Q3 2008 AT&T Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Good morning, ladies and gentlemen and welcome to the AT&T third-quarter earnings release 2008 conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Ms. Brooks McCorcle. Ms. McCorcle, you may begin.

BROOKS MCCORCLE, IR, AT&T INC.: Thank you, Sandra. Good morning, everyone and welcome to our third-quarter conference call. It is really good to have you with us this morning. As Sandra mentioned, this is Brooks McCorcle. I run Investor Relations for AT&T and joining me on the call this morning are Rick Lindner, AT&T's Chief Financial Officer and Ralph de la Vega, AT&T's President and Chief Executive Officer for Mobility and Consumer Markets.

As you know, we released third-quarter results earlier this morning and as you have seen, our wireless results were a key driver. So we wanted to have Ralph on the call this morning to talk about the business and provide additional background.

Before we get underway, let me remind you that our release, investor briefing, supplementary information and the presentation slides that accompany this call are all available on the Investor Relations page of the AT&T website. That is www.ATT.com/investor.relations.

I also need to cover our Safe Harbor statement, which is on slide 3. And that says that information set forth in this presentation contains financial estimates and other forward-looking statements that are subject to risks and uncertainties and that actual results may differ materially. A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update or revise statements contained in these presentations based on new information or otherwise.

This presentation may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are also available on our website at www.ATT.com/investor.relations.

With that covered, let me take you through our EPS comparisons, which are on slide 4. Reported EPS this quarter was $0.55. We had $0.12 of non-cash merger costs and the result is adjusted EPS of $0.67. There are a couple of things that are not excluded from our adjusted results that I want to mention. First, our third-quarter reported and adjusted EPS does not exclude approximately $0.10 of pressure related to very strong results generated by our iPhone 3G initiative. As we have outlined previously, these are success-based costs. Obviously, we are thrilled by the terrific response. Demand was greater than we anticipated. We are certainly winning customers at the high end and as Ralph will cover in more detail, this is really great for our business long term.

Also, third-quarter reported and adjusted EPS does not exclude approximately $0.02 of pressure due to costs associated with hurricanes, including Hurricanes Ike and Gustav, which, as you know, struck the Gulf Coast in September. Restoration work is continuing and we expect additional storm impacts in our fourth-quarter results. With that background, I'll now turn the call over to AT&T's Senior Executive Vice President and CFO, Rick Lindner. Rick?

RICK LINDNER, SENIOR EVP & CFO, AT&T INC.: Thanks, Brooks and good morning, everyone. It is great to be with you again. Before I dive into the slides, I want to make just a few general comments. When I look at the quarter, I believe our results show that while no business is immune to the broader environment, our business mix is more resilient than most. Our revenue streams are predominantly subscription-based. I believe we have the best assets in the telecom industry, along with terrific scale. And we are very sound financially and we are executing with a great deal of discipline.

Looking ahead, we have opportunities, both in terms of revenue initiatives, as well as on the cost side of our business. We have a seasoned management team and we know how to adjust and drive operations.

As you may have read recently, we have begun a reorganization of our business to simplify operations and make sure our customer focus remains sharp and that our business initiatives move forward as technology and our networks advance.

Along with that, we will have opportunities to improve costs. Our planning is just getting underway and we will have more to report in the quarters ahead, but this is just to re-emphasize the point that while the macroenvironment is obviously not ideal, there are still opportunities to improve operations and that is where we were focused.

Now if I may, let me start with slide 5, which lays out our third-quarter highlights. As Ralph will cover in more detail, we drove terrific growth this quarter in wireless. 2 million net ads, 1.7 million of them postpaid; the best postpaid results for any quarter in our history; 2.4 million iPhone activations, roughly 40% of them for new AT&T customers; continued 50% plus wireless data growth and continued mid-teens growth in total wireless revenues, up 15.4% this quarter.

In addition, our business trends continue to be stable. We had sequential growth in enterprise, wholesale and regional business, all three areas. Our U-verse TV service continues to ramp and we are on track to exceed a million subscribers this year. And we continue to have a strong balance sheet. We reduced debt in the third quarter as we told you we would. We continue to have access to the credit markets and we have the financial strength to return value to shareowners and invest in the future of our business.

Turning to slide 6, slide 6 shows our consolidated revenues. Total revenues for the quarter topped $31 billion. That is up more than $1 billion or 3.3% versus adjusted results for the year-ago quarter. And it is up 1.5% sequentially. The major drivers are wireless where, as I said, revenues grew 15.4% and wireline IP data revenues, which were up 16.2%. This includes consumer U-verse services in broadband and on the business side, it includes services such as Virtual Private Networking, managed Internet services and hosting.

Our overall business trends continue to be quite stable. In enterprise, the economic effects we are seeing are primarily in voice usage and some data transport, but deal flow continues to be good. And our wholesale business continued its major turnaround reflecting solid demand and incremental revenue from our IBM relationship. These positives more than offset pressures from wireline consumer voice.

Now this is the point in the webcast where I normally drill down on each of these areas starting with wireless, but I am pleased to say this quarter we have with us Ralph de la Vega who heads up our wireless and consumer operations. So I will let Ralph take you through the next several slides and then I will be back with comments on wireline results, margins and cash. Ralph?

RALPH DE LA VEGA, PRESIDENT & CEO, MOBILITY & CONSUMER, AT&T INC.: Thanks, Rick and good morning to everyone on the call. I am very pleased to be here and what a great time to talk about our wireless business. Not just because we have terrific subscriber numbers to report, but even more important because I'm confident we are on a very solid path for continued good growth.

In June, we outlined for you our plan to accelerate growth in a new era of wireless data services. The foundation for that plan is our 3G network, which is now deployed in 324 US cities and performing very well. The catalyst for our plan was a breakthrough device, the iPhone 3G, which was launched as an AT&T exclusive on July 11. The results are on slide 7, but here are the key takeaways. Number one, iPhone 3G activations have exceeded our expectations and they have brought a significant halo effect, which has driven store traffic and helped sales of other devices.

Number two, the iPhone is delivering very high-quality customers with great ARPU and churn. In simple words, we are winning share at the high end. Number three, our wireless data revenue growth continues to be impressive, above 50% again this quarter and we are still early in the game. And number four, AT&T is on a very sound wireless technology path, which gives us incremental steps to further increase wireless speeds in a timely fashion on our way to 4G with seamless, backwards compatibility for customers.

So my message this morning is as follows. Our iPhone 3G initiative is doing everything we had hoped for and more and that is great for our business going forward and we have a very strong technology and network roadmap, which we believe offers tremendous opportunity for us.

Those are the headlines. Now let me talk about the detailed results, starting on slide 8. We launched the iPhone 3G on July 11, so we had 82 selling days in the quarter and in those 82 days, we activated 2.4 million iPhone 3G units, 40% of them to customers who were new to AT&T. This was 2.4 times our pace with the original iPhone through September of last year. …