AT&T Inc. (T)

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AT&T Inc. (T)

Q1 2010 Earnings Call

April 21, 2010 10:00 am ET

Executives

Brooks McCorcle – Senior Vice President, Investor Relations

Richard Lindner – Chief Financial Officer

Analysts

John Hodulik - UBS

Jason Armstrong - Goldman Sachs

Simon Flannery - Morgan Stanley

Christopher Larsen - Piper Jaffray

David Barden - BofA Merrill Lynch

Jonathan Chaplin - Credit Suisse

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AT&T first quarterly earnings release 2010 conference call. (Operator Instructions) I would now like to turn the conference over to our host, Senior Vice President of Investor Relations for AT&T, Brooks McCorcle. Please go ahead.

Brooks McCorcle

Thank you Rich. Good morning everyone. Welcome to AT&T’s first quarter conference call. As Rich said this is Brooks McCorcle, head of Investor Relations for AT&T. And on behalf of everyone at our company we appreciate your interest and it’s really great to have you with us this morning.

Joining me on the call today is Rick Lindner, AT&T’s Chief Financial Officer. Rick will provide an update with a perspective on the quarter and then we’ll take your questions.

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’s www.att.com/investor.relations.

I also need to cover our Safe Harbor statement which is on Slide 2, 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 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 this presentation 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.

Before I turn the call over to Rick, let me quickly call your attention to Slide 3, which provides a consolidated financial summary. Before a previously disclosed non-cash charge, relating to the taxability of retiree healthcare subsidies, first quarter EPS was $0.59, which was up 11.3%. First quarter consolidated revenues grew year-over-year to $30.6 billion. That was supported by a double digit increase in wireless service revenues, continued mid-teens growth in strategic business products, and further AT&T U-verse gains. Consolidated margins improved both sequentially and year-over-year. We had substantial margin expansion in wireless, and wireline operating income margins were stable sequentially, reflecting solid execution in terms of our cost initiatives.

Finally, although down slightly from the first quarter a year ago, cash flow continues to be strong with cash from operating activities totaling $7.3 billion and free cash flow at $3.9 billion for the quarter.

With that quick overview, I’ll now turn the call over to AT&T’s Chief Financial Officer, Rick Lindner. Rick?

Richard Lindner

Thanks Brooks and good morning everyone. It’s good to have you with us this morning. Before we cover detailed results as we typically do, I’d like to start with a few comments on the quarter overall. The highlights are on Slide 4.

First of all, I’m pleased to be able to say that we had a terrific start to the year. Earnings per share before the non-cash charge was up double digits; consolidated revenues were up; margins expanded; cash flow was strong, and I think all of these reflect good execution on the plans that we outlined for you in January. Our wireless business continues to perform at a high level. We had 1.9 million net adds with continued strength in smart phones and connected devices. Wireless service revenues were up double digits; churn improved to best ever levels; postpaid ARPU grew again for the fifth consecutive quarter. And most important, even with continued strong iPhone activations we delivered substantial service wireless margin expansion to 44.5%.

The other area where we gained traction is in wireline consumer. In fact, we achieved our first sequential improvement in consumer revenues in several years. Our U-verse platform continues to scale and we had a nice rebound in broadband net adds. As a result, consumer IP revenues, that’s U-verse and broadband combined were up better than 32%.

In our business markets we’ve begun to see some early signs of improvement in the economy. Revenue and volume trends have begun to stabilize and sales of our most advanced services continued to be strong. Across the operations, we also continued to execute well on the cost side and that has helped us deliver strong margins and cash flow. So on a number of fronts, a positive quarter and a good start to the year.

Regarding the broader economic environment, in January we said that as we looked at 2010, we modeled a continuing but generally slow recovery. And while the economy has begun to show some encouraging signs, we continue to operate with that as a general framework. So that means we’re running the business in a way that allows us to deliver solid results that are not dependent on a quick economic upturn. And because we focused on cost improvement and margins, we believe we’re well positioned with good leverage when we do start to see meaningful improvement in the macro economy.

So with that as background, let’s get into the detailed results, starting with consolidated revenues on Slide 5. Consolidated revenue trends have stabilized over the past few quarters and as Brooks mentioned, in the first quarter they totaled $30.6 billion, up $78 million versus first quarter a year ago. The key drivers are first, wireless results that continue to be very strong; second, AT&T U-verse growth has driven steady improvement in our consumer trends; and third, business revenue comparisons are improving and we’re seeing signs that economic impacts may be moderating. Our overall revenue mix continues to undergo a substantial transformation, increasingly weighted to wireless, to wireline data and managed services.

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