AT&T reported financial results for the 2017 fourth quarter and full year, with executives saying the recent federal tax bill will benefit the First Responder Network Authority (FirstNet), and the public-safety network will be the foundation for AT&T’s 5G buildout.
The carrier, which last year won the FirstNet contract to build a nationwide public-safety broadband network (NPSBN), reported consolidated revenues for the fourth quarter of $41.7 billion versus $41.8 billion in the year-ago quarter, primarily because of declines in legacy wireline services, wireless service revenues and domestic video, which were mostly offset by growth in wireless equipment and international.
“The impact of tax reform and regulatory rationalization will be substantial and positive for the U.S. economy and AT&T,” said Randall Stephenson, AT&T chairman and CEO. “Our FirstNet win and the opt in by 100 percent of all states and territories will enable us to put the industry’s most robust spectrum assets to work in building a best-in-class nationwide network for public safety and first responders. On the Time Warner front, we look forward to presenting our case in court and closing the deal.”
Compared with results for the fourth quarter of 2016, operating expenses were $41.3 billion versus $37.6 billion primarily because of a write-off of certain network assets and higher wireless equipment costs. Operating income was $400 million versus $4.2 billion, and operating income margin was 0.9 percent versus 10.2 percent.
Fourth-quarter net income attributable to AT&T was $19 billion and reflects the impact of the Tax Cuts and Jobs Act, compared with $2.4 billion in the year-ago quarter. Cash from operating activities was $9.9 billion in the fourth quarter, and capital expenditures were $5.1 billion. Free cash flow — cash from operating activities minus capital expenditures — was $4.8 billion for the quarter.
“FirstNet is going to prove to be the foundation for taking wireless network performance to the next level,” Stephenson said in a call with investors. “That will be our foundation for broad 5G deployment.”
He said the FirstNet buildout is underway with new sites going up in unserved and underserved parts of the country. AT&T plans to deploy 40 megahertz of fallow spectrum it has accumulated over the years along with the FirstNet 700 MHz D block spectrum. AT&T will also deploy the millimeter wave (mmWave) spectrum from its FiberTower purchase.
For full-year 2017, compared with 2016 results, AT&T’s consolidated revenues totaled $160.5 billion versus $163.8 billion, primarily because of declines in legacy wireline services and wireless service revenues, partially offset by growth in international and strategic business services. Operating expenses were $139.6 billion compared with $139.4 billion. Operating income was $20.9 billion versus $24.3 billion, and operating income margin was 13.0 percent versus 14.9 percent.
Net income attributable to AT&T reflects the impact of the new tax law and was $29.5 billion versus $13 billion. With adjustments for both years, operating income was $31.8 for both years, and operating income margin was 19.8 percent versus 19.4 percent.
AT&T’s full-year cash from operating activities was $39.2 billion versus $39.3 billion in 2016. Capital expenditures, including capitalized interest, totaled $21.6 billion versus $22.4 billion in 2016. Full-year free cash flow was $17.6 billion compared with $16.9 billion in 2016.
In 2018, AT&T expects adjusted earnings per share in the $3.50 range and free cash flow of about $21 billion. 2018 capital expenditures are expected to approach $25 billion with $23 billion net of expected FirstNet reimbursements and inclusive of a $1 billion incremental tax reform investment.
John Stevens, AT&T chief financial officer (CFO), said FirstNet buildout plans are in place and ramping up quickly. The carrier will simultaneously deploy multiple spectrum bands. He said the timing of reimbursement impacts reported capital expenditures. “We may have FirstNet-related expenses this year that aren’t reimbursed until 2019,” he said during an investor call.
Steven said 80 percent of reimbursements will offset capital expenditures, with 20 percent offsetting operating expenses. “We expect to expense sustainability payments as paid, net of any recoveries for FirstNet-approved projects,” he said.
Under the contract, AT&T will be required to make 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 billion estimate,” said a Nov. 3 AT&T financial filing. The $6.5 billion “success-based payments” that AT&T receives from FirstNet are based on the number of states and territories that opted in to the nationwide public-safety broadband network (NPSBN).
Stevens outlined how expenses impacted by sustainability payments and interest on spectrum will affect shares. He said there will be a 5-cent-per-share impact from FirstNet sustainability payments and operations and a 5-cent-per-share impact from increased interest expense from placing Advanced Wireless Service (AWS) and Wireless Communications Service (WCS) spectrum into service.
Stephenson highlighted the benefits of 5G, including the technology’s low latency. He said devices that support 5G are not yet on the market, and that will slow uptake. “5G is the first technical innovation that truly gets us to low latency,” he said.
He also said the tax break will help AT&T to achieve and surpass the FirstNet goals.
“AT&T’s FirstNet contract will also bolster mobility subscriber additions in 2018 as the network will serve as a strong differentiator initially to attract first responders and will garner connections from mission-critical internet of things (IoT) applications such as wearables and telemetry solutions,” said Steve Vachon, a telecom analyst with Technology Business Research (TBR). “AT&T will face competition in the long term, however, as Verizon’s rival public-safety network is set to launch in 2018.”