AT&T and Verizon Financial Statement Analysis Essay

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AT&T and Verizon

Background

Both AT&T and Verizon have their roots as Baby Bells, large telecom companies that arose after the breakup of Bell. These are two of the largest telecom companies in the United States. At the time of the breakup, telecom was a highly stable business based on landline telecommunications, but the industry has transformed and is now strongly driven by wireless. As wireless technology continues to improve, being a player in wireless means having a high level of investment in fixed infrastructure assets, something that is evident on the balance sheets of both of these companies.

However, these companies differ significantly on how they are structured. Their businesses are very similar, but AT&T has kept a relatively low debt level, and sought growth through expansion. The massive amount of goodwill on its balance sheet and relatively small amount of long-term debt indicate this. Verizon, by contrast, has not been a player in M&A to nearly the same degree that AT&T has been, and instead has taken on debt in order to finance its infrastructure buildout. The analysis of the finances of these two companies shows that while they have similar businesses in terms of operations, they have very different approaches to these businesses from a financial perspective, and that these differences have a significant impact on the shareholders of these two companies.

The common size income statements for AT&T and Verizon for the past two years are as follows:

Income Statement

Raw

CS

Raw

CS

2016

2015

Revenue

163786

100.00%

146801

100.00%

Cost of Service

76884

46.94%

67046

45.67%

Gross Income

86902

53.06%

79755

54.33%

SGA Exp

36347

22.19%

32919

22.42%

Impairments

361

0.22%

35

0.02%

Depreciation

25847

15.78%

22016

15.00%

Operating Income

24347

14.87%

24785

16.88%

Net Income

13333

8.14%

13345

9.09%

Verizon

Income Statement

Raw

CS

Raw

CS

2016

2015

Revenue

125980

100.00%

131620

100.00%

Cost of Service

51424

40.

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82%

52557

39.93%

Gross Income

74556

59.18%

79063

60.07%

SGA Exp

31569

25.06%

29986

22.78%

Impairments

0

0.00%

0

0.00%

Depreciation

15928

12.64%

16017

12.17%

Operating Income

27059

21.48%

33060

25.12%

Net Income

13608

10.80%

18375

13.96%

The common size statements allow for easier comparison of the two companies. There are a couple of things that stand out from this analysis. The first is that AT&T has a much higher cost of service than does Verizon. As a consequence, AT&T ends up with lower operating and net margins. Both companies have roughly the same selling, general and administrative expenses, though Verizon's increased in 2016. It is worth noting that Verizon's raw number only increased by a couple of million dollars, but the revenue figures decreased, which made SGA expense, which is generally viewed as a fixed cost, a much greater percentage of revenues. It was probably targeted to be more at 22% again, but went higher when revenue failed to reach 2015 levels. The cost of service increased slightly as well. The operating expense took a hit at a result.

While Verizon saw its revenues decrease, AT&T saw a significant increase in expenses. As with Verizon, AT&T saw the cost of service increase slightly, but its SGA expense was held around the same. The company has a higher depreciation expense to begin with, and that actually increased despite the increased revenues. AT&T saw its profit increase in terms of raw number but the profit margin diminished.

Comparing the performance of the two companies on their common size income statements, AT&T had a better year in 2016 in a lot of respects, but still performs more poorly in terms of its margins and cost structure than Verizon does.

AT&T

Balance Sheet

Raw

CS

Raw

CS

2016

2015

Cash

5788

1.44%

5121

1.27%

Accounts Rec

16794

4.16%

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