale of our interest in Hulu. Income taxes decreased in the second quarter and increased for the first six months of 2020. The decrease in income tax expense in the second quarter was primarily attributable to lower income before tax. Our effective tax rate was 37.5% for the second quarter and 25.5% for the first six months of 2020, versus 21.7% and 20.3% for the comparable year-prior periods, respectively. The increases in our effective tax rates were primarily due to the Vrio goodwill impairment, which is not deductible for tax purposes. 39
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per
subscriber amounts
COMMUNICATIONS SEGMENT Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Segment Operating
Revenues
Mobility $ 17,149 $ 17,292 (0.8) % $ 34,551 $ 34,655 (0.3) %
Entertainment Group 10,069 11,368 (11.4) 20,584 22,696 (9.3)
Business Wireline 6,374 6,607 (3.5) 12,706 13,085 (2.9)
Total Segment Operating
Revenues 33,592 35,267 (4.7) 67,841 70,436 (3.7)
Segment Operating
Contribution
Mobility 5,805 5,767 0.7 11,593 11,076 4.7
Entertainment Group 1,030 1,514 (32.0) 2,365 2,992 (21.0)
Business Wireline 1,277 1,390 (8.1) 2,357 2,614 (9.8)
Total Segment Operating $ 8,112 $ 8,671 (6.4) % $ 16,315 $ 16,682 (2.2) %
Contribution
Selected Subscribers and Connections
June 30,
(000s) 2020 2019
Mobility Subscribers1 171,407 158,622
Total domestic broadband connections1 15,201 15,698
Network access lines in service 7,878 9,207
U-verse VoIP connections 4,058 4,766
Excludes 521 wireless and 194 broadband customers who we have agreed not to
1 terminate service under the FCC 's "Keep Americans
Connected Pledge," which was implemented March 13, 2020.
Operating revenues decreased in the second quarter and for the first six months
of 2020, driven by declines in each of our business units, Entertainment Group ,
Business Wireline and Mobility. The decreases reflect the continued shift away
from linear video and legacy services, lower wireless service revenues from a
decline in international travel and waived fees, and suppressed equipment sales
in the first quarter of 2020 attributable to store closures. Partially
offsetting these declines was growth in our prepaid subscriber base.
Operating contribution decreased in the second quarter and for the first six
months of 2020, reflecting declines in our Business Wireline and Entertainment
Group business units, largely offset by improvement in our Mobility business
unit. Our Communications segment operating income margin in the second quarter
decreased from 24.6% in 2019 to 24.1% in 2020 and for the first six months
increased from 23.7% in 2019 to 24.0% in 2020.
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Communications Business Unit Discussion
Mobility Results
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating revenues
Service $ 13,669 $ 13,824 (1.1) % $ 27,637 $ 27,453 0.7 %
Equipment 3,480 3,468 0.3 6,914 7,202 (4.0)
Total Operating Revenues 17,149 17,292 (0.8) 34,551 34,655 (0.3)
Operating expenses
Operations and support 9,332 9,522 (2.0) 18,901 19,563 (3.4)
Depreciation and amortization 2,012 2,003 0.4 4,057 4,016 1.0
Total Operating Expenses 11,344 11,525 (1.6) 22,958 23,579 (2.6)
Operating Income 5,805 5,767 0.7 11,593 11,076 4.7
Equity in Net Income (Loss)
of Affiliates - - - - - -
Operating Contribution $ 5,805 $ 5,767 0.7 % $ 11,593 $ 11,076 4.7 %
The following tables highlight other key measures of performance for Mobility:
Subscribers
June 30, Percent
(in 000s) 2020 2019 Change
Postpaid 74,919 75,478 (0.7) %
Prepaid 18,008 17,434 3.3
Reseller 6,718 7,323 (8.3)
Connected devices1 71,762 58,387 22.9
Total Mobility Subscribers2 171,407 158,622 8.1 % 1 Includes data-centric devices such as session-based tablets, monitoring devices and primarily
wholesale automobile systems.
2 Excludes 521 customers
Connected Pledge."
41
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per
subscriber amounts
Net Additions
Second Quarter Six-Month Period
Percent Percent
(in 000s) 2020 2019 Change 2020 2019 Change
Postpaid Phone Net Additions (151) 74 - % 12 153 (92.2) %
Total Phone Net Additions (16) 357 - 104 525 (80.2)
Postpaid2, 5 (154) (146) (5.5) (127) (353) 64.0
Prepaid 165 341 (51.6) 120 442 (72.9)
Reseller (58) (204) 71.6 (248) (446) 44.4
Connected devices3 2,255 3,959 (43.0) 5,773 7,047 (18.1)
Mobility Net Subscriber 2,208 3,950 (44.1) % 5,518 6,690 (17.5) %
Additions1, 5
Postpaid Churn4, 5 1.05 1.07 (2) BP 1.06 1.12 (6) BP
Postpaid Phone-Only Churn4, 5 0.84 0.86 (2) BP 0.85 0.89 (4) BP
1 Excludes acquisition-related additions during the period.
2 In addition to postpaid phones, includes tablets and wearables and other. Tablet net (losses) were
(159) and (357) for the three months
and (426) and (767) for the six months ended June 30, 2020 and 2019, respectively. Wearables and other
net adds were 155 and 137 for
the three months and 287 and 264 for the six months ended June 30, 2020 and 2019, respectively.
3 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale
automobile systems. Excludes
postpaid tablets.
4 Calculated by dividing the aggregate number of wireless
subscribers
divided by the total number
of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the
average of the churn rate for
each month of that period.
5 The second quarter and six-month period ended June 30, 2020 , exclude 466 (338 phone) and 521 (382
phone), respectively, who we
have agreed not to terminate service under the FCC 's "Keep Americans Connected Pledge." The second
quarter and six-month
period ended June 30, 2020 , postpaid churn includes 21 bps (18 bps phone) and 22 bps (19 bps phone)
pressure for these customers.
Service revenue decreased in the second quarter and increased for the first six
months of 2020. The second quarter decrease is due to lower roaming revenue from
decreased international travel and waived fees, reflecting a full quarter of
pandemic-related impacts. Revenues from the first six months were not as
affected by the pandemic, with approximately 15 days of impact in the first
quarter. Increases in postpaid phone average revenue per subscriber (ARPU) and
gains in prepaid subscribers, largely offset by impacts of the pandemic for the
first six months.
ARPU
Postpaid ARPU decreased in the second quarter and increased for the first six months. ARPU during 2020 has been pressured by the decline in international roaming revenues and waived fees.
Churn
The effective management of subscriber churn is critical to our ability to
maximize revenue growth and to maintain and improve margins. Postpaid churn and
postpaid phone-only churn were lower in the first six months due to migrations
to unlimited plans, continued network improvements and industry-wide store
closures from COVID-19, partially offset by higher accrual for subscriber
disconnections under the "Keep Americans Connected Pledge."
Equipment revenue was stable in the second quarter and decreased for the first
six months of 2020 driven by lower postpaid smartphone sales reflecting store
closures.
Operations and support expenses decreased in the second quarter and for the
first six months of 2020. The decreases were primarily due to higher bad debt
expense in 2019 resulting from prior-year charges in response to credit easing
policies, cost initiatives and asset optimization, and lower marketing and sales
costs, partially offset by higher commission deferral
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
amortization, including the impacts of second-quarter 2020 updates to extend the expected economic life of our Mobility customers.
Depreciation expense increased in the second quarter and for the first six months of 2020 primarily due to ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets.
Operating income increased in the second quarter and for the first six months of 2020. Our Mobility operating income margin in the second quarter increased from 33.4% in 2019 to 33.9% in 2020, and for the first six months increased from 32.0% in 2019 to 33.6% in 2020. Our Mobility EBITDA margin in the second quarter increased from 44.9% in 2019 to 45.6% in 2020, and for the first six months increased from 43.5% in 2019 to 45.3% in 2020. EBITDA is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization.
Subscriber Relationships
As the wireless industry has matured, future wireless growth will depend on our ability to offer innovative services, plans and devices that take advantage of our premier 5G wireless network, which recently went nationwide (inJuly 2020 ), and to provide these services in bundled product offerings. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a mature and highly competitive market, we have launched a wide variety of plans, including our FirstNet and prepaid products, and arrangements that bundle our video services. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. We offer unlimited data plans and such subscribers also tend to have higher retention and lower churn rates. Our offerings are intended to encourage existing subscribers to upgrade their current services and/or add devices, attract subscribers from other providers and/or minimize subscriber churn.
Connected Devices
Connected devices include data-centric devices such as wholesale automobile
systems, monitoring devices, fleet management and session-based tablets. The
number of connected device subscribers increased in 2020, and during the second
quarter and for the first six months of 2020, we added approximately 1.3 million
and 3.6 million wholesale connected cars through agreements with various
carmakers, and experienced strong growth in other Internet of Things (IoT)
connections. We believe that these connected car agreements give us the
opportunity to create future retail relationships with the car owners.
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per
subscriber amounts
Entertainment Group Results
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating revenues
Video entertainment $ 6,976 $ 8,035 (13.2) % $ 14,371 $ 16,109 (10.8) %
High-speed internet 2,092 2,109 (0.8) 4,201 4,179 0.5
Legacy voice and data services 560 658 (14.9) 1,141 1,341 (14.9)
Other service and equipment 441 566 (22.1) 871 1,067 (18.4)
Total Operating Revenues 10,069 11,368 (11.4) 20,584 22,696 (9.3)
Operating expenses
Operations and support 7,730 8,515 (9.2) 15,621 17,042 (8.3)
Depreciation and amortization 1,309 1,339 (2.2) 2,598 2,662 (2.4)
Total Operating Expenses 9,039 9,854 (8.3) 18,219 19,704 (7.5)
Operating Income 1,030 1,514 (32.0) 2,365 2,992 (21.0)
Equity in Net Income (Loss)
of Affiliates - - - - - -
Operating Contribution $ 1,030 $ 1,514 (32.0) % $ 2,365 $ 2,992 (21.0) %
44
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
The following tables highlight other key measures of performance forEntertainment Group : Connections June 30, Percent (in 000s) 2020 2019 Change Video Connections Premium TV1 17,690 21,581 (18.0) % AT&T TV Now 720 1,340 (46.3) Total Video Connections
18,410 22,921 (19.7)
Total Broadband Connections 13,944 14,420 (3.3) Fiber Broadband Connections
4,321 3,378 27.9
Retail Consumer Switched Access Lines 3,096 3,630 (14.7) U-verse Consumer VoIP Connections 3,480 4,211 (17.4) Total Retail Consumer Voice Connections
6,576 7,841 (16.1) %
Excludes 157 premium TV and 194 broadband connections
Americans Connected Pledge."
Net Additions
Second Quarter Six-Month Period
Percent Percent
(in 000s) 2020 2019 Change 2020 2019 Change
Video Net Additions
Premium TV1 (886) (778) (13.9) % (1,783) (1,322) (34.9) %
AT&T TV Now (68) (168) 59.5 (206) (251) 17.9
Net Video Additions1 (954) (946) (0.8) (1,989) (1,573) (26.4)
Net Broadband Additions1 (102) (34) - (175) 11 - Fiber Broadband Net Additions 225 318 (29.2) %
434 615 (29.4) %
The second quarter and six-month period ended
fiber) connections, respectively,
Americans Connected Pledge."
Video entertainment revenues are comprised of subscription and advertising
revenues. Revenues decreased in the second quarter and for the first six months
of 2020, largely driven by a decline in premium TV and OTT subscribers as we
continue to focus on retention of existing subscribers with a particular focus
on our high-value subscribers, and lower subscription-based advertising revenues
driven by impacts of the pandemic. Consistent with the rest of the industry, our
customers continue to shift from a premium linear service to more economically
priced OTT and subscription video on demand services, which has pressured our
video revenues.
High-speed internet revenues decreased in the second quarter and increased for
the first six months of 2020. The decrease in the second quarter was driven by a
decline in the average subscriber base, partially offset by higher ARPU. The
increase for the six months reflects higher ARPU resulting from an increase in
high-speed fiber and pricing.
Legacy voice and data service revenues decreased in the second quarter and for
the first six months of 2020, reflecting the continued decline in the number of
customers.
45
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Operations and support expenses decreased in the second quarter and for the first six months of 2020. Contributing to the decreases were lower content and selling costs largely due to fewer subscribers, lower marketing costs and our ongoing focus on cost initiatives. Partially offsetting the decreases were annual content rate increases, higher amortization of fulfillment cost deferrals, including the impact of second-quarter 2020 updates to decrease the estimated economic life for ourEntertainment Group customers, and pandemic-related compassion payments.
Depreciation expense decreased in the second quarter and for the first six months of 2020 due to network assets becoming fully depreciated. Partially offsetting the decreases was ongoing capital spending for network upgrades and expansion.
Operating income decreased in the second quarter and for the first six months of 2020. OurEntertainment Group operating income margin in the second quarter decreased from 13.3% in 2019 to 10.2% in 2020, and for the first six months decreased from 13.2% in 2019 to 11.5% in 2020. Our Entertainment Group EBITDA margin in the second quarter decreased from 25.1% in 2019 to 23.2% in 2020, and for the first six months decreased from 24.9% in 2019 to 24.1% in 2020. Business Wireline Results Second Quarter Six-Month Period Percent Percent 2020 2019 Change 2020 2019 Change Operating revenues Strategic and managed services$ 3,943 $ 3,834 2.8 %$ 7,822 $ 7,613 2.7 % Legacy voice and data services 2,067 2,324 (11.1) 4,196 4,721 (11.1) Other service and equipment 364 449 (18.9) 688 751 (8.4) Total Operating Revenues 6,374 6,607 (3.5) 12,706 13,085 (2.9) Operating expenses Operations and support 3,779 3,975 (4.9) 7,730 8,007 (3.5) Depreciation and amortization 1,318 1,242 6.1 2,619 2,464 6.3 Total Operating Expenses 5,097 5,217 (2.3) 10,349 10,471 (1.2) Operating Income 1,277 1,390 (8.1) 2,357 2,614 (9.8) Equity in Net Income (Loss) of Affiliates - - - - - - Operating Contribution$ 1,277 $ 1,390 (8.1) %$ 2,357 $ 2,614 (9.8) % Strategic and managed services revenues increased in the second quarter and for the first six months of 2020. Our strategic services are made up of (1) data services, including our VPN, dedicated internet ethernet and broadband, (2) voice service, including VoIP and cloud-based voice solutions, (3) security and cloud solutions, and (4) managed, professional and outsourcing services. Revenue increases were primarily attributable to growth in our security and cloud solutions, dedicated internet and managed services and also includes the impact of higher demand for connectivity due to the pandemic.
Legacy voice and data service revenues decreased in the second quarter and for the first six months of 2020, primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.
Other service and equipment revenues decreased in the second quarter and for the first six months of 2020, reflecting prior-year licensing of intellectual property assets. Revenue trends are impacted by the licensing of intellectual property assets, which vary from period-to-period. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from customer premises equipment.
Operations and support expenses decreased in the second quarter and for the first six months of 2020, primarily due to our continued efforts to drive efficiencies in our network operations through automation and reductions in customer support expenses through digitization.
46--------------------------------------------------------------------------------
AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Depreciation expense increased in the second quarter and for the first six months of 2020, primarily due to increases in capital spending for network upgrades and expansion.
Operating income decreased in the second quarter and for the first six months of
2020. Our Business Wireline operating income margin in the second quarter
decreased from 21.0% in 2019 to 20.0% in 2020, and for the first six months
decreased from 20.0% in 2019 to 18.6% in 2020. Our Business Wireline EBITDA
margin in the second quarter increased from 39.8% in 2019 to 40.7% in 2020, and
for the first six months increased from 38.8% in 2019 to 39.2% in 2020.
WARNERMEDIA SEGMENT Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Segment Operating Revenues
Turner $ 2,988 $ 3,410 (12.4) % $ 6,150 $ 6,853 (10.3) %
Home Box Office 1,627 1,716 (5.2) 3,124 3,226 (3.2)
Warner Bros. 3,256 3,389 (3.9) 6,496 6,907 (6.0)
Eliminations and other (1,057) 320 - (1,108) 654 -
Total Segment Operating
Revenues 6,814 8,835 (22.9) 14,662 17,640 (16.9)
Cost of revenues
Turner 965 1,796 (46.3) 2,285 3,476 (34.3)
Home Box Office 1,095 839 30.5 1,911 1,509 26.6
Warner Bros. 2,233 2,492 (10.4) 4,579 4,922 (7.0)
Selling, general and
administrative 1,324 1,344 (1.5) 2,788 2,716 2.7
Eliminations and other (883) (35) - (1,142) (34) -
Depreciation and
amortization 167 104 60.6 330 260 26.9
Total Operating Expenses 4,901 6,540 (25.1) 10,751 12,849 (16.3)
Operating Income 1,913 2,295 (16.6) 3,911 4,791 (18.4)
Equity in Net Income (Loss)
of Affiliates 4 55 (92.7) 19 122 (84.4)
Total Segment Operating
Contribution $ 1,917 $ 2,350 (18.4) % $ 3,930 $ 4,913 (20.0) %
Our WarnerMedia segment includes our Turner, Home Box Office (HBO) and Warner
Bros. business units. The order of presentation reflects the consistency of
revenue streams, rather than overall magnitude as that is subject to timing and
frequency of studio releases.
Operating revenues decreased in the second quarter and for the first six months
of 2020, primarily due to lower advertising revenues from the postponement or
cancellation of televised sporting events at Turner; lower theatrical product
revenues, reflecting the pandemic-related closure of movie theaters and
postponement of theatrical releases, and unfavorable programming comparisons,
including strong carryover revenues in the first quarter of 2019 at Warner
Bros.; and lower linear subscription revenue at HBO .
Operating contribution decreased in the second quarter and for the first six
months of 2020. The WarnerMedia segment operating income margin in the second
quarter increased from 26.0% in 2019 to 28.1% in 2020 and for the first six
months decreased from 27.2% in 2019 to 26.7% in 2020.
47--------------------------------------------------------------------------------
AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
WarnerMedia Business Unit Discussion
Turner Results
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating revenues
Subscription $ 1,804 $ 1,943 (7.2) % $ 3,853 $ 3,908 (1.4) %
Advertising 796 1,266 (37.1) 1,753 2,527 (30.6)
Content and other 388 201 93.0 544 418 30.1
Total Operating Revenues 2,988 3,410 (12.4) 6,150 6,853 (10.3)
Operating expenses
Cost of revenues 965 1,796 (46.3) 2,285 3,476 (34.3)
Selling, general and
administrative 382 421 (9.3) 772 877 (12.0)
Depreciation and
amortization 69 39 76.9 138 99 39.4
Total Operating Expenses 1,416 2,256 (37.2) 3,195 4,452 (28.2)
Operating Income 1,572 1,154 36.2 2,955 2,401 23.1
Equity in Net Income
(Loss) of Affiliates - 11 - 6 36 (83.3)
Operating Contribution $ 1,572 $ 1,165 34.9 % $ 2,961 $ 2,437 21.5 %
Operating revenues decreased in the second quarter and for the first six months
of 2020, primarily due to decreases in advertising revenue largely resulting
from the postponement of the NBA season and the cancellation of the NCAA
Division I Men's Basketball Tournament, in the first quarter of 2020.
Subscription revenue declines reflect lower regional sports network revenue and
unfavorable exchange rates. These decreases were partially offset by higher
content and other revenue, including internal sales to HBO Max, which are
eliminated in consolidation within the WarnerMedia segment.
Cost of revenues decreased in the second quarter and for the first six months of
2020, primarily due to lower programming costs, including a decline of
approximately $850 in the second quarter and $1,125 for the first six months in
sports costs resulting from the postponement of the NBA season, the cancellation
of the NCAA tournament and other smaller items.
Selling, general and administrative decreased in the second quarter and for the first six months of 2020, primarily due to lower marketing costs.
Operating income increased in the second quarter and for the first six months of
2020. Our Turner operating income margin in the second quarter increased from
33.8% in 2019 to 52.6% in 2020, and for the first six months increased from
35.0% in 2019 to 48.0% in 2020.
48--------------------------------------------------------------------------------
AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per
subscriber amounts
Home Box Office Results
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating revenues
Subscription $ 1,441 $ 1,516 (4.9) % $ 2,779 $ 2,850 (2.5) %
Content and other 186 200 (7.0) 345 376 (8.2)
Total Operating Revenues 1,627 1,716 (5.2) 3,124 3,226 (3.2)
Operating expenses
Cost of revenues 1,095 839 30.5 1,911 1,509 26.6
Selling, general and
administrative 394 292 34.9 631 543 16.2
Depreciation and
amortization 25 12 - 46 34 35.3
Total Operating Expenses 1,514 1,143 32.5 2,588 2,086 24.1
Operating Income 113 573 (80.3) 536 1,140 (53.0)
Equity in Net Income
(Loss) of Affiliates (5) 15 - 15 30 (50.0)
Operating Contribution $ 108 $ 588 (81.6) % $ 551 $ 1,170 (52.9) %
Operating revenues decreased in the second quarter and for the first six months
of 2020, primarily due to decreases in subscription revenue resulting from
domestic linear subscriber decline, including Cinemax depackaging, partially
offset by growth in digital and international, including HBO Latin America
Group , following our May 2020 acquisition of the remaining interest in this
entity. At June 30, 2020 , we had 36.3 million U.S. subscribers from HBO Max and
HBO , up from 34.6 million at December 31, 2019 .
Cost of revenues increased in the second quarter and for the first six months of 2020, primarily due to higher programming costs and expenses related to HBO Max.
Selling, general and administrative increased in the second quarter and for the first six months of 2020, primarily due to higher marketing costs associated with HBO Max. Operating income decreased in the second quarter and for the first six months of 2020. OurHBO operating income margin in the second quarter decreased from 33.4% in 2019 to 6.9% in 2020, and for the first six months decreased from 35.3% in 2019 to 17.2% in 2020. 49
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per
subscriber amounts
Warner Bros. Results
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating revenues
Theatrical product $ 1,029 $ 1,527 (32.6) % $ 2,135 $ 3,033 (29.6) %
Television product 1,876 1,310 43.2 3,645 2,923 24.7
Games and other 351 552 (36.4) 716 951 (24.7)
Total Operating Revenues 3,256 3,389 (3.9) 6,496 6,907 (6.0)
Operating expenses
Cost of revenues 2,233 2,492 (10.4) 4,579 4,922 (7.0)
Selling, general and
administrative 350 426 (17.8) 954 915 4.3
Depreciation and
amortization 40 31 29.0 81 83 (2.4)
Total Operating Expenses 2,623 2,949 (11.1) 5,614 5,920 (5.2)
Operating Income 633 440 43.9 882 987 (10.6)
Equity in Net Income
(Loss) of Affiliates (19) - - (27) 6 -
Operating Contribution $ 614 $ 440 39.5 % $ 855 $ 993 (13.9) %
Operating revenues decreased in the second quarter and for the first six months
of 2020, primarily due to lower theatrical product resulting from the absence of
theatrical releases in the second quarter of 2020 and, for the six months,
unfavorable comparisons to the prior year, which included, in 2019, carryover
revenues from the theatrical release of Aquaman. Games and other revenue
declines were primarily due to unfavorable games comparison to the prior year,
which included the release of Mortal Kombat 11, and other revenue decreased due
to reduced studio operations. Partially offsetting these decreases were higher
television product revenues, driven by licensing, including internal sales to
HBO Max, partially offset by lower initial telecast revenues resulting from
pandemic-related television production delays.
Cost of revenues decreased in the second quarter and for the first six months of
2020, primarily due to lower marketing of theatrical product, partially offset
by incremental costs incurred due to the production hiatus.
Selling, general and administrative decreased in the second quarter and
increased for the first six months of 2020. The decrease in the quarter was
primarily due to lower distribution fees and favorable collection experience
that allowed us to reduce our first quarter bad debt estimates for COVID-19. The
increase for the six months primarily resulted from higher first-quarter
pandemic-related bad debt expense and other charges.
Operating income increased in the second quarter and decreased for the first six
months of 2020. Our Warner Bros. operating income margin in the second quarter
increased from 13.0% in 2019 to 19.4% in 2020, and for the first six months
decreased from 14.3% in 2019 to 13.6% in 2020.
50--------------------------------------------------------------------------------
AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per
subscriber amounts
LATIN AMERICA SEGMENT Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Segment Operating Revenues
Vrio $ 752 $ 1,032 (27.1) % $ 1,639 $ 2,099 (21.9) %
Mexico 480 725 (33.8) 1,183 1,376 (14.0)
Total Segment Operating Revenues 1,232 1,757 (29.9) 2,822 3,475 (18.8)
Segment Operating Contribution Vrio (28) (2) - (67) 30 - Mexico (173) (207) 16.4 (318)
(412) 22.8
Total Segment Operating Contribution
Operating Results OurLatin America operations conduct business in their local currency and operating results are converted toU.S. dollars using official exchange rates, subjecting results to foreign currency fluctuations. InMay 2020 , we found it necessary to close our DIRECTV operations inVenezuela due to political instability in the country and to comply with sanctions of theU.S. government.
Operating revenues decreased in the second quarter and for the first six months of 2020 primarily driven by foreign exchange pressures and the impact of COVID-19.
Operating contribution increased in the second quarter and decreased for the first six months of 2020, reflecting foreign exchange pressures and the impact of COVID-19. OurLatin America segment operating income margin in the second quarter decreased from (12.6)% in 2019 to (17.0)% in 2020, and for the first six months decreased from (11.3)% in 2019 to (14.1)% in 2020. Latin America Business Unit Discussion Vrio Results Second Quarter Six-Month Period Percent Percent 2020 2019 Change 2020 2019 Change Operating revenues$ 752 $ 1,032 (27.1) %$ 1,639 $ 2,099 (21.9) % Operating expenses Operations and support 661 881 (25.0) 1,444 1,747 (17.3) Depreciation and amortization 127 165 (23.0) 274 334 (18.0) Total Operating Expenses 788 1,046 (24.7) 1,718 2,081 (17.4) Operating Income (36) (14) - (79) 18 - Equity in Net Income (Loss) of Affiliates 8 12 (33.3) 12 12 - Operating Contribution$ (28) $ (2) - %$ (67) $ 30 - % 51
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
The following tables highlight other key measures of performance for Vrio:
June 30, Percent
(in 000s) 2020 2019 Change
Vrio Video Subscribers 10,664 13,473 (20.8) %
Second Quarter Six -Month Period
Percent Percent
(in 000s) 2020 2019 Change 2020 2019 Change
Vrio Video Net Additions1 (312) (111) - % (426) (143) - %
1 The second-quarter and six-month period ended
resulting
from the closure of our DIRECTV operations in Venezuela .
Operating revenues decreased in the second quarter and for the first six months of 2020, primarily driven by foreign exchange and COVID-19 pressures.
Operations and support expenses decreased in the second quarter and for the
first six months of 2020, primarily driven by foreign exchange and COVID-19
pressures. Approximately 21% of Vrio expenses are
Depreciation expense decreased in the second quarter and for the first six months of 2020, primarily due to changes in foreign exchange rates.
Operating income decreased in the second quarter and for the first six months of
2020. Our Vrio operating income margin in the second quarter decreased from
(1.4)% in 2019 to (4.8)% in 2020, and for the first six months decreased from
0.9% in 2019 to (4.8)% in 2020. Our Vrio EBITDA margin in the second quarter
decreased from 14.6% in 2019 to 12.1% in 2020, and for the first six months
decreased from 16.8% in 2019 to 11.9% in 2020.
Mexico Results
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating revenues
Service $ 345 $ 479 (28.0) % $ 812 $ 921 (11.8) %
Equipment 135 246 (45.1) 371 455 (18.5)
Total Operating Revenues 480 725 (33.8) 1,183 1,376 (14.0)
Operating expenses
Operations and support 538 813 (33.8) 1,252 1,538 (18.6)
Depreciation and amortization 115 119 (3.4) 249 250 (0.4)
Total Operating Expenses 653 932 (29.9) 1,501 1,788 (16.1)
Operating Income (Loss) (173) (207) 16.4 (318) (412) 22.8
Equity in Net Income (Loss)
of Affiliates - - - - - -
Operating Contribution $ (173) $ (207) 16.4 % $ (318) $ (412) 22.8 %
52
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
The following tables highlight other key measures of performance forMexico : June 30, Percent (in 000s) 2020 2019 Change Mexico Wireless Subscribers Postpaid 4,771 5,489 (13.1) % Prepaid 12,777 12,180 4.9 Reseller 425 352 20.7 Total Mexico Wireless Subscribers 17,973 18,021 (0.3) % Second Quarter Six-Month Period Percent Percent (in 000s) 2020 2019 Change 2020 2019 Change Mexico Wireless Net Additions1 Postpaid (191) (153) (24.8) % (332) (222) (49.5) % Prepaid (915) 401 - (807) 515 - Reseller 21 51 (58.8) 53 99 (46.5) Mexico Wireless Net Additions (1,085) 299 - % (1,086) 392 - %
1 The second-quarter and six-month period ended
resulting from
conforming our policy on reporting of fixed wireless resellers.
Service revenues decreased in the second quarter and for the first six months of
2020, primarily due to foreign exchange pressures, as well as lower volumes and
store traffic related to COVID-19.
Equipment revenues decreased in the second quarter and for the first six months
of 2020, primarily due to lower equipment sales volumes related to COVID-19 and
foreign exchange rates.
Operations and support expenses decreased in the second quarter and for the
first six months of 2020, primarily due to changes in foreign exchange rates and
lower equipment sales. Approximately 8% of
Depreciation and amortization expense decreased in the second quarter and for the first six months of 2020, primarily due to foreign exchange pressures.
Operating income increased in the second quarter and first six months of 2020. OurMexico operating income margin in the second quarter decreased from (28.6)% in 2019 to (36.0)% in 2020, and for the first six months increased from (29.9)% in 2019 to (26.9)% in 2020. Our Mexico EBITDA margin in the second quarter was stable at (12.1)% in 2019 and 2020, and for the first six months increased from (11.8)% in 2019 to (5.8)% in 2020. 53
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION
As a supplemental presentation, we are providing a view of total advertising revenues generated byAT&T . See revenue categories tables in Note 5 for a reconciliation. Total Advertising Revenues Second Quarter Six-Month Period Percent Percent 2020 2019 Change 2020 2019 Change Operating Revenues Turner$ 796 $ 1,266 (37.1) %$ 1,753 $ 2,527 (30.6) % Entertainment Group 294 399 (26.3) 707 749 (5.6) Xandr 362 485 (25.4) 851 911 (6.6) Other 75 90 (16.7) 173 175 (1.1) Eliminations (294) (399) 26.3 (707) (749) 5.6
Total Advertising Revenues
SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION
As a supplemental presentation to our Communications segment operating results,
we are providing a view of our AT&T Business Solutions results which includes
both wireless and wireline operations. This combined view presents a complete
profile of the entire business customer relationship and underscores the
importance of mobile solutions to serving our business customers. Results have
been recast to conform to the current period's classification of consumer and
business wireless subscribers. See "Discussion and Reconciliation of Non-GAAP
Measure" for a reconciliation of these supplemental measures to the most
directly comparable financial measures calculated and presented in accordance
with GAAP.
Business Solutions Results
Second Quarter Six-Month Period
Percent Percent
2020 2019 Change 2020 2019 Change
Operating revenues
Wireless service $ 1,884 $ 1,881 0.2 % $ 3,833 $ 3,658 4.8 %
Strategic and managed services 3,943 3,834 2.8 7,822 7,613 2.7
Legacy voice and data services 2,067 2,324 (11.1) 4,196 4,721 (11.1)
Other service and equipment 364 449 (18.9) 688 751 (8.4)
Wireless equipment 585 617 (5.2) 1,295 1,207 7.3
Total Operating Revenues 8,843 9,105 (2.9) 17,834 17,950 (0.6)
Operating expenses
Operations and support 5,424 5,512 (1.6) 11,134 11,126 0.1
Depreciation and amortization 1,637 1,545 6.0 3,262 3,070 6.3
Total Operating Expenses 7,061 7,057 0.1 14,396 14,196 1.4
Operating Income 1,782 2,048 (13.0) 3,438 3,754 (8.4)
Equity in Net Income (Loss)
of Affiliates - - - - - -
Operating Contribution $ 1,782 $ 2,048 (13.0) % $ 3,438 $ 3,754 (8.4) %
54
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
OTHER BUSINESS MATTERS Spectrum Auction InMarch 2020 , we were the winning bidder of high-frequency 37/39 GHz licenses inFCC Auction 103 covering an average of 786 MHz nationwide for approximately$2,400 . Prior to the auction, we exchanged the 39 GHz licenses with a book value of approximately$300 that were previously acquired throughFiberTower Corporation for vouchers to be applied against the winning bids and recorded a$900 gain in the first quarter of 2020. These vouchers yielded a value of approximately$1,200 which was applied toward our$2,400 gross bids. We made our final payment of approximately$950 for the Auction 103 payment inApril 2020 . TheFCC granted the licenses inJune 2020 . Labor Contracts As ofJune 30, 2020 , we employed approximately 243,000 persons. Approximately 40% of our employees are represented by theCommunications Workers of America (CWA), theInternational Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the collective bargaining agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached. ?A contract covering approximately 7,000 Mobility employees expired inFebruary 2020 . InMarch 2020 , a new 4-year contract was ratified by employees and will expire inFebruary 2024 . ?A contract covering approximately 13,000 wireline employees in our West region expired inApril 2020 . InMarch 2020 , a tentative agreement was reached on a new 4-year contract. The tentative agreement is subject to ratification by employees.
?A contract covering approximately 14,000 employees in the Southwest region
scheduled to expire in
COMPETITIVE AND REGULATORY ENVIRONMENT
OverviewAT&T subsidiaries operating withinthe United States are subject to federal and state regulatory authorities.AT&T subsidiaries operating outsidethe United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided. In the Telecommunications Act of 1996 (Telecom Act),Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Nonetheless, over the ensuing two decades, theFCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. More recently, theFCC has pursued a more deregulatory agenda, eliminating a variety of antiquated and unnecessary regulations and streamlining its processes in a number of areas. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition. Communications Segment Internet TheFCC currently classifies fixed and mobile consumer broadband services as information services, subject to light-touch regulation. The D.C. Circuit upheld theFCC 's current classification, although it remanded three discrete issues to theFCC for further consideration. No party soughtSupreme Court review of the D.C. Circuit's decision, so that decision is final, although theFCC 's consideration of the three issues remains pending. Some states have adopted legislation or issued executive orders that would reimpose net neutrality rules repealed by theFCC . Suits have been filed concerning such laws in two states. InOctober 2016 , theFCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and 55
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Facebook. In
Privacy-related legislation has been considered or adopted in a number of states. Legislative and regulatory action and ballot initiatives could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. Effective as ofJanuary 1, 2020 , aCalifornia state law gives consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also givesCalifornia consumers the right to opt out of the sale of personal information. Wireless The industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of "small cell" equipment and therefore increase the need for local permitting processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede the deployment of infrastructure used to provide telecommunications and broadband services, including small cell equipment. In March, August andSeptember 2018 , theFCC adopted orders to streamline federal and local wireless infrastructure review processes in order to facilitate deployment of next-generation wireless facilities. Specifically, theFCC 'sMarch 2018 Order streamlined historical, tribal, and environmental review requirements for wireless infrastructure, including by excluding most small cell facilities from such review. The Order was appealed and inAugust 2019 , theD.C. Circuit Court of Appeals vacated theFCC 's finding that most small cell facilities are excluded from review, but otherwise upheld theFCC 's Order. TheFCC 's August andSeptember 2018 Orders simplified the regulations for attaching telecommunications equipment to utility poles and clarified when local government right-of-way access and use restrictions can be preempted because they unlawfully prohibit the provision of telecommunications services. Those orders were appealed to the9th Circuit Court of Appeals , where they remain pending. In addition to theFCC 's actions, to date, 28 states andPuerto Rico have adopted legislation to facilitate small cell deployment. InDecember 2018 , we introduced the nation's first commercial mobile 5G service. InJuly 2020 , we announced nationwide 5G coverage. We anticipate the introduction of 5G handsets and devices will contribute to a renewed interest in equipment upgrades. 56
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
LIQUIDITY AND CAPITAL RESOURCES
We had$16,941 in "Cash and cash equivalents" available atJune 30, 2020 . "Cash and cash equivalents" included cash of$3,781 and money market funds and other cash equivalents of$13,160 . Approximately$2,529 of our "Cash and cash equivalents" were held by our foreign entities in accounts predominantly outside of theU.S. and may be subject to restrictions on repatriation. The Company's liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the first six months of 2020. We will continue to monitor impacts on the COVID-19 pandemic on our liquidity and capital resources. "Cash and cash equivalents" increased$4,811 sinceDecember 31, 2019 . In the first six months of 2020, cash inflows were primarily provided by the cash receipts from operations, including cash from our sale and transfer of our receivables to third parties, and the issuances of commercial paper, long-term debt and cumulative preferred stock. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, spectrum acquisitions, debt repayments, funding capital expenditures and vendor financing payments, collateral posted to banks and other participants in derivative arrangements, share repurchase and dividends to stockholders.
Cash Provided by or Used in Operating Activities
During the first six months of 2020, cash provided by operating activities was$20,925 , compared to$25,336 for the first six months of 2019. Lower operating cash flows in 2020 were primarily driven by lower incremental receivable securitization (see Note 9). We actively manage the timing of our supplier payments for non-capital items to optimize the use of our cash. Among other things, we seek to make payments on 90-day or greater terms, while providing the suppliers with access to bank facilities that permit earlier payments at their cost. In addition, for payments to a key supplier, we have arrangements that allow us to extend payment terms up to 90 days at an additional cost to us (referred to as supplier financing). The net impact of supplier financing on cash from operating activities was to decrease working capital$1,452 and$496 for the six months endedJune 30, 2020 and 2019, respectively. All supplier financing payments are due within one year.
Cash Used in or Provided by Investing Activities
For the first six months of 2020, cash used in investing activities totaled
For capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. For the first six months of 2020, vendor financing payments were$1,354 , compared to$1,836 for the first six months of 2019. Capital expenditures in the first six months of 2020 were$9,432 , and when including$1,354 cash paid for vendor financing and excluding$79 of FirstNet reimbursements, gross capital investment was$10,865 ($1,728 lower than the prior-year comparable period). The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. During the first six months, we placed$1,681 of equipment in service under vendor financing arrangements (compared to$1,265 in the prior-year comparable period) and approximately$640 of assets related to the FirstNet build (compared to$600 in the prior-year comparable period). The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements.
Cash Provided by or Used in Financing Activities
For the first six months of 2020, cash used in financing activities totaled
57
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
During the first six months of 2020, debt issuances included proceeds of$8,440 in short-term borrowings and$21,060 of net proceeds from long-term debt. Borrowing activity consisted of approximately$2,940 in commercial paper draws and the following issuances: Issued and redeemed in 2020:
?March draw of
?April draw of
Issued and outstanding in 2020:
?February issuance of
?March borrowings of
?May issuances totaling$12,500 in global notes, comprised of$2,500 of 2.300% global notes due 2027,$3,000 of 2.750% global notes due 2031,$2,500 of 3.500% global notes due 2041,$3,000 of 3.650% global notes due 2051 and$1,500 of 3.850% global notes due 2060. ?May issuances totaling €3,000 million in global notes (approximately$3,281 at issuance), comprised of €1,750 million of 1.600% global notes due 2028, €750 million of 2.050% global notes due 2032 and €500 million of 2.600% global notes due 2038.
?June issuance of
During the first six months of 2020, repayments of debt included
Notes redeemed at maturity:
?
?
Notes redeemed prior to maturity:
?
?
?
?
?
?
?
?
Credit facilities repaid and other borrowings:
?
?
?
?
?
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.3% as ofJune 30, 2020 and 4.4% as ofDecember 31, 2019 . We had$164,099 of total notes and debentures outstanding atJune 30, 2020 , which included Euro, British pound sterling, Canadian dollar, Swiss franc, Australian dollar, Brazilian real, and Mexican peso denominated debt that totaled approximately$44,798 . 58
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
AtJune 30, 2020 , we had$15,576 of debt maturing within one year, consisting of$3,001 of commercial paper borrowings and$12,575 of long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders: ?An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the remainder of the zero-coupon note (issued for principal of$500 in 2007 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be$592 . For the first six months of 2020, we paid$1,354 of cash under our vendor financing program, compared to$1,836 in the first six months of 2019. Total vendor financing payables included in ourJune 30, 2020 consolidated balance sheet were approximately$1,556 , with$718 due within one year (in "Accounts payable and accrued liabilities") and the remainder predominantly due within two to three years (in "Other noncurrent liabilities").
Financing activities in the first six months of 2020 also included
We repurchased approximately 142 million shares of common stock, predominantly in the first quarter, and completed the share repurchase authorization approved by the Board of Directors in 2013. InMarch 2020 , we cancelled an accelerated share repurchase agreement that was planned for the second quarter and other repurchases to maintain flexibility and focus on continued investment in serving our customers, taking care of our employees and enhancing our network, including 5G. AtJune 30, 2020 , we had approximately 178 million shares remaining from our share repurchase authorizations approved by the Board of Directors in 2014. We paid dividends on common and preferred shares of$7,474 during the first six months of 2020, compared with$7,436 for the first six months of 2019. Dividends were higher in 2020, primarily due to dividend payments to preferred stockholders and the increase in our quarterly dividend on common stock approved by our Board of Directors inDecember 2019 , partially offset by fewer shares outstanding. Dividends on common stock declared by our Board of Directors totaled$1.04 per share in the first six months of 2020 and$1.02 per share for the first six months of 2019. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements ofAT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
Financing Activities Subsequent to the Second Quarter
Taking advantage of attractive rates, we completed the following financing activities subsequent to the second quarter of 2020.
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Credit Facilities The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K. We use credit facilities as a tool in managing our liquidity status. InDecember 2018 , we amended our five-year revolving credit agreement (the "Amended and Restated Credit Agreement") and concurrently entered into a new five-year agreement (the "Five Year Credit Agreement") such that we now have two$7,500 revolving credit agreements totaling$15,000 . The Amended and Restated Credit Agreement terminates onDecember 11, 2021 and the Five Year Credit Agreement terminates onDecember 11, 2023 . No amounts were outstanding under either agreement as ofJune 30, 2020 . InSeptember 2019 , we entered into and drew on a$1,300 term loan credit agreement containing (i) a 1.25 year$400 facility due in 2020 (BAML Tranche A Facility), (ii) a 2.25 year$400 facility due in 2021 (BAML Tranche B Facility), and (iii) a 3.25 year$500 facility due in 2022 (BAML Tranche C Facility), withBank of America, N.A ., as agent. These facilities were repaid and terminated in the second quarter of 2020.
On
We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases as well as a commercial paper program.
Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiringAT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As ofJune 30, 2020 , we were in compliance with the covenants for our credit facilities. Collateral Arrangements During 2019 and 2020, we amended collateral arrangements with certain counterparties to require cash collateral posting byAT&T only when derivative market values exceed certain thresholds. Under these arrangements, counterparties are still required to post collateral. During the first six months of 2020, we deposited approximately$518 of cash collateral, on a net basis as we exceeded the market value thresholds with some of the counterparties. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7)
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. AtJune 30, 2020 , our debt ratio was 46.6%, compared to 46.8% atJune 30, 2019 and 44.7% atDecember 31, 2019 . Our net debt ratio was 41.9% atJune 30, 2020 , compared to 44.5% atJune 30, 2019 and 41.4% atDecember 31, 2019 . The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments and debt acquired in business combinations. During the first six months of 2020, we have received$347 from the disposition of assets, and when combined with working capital monetization initiatives, which include the sale of receivables, total cash received from monetization efforts, net of$1,046 of spectrum acquisitions, was approximately$300 . We plan to continue to explore similar opportunities throughout 2020. 60
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.
Business Solutions Reconciliation
We provide a supplemental discussion of our Business Solutions operations that
is calculated by combining our Mobility and Business Wireline business units,
and then adjusting to remove non-business operations. The following table
presents a reconciliation of our supplemental Business Solutions results.
Three Months Ended
June 30, 2020 June 30, 2019
Business Business Business Business
Mobility Wireline Adjustments1 Solutions Mobility Wireline Adjustments1 SolutionsOperating Revenues Wireless service$ 13,669 $ -$ (11,785) $ 1,884 $ 13,824 $ -$ (11,943) $ 1,881 Strategic and managed services - 3,943 - 3,943 - 3,834 - 3,834 Legacy voice and data services - 2,067 - 2,067 - 2,324 - 2,324 Other service and equipment - 364 - 364 - 449 - 449 Wireless equipment 3,480 - (2,895) 585 3,468 - (2,851) 617 Total Operating Revenues 17,149 6,374 (14,680) 8,843 17,292 6,607 (14,794) 9,105 Operating Expenses Operations and support 9,332 3,779 (7,687) 5,424 9,522 3,975 (7,985) 5,512 EBITDA 7,817 2,595 (6,993) 3,419 7,770 2,632 (6,809) 3,593 Depreciation and amortization 2,012 1,318 (1,693) 1,637 2,003 1,242 (1,700) 1,545 Total Operating Expense 11,344 5,097 (9,380) 7,061 11,525 5,217 (9,685) 7,057 Operating Income 5,805 1,277 (5,300) 1,782 5,767 1,390 (5,109) 2,048 Equity in net income (loss) of affiliates - - - - - - - - Operating Contribution$ 5,805 $ 1,277 $ (5,300) $ 1,782
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AT&T INC. JUNE 30, 2020
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per
subscriber amounts
Six Months Ended
June 30, 2020 June 30, 2019
Business Business Business Business
Mobility Wireline Adjustments1 Solutions Mobility Wireline Adjustments1 SolutionsOperating Revenues Wireless service$ 27,637 $ -$ (23,804) $ 3,833 $ 27,453 $ -$ (23,795) $ 3,658 Strategic and managed 7,613 services - 7,822 - 7,822 - - 7,613 Legacy voice and data services - 4,196 - 4,196 - 4,721 - 4,721 Other service and equipment - 688 - 688 - 751 - 751 Wireless equipment 6,914 - (5,619) 1,295 7,202 - (5,995) 1,207 Total Operating Revenues 34,551 12,706 (29,423) 17,834 34,655 13,085 (29,790) 17,950 Operating Expenses Operations and support 18,901 7,730 (15,497) 11,134 19,563 8,007 (16,444) 11,126 EBITDA 15,650 4,976 (13,926) 6,700 15,092 5,078 (13,346) 6,824 Depreciation and amortization 4,057 2,619 (3,414) 3,262 4,016 2,464 (3,410) 3,070 Total Operating Expense 22,958 10,349 (18,911) 14,396 23,579 10,471 (19,854) 14,196 Operating Income 11,593 2,357 (10,512) 3,438 11,076 2,614 (9,936) 3,754 Equity in net income (loss) of affiliates - - - - - - - - Operating Contribution$ 11,593 $ 2,357 $ (10,512) $ 3,438
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