INTERNATIONAL ACCOUNTING AT&T Vs. Verizon Case LORENZO ROSSI 1224242 1) It is absolutely reasonable to compare two corporations like AT&T and Verizon, since these two are very similar in characteristics and in the services they offer. Both companies are communications network providers and both provide to general customers and companies different services like wireless, wireline, broadband data, and video services along with managed m networking and wholesale services. More over, these two telecommunication giants are er as co structured in a really close manner; they are indeed set up on two main operating branches, eH w which are wireless and wireline. o. rs e A comparison between the two may be made for several different reasons; it could be done a ou urc research to better understand the industry, or to analyze and compare the financial position of each of the companies, or even to understand market strategies or to assess the weight of a o single company in the entire industry and the market share that it possesses. As a financial aC s vi y re analyst, in my case, I would definitely go and analyze the financial structure, position and strategy of AT&T and Verizon. From such a research I could gain important information on who might be a future market leader, or whom revenues will tend to increase over time, or which of the two ed d ar stu corporations may represent a better investment for me or for some of my hypothetical clients willing to invest in the telecommunication industry. Benefits from running such a comparison are sh is several and these up mentioned are just a few, since from the financial point of view, these two giant companies have long stories to tell and big questionings to be discovered. Th 2) Overall, people nowadays tend to have a higher need of communication means than it used to be in past times. And this tendency is visible even from year to year, especially on the Wireless side where every year there is a noticeable and impressive surge in subscriptions and so in revenues for these two companies. While the wireless side is going really strongly and really fast, https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 1 the wireline is struggling and it may be possible to see it disappear in some near future. The future is of course in the wireless side of communications and many people have already abandoned the wireline towards wireless. Overall though, the trend is that of an industry in constant and rapid growth, given also by the fast pace of technology, which goes hand by hand with the wireless and the communication industry as a whole. 3) Operating Results ($ Millions): 2010 2011 2012 2013 2014 Total Operating Revenue 124,280 126,723 127,434 128,752 132,447 Less: Cost of Services (Excluding Depreciation) 52,379 57,374 55,228 51,464 60,611 m Less: Selling General & Administrative 32,864 38,844 41,066 28,414 39,697 er as Less: Impairment & Other Charges 85 2,910 0 0 2,120 EBITDA 38,952 27,595 31,140 48,874 30,019 co 31% 22% 24% 38% 23% 28% eH w Less: Depreciation & Amortization 19,379 18,377 18,143 18,395 18,273 EBIT 19,573 9,218 12,997 30,479 11,746 o. 16% 7% 10% 24% 9% 13% Less: Interest Expense rs e Plus: Equity in Net Income of Affiliates 2,994 762 3,535 784 3,444 752 3,940 642 3,613 175 ou urc Plus: Other Income (1) 1,676 249 134 596 1,652 EBT 19,017 6,716 10,439 27,777 9,960 15% 5% 8% 22% 8% 12% Less: Taxes -1,162 2,532 2,900 9,224 3,442 o Net Income 20,179 4,184 7,539 18,553 6,518 16% 3% 6% 14% 5% 9% aC s Less: Income Attributable to Minority Interest 315 240 275 304 294 vi y re Net Income Attributable to AT&T Shareholders 19,864 3,944 7,264 18,249 6,224 16% 3% 6% 14% 5% 9% ed d ar stu Operating Results ($ Millions): 2010 2011 2012 2013 2014 Total Operating Revenue 106,565 110,875 115,846 120,550 127,079 Less: Cost of Services (Excluding Depreciation) 44,149 45,875 46,275 44,887 49,931 Less: Selling General & Administrative 31,366 35,624 39,951 27,089 41,016 sh is EBITDA 31,050 29,376 29,620 48,574 36,132 29% 26% 26% 40% 28% 30% Th Less: Depreciation & Amortization 16,405 16,496 16,460 16,606 16,533 EBIT 14,645 12,880 13,160 31,968 19,599 14% 12% 11% 27% 15% 16% Less: Interest Expense 2,523 2,827 2,571 2,667 4,915 Plus: Equity in Net Income of Affiliates 508 444 324 142 1,780 Plus: Other Income (Expense) 54 -14 -1,016 -166 -1,194 EBT 12,684 10,483 9,897 29,277 15,270 12% 9% 9% 24% 12% 13% Less: Taxes 2,467 285 -660 5,730 3,314 Net Income 10,217 10,198 10,557 23,547 11,956 10% 9% 9% 20% 9% 11% Less: Income Attributable to Non-controlling Interest 7,668 7,794 9,682 12,050 2,331 Net Income Attributable to Verizon Shareholders 2,549 2,404 875 11,497 9,625 2% 2% 1% 10% 8% 4% https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 2 The first table is relative to Verizon while the second regards AT&T. From the margin analysis I did, we may see a common trend for EBIT, EBT and Net Income margins, with a little difference that Verizon is more efficient since its margins are on average higher than AT&T ones. There is one exception though, we may see that Income attributable to minority interest (which may represent preferred stock holders) is much higher for Verizon, so that the actual Net income attributable to shareholders’ margin is higher for AT&T with respect to Verizon. Overall, trends are pretty much similar for both companies, but we can also notice how both companies over time tent to be less and less efficient since expenses are rising at a faster pace with respect to revenues. m er as co 4) eH w This is the data relative to Verizon (reorganized BS, showing NOA, then tables for NOWC and o. ratios). rs e ou urc Assets ($ Millions): 2009 2010 2011 2012 2013 2014 Accounts Receivable 12,573 11,781 11,776 12,576 12,439 13,993 Inventory 1,426 1,131 940 1,075 1,020 1,153 o Prepaid Expenses & Other Current Assets 5,247 2,223 4,269 4,021 3,406 3,324 Property, Plant & Equipment 91,985 87,711 88,434 88,642 88,956 89,947 aC s Wireless Licenses 72,067 72,996 73,250 77,744 75,747 75,341 vi y re Goodwill & Other Intangibles 29,236 27,818 29,235 30,072 30,434 30,367 Other Assets 8,756 5,635 5,155 4,128 4,535 6,628 Investments in Unconsolidated Businesses 3,118 3,497 3,448 3,401 3,432 802 Total Operating Assets 224,408 212,792 216,507 221,659 219,969 221,555 ed d Cash & Cash Equivalents 2,009 6,668 13,362 3,093 53,528 10,598 ar stu Short-Term Investments 490 545 592 470 601 555 Total Assets 226,907 220,005 230,461 225,222 274,098 232,708 Liabilities & Owners' Equity ($ Millions): 2009 2010 2011 2012 2013 2014 sh is Accounts Payable & Accrued Liabilities 15,223 15,702 14,689 16,182 16,453 16,680 Other Current Liabilities 6,708 7,353 11,223 6,405 6,664 8,649 Th Post-Retirement Obligations 32,622 28,164 32,957 34,346 27,682 33,280 Other Long-Term Liabilities 6,765 6,262 5,472 6,092 5,653 5,574 Deferred Taxes 19,190 22,818 25,060 24,667 28,639 41,578 Total Operating Liabilities 80,508 80,299 89,401 87,692 85,091 105,761 Current Portion of Long-Term Debt 7,205 7,542 4,849 4,369 3,933 2,735 Long-Term Debt 55,051 45,252 50,303 47,618 89,658 110,536 Total Owners' Equity 84,143 86,912 85,908 85,533 95,416 13,676 Total Liabilities & Owners' Equity 226,907 220,005 230,461 225,212 274,098 232,708 Net Operating Assets 143,900 132,493 127,106 133,967 134,878 115,794 Change -11,407 -5,387 6,861 911 -19,084 https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 3 Working Capital Ratios 2010 2011 2012 2013 2014 Daily Sales 292 304 317 330 348 Daily Expenses 207 223 236 197 249 DSO 40 39 40 38 40 Days Inventory 9 7 8 8 8 Days Prepaid Expenses 11 19 17 17 13 Days Payable 76 66 68 83 67 Days Other Current Liabilities 36 50 27 34 35 Cash-to-cash Cycle -51 -51 -30 -54 -40 Net Working Capital 2009 2010 2011 2012 2013 2014 Accounts Receivable 12,573 11,781 11,776 12,576 12,439 13,993 m Plus: Inventory 1,426 1,131 940 1,075 1,020 1,153 er as Plus: Prepaid Expenses & Other Current Assets 5,247 2,223 4,269 4,021 3,406 3,324 co Less: Accounts Payable & Accrued Liabilities 15,223 15,702 14,689 16,182 16,453 16,680 eH w Less: Other Current Liabilities 6,708 7,353 11,223 6,405 6,664 8,649 Net Working Capital -2,685 -7,920 -8,927 -4,915 -6,252 -6,859 o. rs e Following is the data relative to AT&T instead. ou urc Assets ($ Millions): 2009 2010 2011 2012 2013 2014 Accounts Receivable 14,845 13,610 13,231 12,657 12,918 14,527 Prepaid Expenses 1,562 1,458 1,102 1,035 960 831 o Other Current Assets 3,792 2,276 4,137 3,110 4,780 6,925 Property, Plant & Equipment 99,519 103,196 107,087 109,767 110,968 112,898 aC s Licenses 48,741 50,372 51,374 52,352 56,433 60,824 vi y re Customer Lists 7,393 4,708 2,757 1,391 0 0 Goodwill & Other Intangibles 78,276 79,041 76,054 74,805 75,052 75,831 Other Assets 6,275 6,705 6,467 6,713 8,278 10,998 Deferred Taxes 1,247 1,170 1,470 1,036 1,199 1,142 Investments in Affiliates 2,921 4,515 3,718 4,581 3,860 250 ed d Total Operating Assets 264,571 267,051 267,397 267,447 274,448 284,226 ar stu Cash & Cash Equivalents 3,741 1,437 3,045 4,868 3,339 8,603 Total Assets 268,312 268,488 270,442 272,315 277,787 292,829 Liabilities & Owners' Equity ($ Millions): 2009 2010 2011 2012 2013 2014 sh is Accounts Payable & Accrued Liabilities 21,260 20,055 19,956 20,911 21,107 23,592 Prepaid Revenue & Customer Deposits 4,170 4,086 3,872 3,808 4,212 4,105 Th Deferred Taxes 1,681 72 1,003 1,026 1,774 1,091 Post-Retirement Obligations 27,847 28,803 34,011 41,392 29,946 37,079 Deferred Taxes 23,579 22,070 25,748 28,491 36,308 37,544 Other Long-Term Liabilities 13,226 12,743 12,694 11,592 15,766 17,989 Total Operating Liabilities 91,763 87,829 97,284 107,220 109,113 121,400 Dividends Payable 2,479 2,542 2,608 2,556 2,404 2,438 Current Portion of Long-Term Debt 7,361 7,196 3,453 3,486 5,498 6,056 Long-Term Debt 64,720 58,971 61,300 66,358 69,290 76,011 Total Owners' Equity 101,989 111,950 105,797 92,695 91,482 86,924 Total Liabilities & Owners' Equity 373,301 369,060 380,420 391,127 402,666 432,218 Net Operating Assets 172,808 179,222 170,113 160,227 165,335 162,826 Change 6,414 -9,109 -9,886 5,108 -2,509 https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 4 Working Capital Ratios 2010 2011 2012 2013 2014 Daily Sales 340 347 349 353 363 Daily Expenses 234 272 264 219 281 DSO 40.0 38.1 36.3 36.6 40.0 Days Prepaid Expenses 6.2 4.1 3.9 4.4 3.0 Days Other Current Assets 9.7 15.2 11.8 21.8 24.7 Days Payable 85.8 73.5 79.3 96.4 84.1 Days Prepaid Revenue 12.2 11.8 11.1 10.8 11.6 Cash-to-cash Cycle -42 -28 -38 -44 -28 Net Operating Working Capital 2009 2010 2011 2012 2013 2014 Accounts Receivable 14,845 13,610 13,231 12,657 12,918 14,527 Plus: Prepaid Expenses 1,562 1,458 1,102 1,035 960 831 Plus: Other Current Assets 3,792 2,276 4,137 3,110 4,780 6,925 Less: Accounts Payable & Accrued Liabilities 21,260 20,055 19,956 20,911 21,107 23,592 m er as Less: Prepaid Revenue & Customer Deposits 4,170 4,086 3,872 3,808 4,212 4,105 Net Working Capital -5,231 -6,797 -5,358 -7,917 -6,661 -5,414 co eH w o. 5) rs e ou urc Here we see net operating assets and the amount of reinvestment in the business through long-‐ term assets from 2009 to 2014 for AT&T, from here we may see if the company has been o reinvesting in the business or not by looking at the change over the years. Overall, in these 6 aC s vi y re years the company has reinvested money into the business. Net Operating Assets 200,851 201,717 197,903 189,006 205,846 207,060 ed d Change 866 -3,814 -8,897 16,840 1,214 ar stu Ending Balance in Long-term Assets 2010 2011 2012 2013 2014 PPE 103,196 107,087 109,767 110,968 112,898 Licenses 50,372 51,374 52,352 56,433 60,824 sh is Customer Lists 4,708 2,757 1,391 0 0 Other Assets 6,705 6,467 6,713 8,278 10,998 Th Total Ending Balance in Long Term Assets 164,981 167,685 170,223 175,679 184,720 Beginning Balance in Long-term Assets PPE 99,519 103,196 107,087 109,767 110,968 Licenses 48,741 50,372 51,374 52,352 56,433 Customer Lists 7,393 4,708 2,757 1,391 0 Other Assets 6,275 6,705 6,467 6,713 8,278 Total Beginning Balance in Long Term Assets 161,928 164,981 167,685 170,223 175,679 Depreciation 19,379 18,377 18,143 18,395 18,273 Reinvestment in the business 22,432 21,081 20,681 23,851 27,314 W/o Depreciation 3,053 2,704 2,538 5,456 9,041 https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 5 For Verizon instead, we may see underneath, that from 2009 to 2014 there have been many variations but overall the company has not much reinvested into the business since over these 6 years NOA have actually decreased and long term assets haven’t changed much. Net Operating Assets 157,981 152,441 149,035 157,197 161,203 155,516 Change -5,540 -3,406 8,162 4,006 -5,687 Ending Balance in Long-term Assets 2010 2011 2012 2013 2014 PPE 87,711 88,434 88,642 88,956 89,947 Wireless Licenses 72,996 73,250 77,744 75,747 75,341 Investments in Unconsolidated Businesses 3,497 3,448 3,401 3,432 802 m er as Other Assets 5,635 5,155 4,128 4,535 6,628 Total Ending Balance in Long Term Assets 169,839 170,287 173,915 172,670 172,718 co eH w Beginning Balance in Long-term Assets o. PPE 91,985 87,711 88,434 88,642 88,956 Wireless Licenses rs e 72,067 72,996 73,250 77,744 75,747 ou urc Investments in Unconsolidated Businesses 3,118 3,497 3,448 3,401 3,432 Other Assets 8,756 5,635 5,155 4,128 4,535 Total Beginning Balance in Long Term Assets 175,926 169,839 170,287 173,915 172,670 o Depreciation aC s 16,405 16,496 16,460 16,606 16,533 vi y re Reinvestment in the business 10,318 16,944 20,088 15,361 16,581 W/o Depreciation -6,087 448 3,628 -1,245 48 ed d 6) ar stu Here is Unlevered FCF for Verizon. Unlevered FCF 2010 2011 2012 2013 2014 sh is EBIAT 8,787 7,728 7,896 19,181 11,759 Th Less: Change in NOA -5,540 -3,406 8,162 4,006 -5,687 Unlevered FCF 14,327 11,134 -266 15,175 17,446 Underneath, there is Unlevered FCF for AT&T instead. Unlevered FCF 2010 2011 2012 2013 2014 EBIAT 11,744 5,531 7,798 18,287 7,048 Less: Change in NOA 866 -3,814 -8,897 16,840 1,214 Unlevered FCF 10,878 9,345 16,695 1,447 5,834 https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 6 7) I calculate ROE as Total asset turnover times Profit margin times equity multiplier. Instead, for RNOA I posed EBIAT over NOA, for ROOA I posed (EBIAT + (Operating Liabilities*(1-‐Tax Rate)) all over Total Operating assets. I get return from operating leverage as (op liab/noa)*(rooa*((0.6)*r)) and return from financial leverage as (net debt/equity)*(rnoa-‐r(1-‐t)). This is for AT&T. 2010 2011 2012 2013 2014 m Total Asset Turnover 46% 47% 47% 46% 45% er as Profit Margin 16% 3% 6% 14% 5% Equity Multiplier 2.4 2.6 2.9 3.0 3.4 co eH w ROE 18% 4% 8% 20% 7% o. rs e ou urc 2010 2011 2012 2013 2014 RNOA 6.6% 3.3% 4.9% 11.1% 4.3% ROOA 4.8% 2.5% 3.4% 7.1% 3.0% o ROE 18% 4% 8% 20% 7% aC s Return From Operating Leverage 1.8% 0.7% 1.5% 3.9% 1.3% vi y re Return From Financial Leverage 11.5% 0.7% 3.3% 9.2% 3.2% ed d This is for Verizon. ar stu 2010 2011 2012 2013 2014 Total Asset Turnover 48% 48% 51% 44% 55% sh is Profit Margin 10% 9% 9% 20% 9% Equity Multiplier 2.5 2.7 2.6 2.9 17.0 Th ROE 12% 12% 12% 25% 87% 2010 2011 2012 2013 2014 RNOA 6.6% 6.1% 5.9% 14.2% 10.2% ROOA 4.6% 4.1% 4.0% 9.2% 5.9% ROE 11.8% 11.9% 12.3% 24.7% 21.9% Return From Operating Leverage 2.0% 2.0% 1.9% 5.0% 4.3% Return From Financial Leverage 5.1% 5.8% 6.4% 10.5% 11.7% https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 7 8) By taking a look at the numbers, postpaid subscribers increased dramatically in the last 5/6 years for both companies, while the number of prepaid subscribers decreased in the meanwhile. So totally the number of total subscriptions increased massively over these years, and this is mainly due to postpaid subscribers; this may be due to improvements in technology over the years, where paying with credit cards and so with postpaid automatic refill accounts may have gotten easier. ARPU instead has decreased over time and this is mainly due by the customer shift toward installment purchases, and away from extended service contracts. EBIT and EBITDA margins are volatile but they mainly stay over an average of 28/30% for EBITDA and 13/16% for EBIT. m er as co 9) eH w Overall, there has been a huge increase in the wireless industry. Both firms have experienced a o. rs e rise in revenues and customers in it. This may be mainly driven by the fact that mobile devices ou urc have increased dramatically in the last few years and so consequently the use of wireless connection. More over, the convergence of voice, data and video in unique packets on wireless o platforms pumped up even more the industry. aC s vi y re 10) In the wireline sector, mainly corporations, and not much individual customers, are still keeping ed d ar stu up the industry. This market has seen a deteriorating trend over the last decade due primarily to the rise of the wireless connections. The wireline industry is mainly driven by the fact that much sh is of a packet’s life is wireline before becoming wireless, so even today, many people still utilize wireline connections and this is the key factor that still keeps up the industry. Th 11) The overall strategy for each firm obviously is to move towards the wireless market since it represents the market and the industry of the future as I think that the wireline industry is destined to die and disappear in a near future. This indeed may be seen from the data given, as we can see that year by year the market for wireline has been going down. The strategy is, in my https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 8 opinion, to make as much technological improvements as possible in the wireless industry, and to invest more and more capital on it in order to facilitate the customer experience. I definitely expect to see the wireless market to increase massively and the wireline to disappear completely over the long run. m er as co eH w o. rs e ou urc o aC s vi y re ed d ar stu sh is Th https://www.coursehero.com/file/13702395/Accounting-ATT-V-Verizon-Case/ 9 Powered by TCPDF (www.tcpdf.org)