Entries in AT&T:T (23)


4Q10 ILEC Quarterly Review - AT&T

Top Line Growing but So are Expenses

AT&T (NYSE:T) benefited in 2010 from its third (and final) year as the exclusive wireless service provider to offer the iPhone, as well as from its fiber to the node product, U-verse, on the wireline side.  Total connections increased by 5.2% in 2010, to more than 160m, with the strongest growth coming in the fourth quarter.  AT&T activated a whopping 4.1m iPhones in the period.

Wireless net adds of 2.8m in 4Q10 drove the connections growth; for the full year, AT&T added 8.9m new wireless connections. AT&T displaced Verizon Wireless as the largest wireless service provider nationwide in 2010, ending the year with 95.5m connections.  Of course, the pending acquisition of T-Mobile, announced in March, will put AT&T far ahead of the number two carrier if/when the deal closes. 

Notable, however, was the dominance of connected devices within the 2.8m wireless net adds.  Connected devices increased by a record 1.5m units, or more than half of total net adds.  The iPad and Android-based tablets grew by 442k in the fourth quarter; other connected devices growth came from eReaders, security systems, and fleet management. Wireless data revenue also continued to grow rapidly—no surprise given the strong sales of smartphones and tablet devices.  Data revenue grew more than 27% in 4Q10 versus the year earlier.  Retail net adds—postpaid and prepaid—totaled just 700k in 4Q10; wholesale adds accounted for the final 600k.

On the wireline side, AT&T ended the year with nearly 3m U-verse TV subscribers, and the company said that wireline consumer IP data revenue improved by 28.5%. 

The aggressive push for top-line growth in 2010 did have an effect on OIBDA and operating income last year. Capital investment in 2010 rose by $3b, driven by a more than 50% increase in wireless capex compared with 2009.  Free cash flow for the year fell to $14.7b compared with $17.1b in 2009. For 2011, AT&T said it expects modest improvement in free cash flow and that capex will be in the “low- to mid-$19b range.”  An increase in wireless capex this year is expected to be largely offset by a decline in wireline capital investment.    


4Q10 U-Verse vs. FiOS

AT&T and Verizon Report Steady Growth in U-Verse and FiOS

AT&T (NYSE:T) and Verizon (NYSE:VZ) have been reporting strong growth in video connections during recent quarters, largely as a result of the companies’ U-Verse and FiOS offerings.  AT&T’s U-Verse added between 200k-300k subs in every quarter of 2010 (248k in 4Q10 alone) and is growing at 44.7% annually.  Verizon’s FiOS has been growing somewhat more slowly than rival U-Verse (adding 197k during 4Q10), partially as a result of Verizon’s sale of lines to Frontier (NYSE:FTR) back on July 1, 2010.  Still, FiOS maintains a nearly 1.1m customer lead over U-Verse, ending 4Q10 with approximately 4.1m subs and reporting 18.9% year over year growth.


Phone Numbers: 2010 Goodwill and Intangible Asset Impairments

No Impairments, only Purchase Adjustments, Recognized During 2010

Every November we review the goodwill and intangible assets fair value reporting of the public ILECs.  Public companies are required to test the carrying value of goodwill and intangible assets on at least an annual basis.  Goodwill is generally defined as the cost of an acquisition in excess of fair value of the tangible and intangible assets acquired.  Since 2002, accounting rules have required that companies, at least once a year, determine the fair value of their assets and operations and compare that value to their carrying value (think book value) as reflected on the financial statements.  If the test determines the fair value is below the carrying value, the asset is impaired (think write-down) and the company must reduce the carrying value to fair value.  If the fair value of the asset is determined to be above the carrying value of the asset, nothing further is needed. 

Without putting too fine a point on it, companies “test” the carrying value of goodwill and intangible assets through standard valuation practices– namely discounted cash flow analysis and comparison with guideline public companies.  Back in the mid 2000’s, with record high stock prices and a very active deal market, values increased.  Once the Great Recession hit we saw many companies forced to write-down the value of assets purchased during the boom years. 

Last year when we analyzed goodwill and intangible asset impairments, we were surprised to find fewer asset impairments than we expected.  Internally, we speculated we would see another round of impairments as a result of testing conducted in 4Q09 and the first half of 2010 due to the continuing economic uncertainty.  The group as a whole reported $52.65m in impairments in 2007, $540.78m in 2008 and $37.5m in 2009.

But, in the first nine months of 2010 only two of the public ILECs reported adjustments to goodwill or intangible assets, and neither of those represented impairments.  AT&T (NYSE:T) reported $191m reduction of goodwill related to its acquisition of Centennial in November 2009.  This reduction was not an impairment but, rather, an adjustment to the preliminary purchase price allocation.  Plainly speaking, AT&T revised upward the value of some of the assets acquired once the deal closed, resulting in a lower goodwill number on the purchase price allocation reported on AT&T’s 3Q10 form 10-Q. 

Similarly, Cincinnati Bell (NYSE:CBB) reported a $1.9m adjustment to goodwill as a result of changes to the preliminary purchase price allocation related to its acquisition of CyrusOne Networks.  Aside from the adjustments to goodwill by AT&T and CBB, no goodwill or intangible asset impairments were reported by the public ILECs during the first nine months of 2010. 

In the full year 2009, only three companies reported impairments– AT&T reported $18m impairment to the carrying value of wireline licenses the company no longer plans to use.  And Telephone & Data Systems (NYSE:TDS) reported a $14m impairment to wireless licenses held by subsidiary U.S. Cellular (NYSE:USM).  2009 was the second year in a row USM wireless licenses were impaired– in 2008 TDS reported a $414m impairment, $387m of which was an impairment to wireless licenses held by USM.  TDS explains the impairment as a result of deterioration in credit markets, resulting in use of a higher discount rate in USM’s fair value calculation.  TDS also recognized $27.7m impairment charge on the consolidated level in 2008 to account for USM share repurchases because TDS’ ownership percentage increased as a result of the repurchases. 

Finally, D&E Communications, since acquired by Windstream (Nasdaq:WIN), reported an impairment to franchise intangible assets as a result of impairment testing conducted in April 2009.  The company explained the impairment as being “the result of an increase in the discount rate from 9.75% to 12.65%” used to calculate the fair value of the franchise intangible asset.  WIN has been very active on the deal front over the last year and a half, and the goodwill and intangible assets related to those deals now make up 48% of total assets on WIN’s balance sheet.  Going forward it will be interesting to see if the values of these acquisitions hold up, or whether WIN will see impairments at some point in the future. 

Because stock prices have not yet rebounded to their previous highs, and with access line trends putting downward pressure on revenues, we expected goodwill and intangible asset testing conducted in late 2009 and the first nine months of 2010 to prove out our expectation that values have continued to fall.  But, with very few impairments reported, we were curious as to why not?  Since we routinely calculate the implied business enterprise value (BEV) of the public companies for the Public Values charts at the back of this newsletter, we thought we might gain some insight by analyzing the trend of common valuation multiples–BEV to TTM revenue and BEV to TTM OIBDA– over the last few years. 

What this analysis shows is values have indeed come down considerably from mid-late 2007.  At September 30, 2007, the median BEV to TTM revenue multiple was 2.96x, meaning a hypothetical company that generated $100m in revenue would have been valued by the public markets at approximately $296m.  Fast forward to September 30, 2008 and 2009 and that value falls to $236m and $211m, respectively.  A very similar trend is evidenced by the BEV to TTM OIBDA multiples.  The median multiple fell from 7.58x OIBDA at September 30, 2007 to 6.02x and 5.98x at the same date in 2008 and 2009, respectively. 

More recently, both median revenue and OIBDA multiples at September 30, 2010 were slightly higher than 2009 figures, meaning that, for the time being anyway, values have stabilized and may be creeping higher, albeit at lower levels than in 2007. 

For example, Ntelos(Nasdaq:NTLS) revenue multiple dropped from 4.23x at September 30, 2007 to 1.6x  at September 30, 2009, and on the same date in 2010 had edged higher to reach 2.0x.  Qwest’s (NYSE:Q) revenue multiple tells a similar story, with BEV falling from 2.2x revenue at September 30, 2007 to 1.42x, 1.47x and 1.91x at September 30 of 2008, 2009 and 2010, respectively. 

Shenandoah Telecom’s (Nasdaq:SHEN) multiples tell a slightly different story, however, with BEV falling from 3.37x revenue at September 30, 2007 to 3.15x in 2009 and continuing to drop to 2.23x revenue at September 30, 2010, exactly at the median for the group as a whole. 

The BEV to TTM revenue multiples at a couple of ILECs actually came in higher at September 30, 2010 than at the same date in 2007.  Alaska Communications’ (Nasdaq:ALSK) BEV came in at 3.4x revenue, up from 3.09x at September 30, 2007.  Similarly, Consolidated Communications’ (Nasdaq:CNSL) September 30, 2010 BEV was 3.36x revenue, up from 3.23x at the same date in 2007.  Revenue multiples at both ALSK and CNSL were lower during 2008 and 2009. 

So, although values haven’t rebounded as much as many would have liked, they seem to have stabilized.  Furthermore, cash flow projections used during impairment testing in the dark days of the recession were possibly overly pessimistic, leading to lower valuations and larger impairments than may have been necessary (in hindsight).  Now, although access line losses continue to put downward pressure on revenues, with stabilizing values, it seems the impairments of these assets in the past were enough that there is still “water under the boat.”

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