AT&T and Verizon’s 4Q18 results hint at more layoffs as operators gear up for 5G

The 4Q18 results of the two US wireless biggies AT&T and Verizon suggests that headcount reduction remains a common focus. Both operators need to reduce their debt burden ahead of the 5G push.

Some highlights from their financial results:

• Capex drops as Verizon and AT&T prioritize debt repayment: By global standards, capital intensity for AT&T and Verizon is low. Their capital intensity has been in the range of 12-14%, lower than other European telcos such as DT, Orange and Telefonica (with capex/sales of 14-16%). Capex reported by AT&T and Verizon further declined YoY by 17% and 22%, respectively, in 4Q18. Recent M&A could be a major reason for this, as the companies have increased their focus on debt repayment. AT&T’s debt ratio declined from 56% in 3Q17 to 47.7% in 4Q18; strong free cash flow generation (~$8B in 4Q18) supported this drop. On a similar note, Verizon’s debt ratio also fell from 46% in 3Q17 to 43% in 4Q18; and generated a free cash flow of $17.7B in 2018. This might also be early signs of telcos saving cash and reducing debt to prepare for 5G.
• Unlike Verizon, AT&T shows revenue growth largely due to Time Warner acquisition: Verizon’s service revenues were flat (up just 0.1% YoY), mostly attributed to its media segment (which saw YoY revenue fall by 6%) and wireline segment (YoY revenue was down by 3.2%). However, AT&T reported strong YoY revenue growth (up 15%) in 4Q18 – primarily due to the WarnerMedia acquisition and strong growth from its wireless business. This is good news for AT&T which posted a YoY rise in revenue for the second consecutive quarter, after declining for seven straight quarters.
• AT&T asserts its position in the media space, while Verizon chooses to focus on its core competency: Verizon continued its momentum in its mobile segment, as wireless subs saw 1.2M postpaid net adds, and wireless revenues increased 2.7% YoY. However, Verizon wants to just stick to partnerships with other companies and not own content – especially after its after its Go90 video platform debacle (which shut down in mid-2018 due to low viewership and uninspiring original video programming). On the flipside, AT&T’s entertainment segment was a huge let down, as it lost 267,000 and 403,000 subs from its DirecTV Now (streaming service) and satellite service, respectively. This was due to the phase out of its promotional pricing of DirecTV Now subscribers. Despite these setbacks, AT&T remains bullish of its streaming and entertainment business. AT&T is pinning its hopes on its ‘to be launched’ standalone streaming service, which will have content from Turner Media networks, HBO, and WarnerMedia films.
• Verizon’s profit takes a dent as media business struggles: Facing a $4.6B write-down from its Verizon Media business (formed in 2017 post merger of Yahoo! and AOL), the group has accepted that they might have overpaid for media properties. In a Dec. 2018 8-K filing, Verizon stated that the merger of Yahoo! and AOL achieved lower-than-expected benefits. This was evident in 4Q18 results: Verizon’s net profit fell 89% YoY to $2.1B¹.

A year after Trump’s tax reforms, US telecom giants continue to slash headcount

Despite receiving huge tax breaks from the ‘Tax Cuts and Jobs Act of 2017,’ the telco giants continued to slash headcount and offshore jobs. In 4Q18, AT&T and Verizon reduced headcount by 7% and 4%, respectively from 4Q17 levels.

In 4Q17, AT&T recorded a whopping $19B profit and $3B of surplus cash due to the new tax law. Publicly, AT&T announced plans to increase its network spending with an estimated capex of $25B for 2018. However, AT&T fell far short of its own estimates as it spent just $20.7B in 2018 (which was just at par with its 2017 capex). Job cuts were also on the rise. According to the 2019 Communications Workers of America (CWA) report, AT&T cut 10,700 union jobs in 2018 and planned closure of three more call centers. To date, it has closed 44 call centers resulting in 16,000 job losses.

The corporate tax overhaul also did not stop Verizon from lowering its headcount:

• In December 2018, it announced a 7% cut of its workforce as part of its voluntary separation scheme⁴
• In early 2019, the company announced plans to sack 800 staff members (of 11,400 employees) from its Verizon Media business, as it struggled to compete with advertising giants such as Google and Facebook.

These cuts come despite the company’s recent growth in operating cash flow, and reduction in deferred tax liabilities, both related at least in part to the Trump tax law. Further, like AT&T, Verizon’s 2018 capex results were disappointing, as 4Q18 capex was down by 22% YoY.

Moreover, AT&T in its latest earnings also cited its plans to increase usage of automation, artificial intelligence (AI), and other technologies to drive efficiency gains – as demand for legacy services drops. This spells more bad news for headcount levels in the telecom industry. There is lots of hype in the market about how operators are undergoing digital transformations, and how this will bring greater efficiencies and new services. The stark reality is that it also means job cuts.

¹Verizon 8-K filing
²AT&T 4Q’17 results
³CWA report
⁴Verizon announces results of voluntary separation offer