AT&T Inc. (T)

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AT&T (T)

Q3 2010 Earnings Call

October 21, 2010 10:00 am ET

Executives

Rick Lindner - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Brooks McCorcle - Senior Vice President of Investor Relations

Ralph de la Vega - Chief Executive Officer of AT&T Mobility and Consumer Markets and President of Mobility & Consumer Markets

Analysts

John Hodulik - UBS Investment Bank

Jonathan Chaplin - Crédit Suisse AG

Timothy Horan - Oppenheimer & Co. Inc.

Michael Rollins - Citigroup Inc

David Barden

Brett Feldman - Deutsche Bank AG

Jason Armstrong - Goldman Sachs Group Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the AT&T Third Quarter 2010 Earnings Release. [Operator Instructions] With that being said, I'll turn the conference now to Brooks McCorcle, Senior Vice President of Investor Relations for AT&T. Please go ahead.

Brooks McCorcle

Thank you, John. Good morning, everyone. Welcome to our third quarter conference call. It's great to have you with us this morning. As John mentioned, this is Brooks McCorcle, Head of Investor Relations for AT&T, and joining me on the call today are Rick Lindner, AT&T's Chief Financial Officer; and Ralph de la Vega, AT&T's President and CEO for Mobility and Consumer markets. Rick and Ralph will cover our results, then we'll follow with Q&A.

Let me remind you that our release, our investor briefing, our supplementary information and the presentation slides that accompany this call are all available on the Investor Relations page of the AT&T website. And as a reminder, that's 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 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, and reconciliations between the non-GAAP financial measures and the GAAP financial measures are also available on our website.

Before I turn the call over to Rick, let me call your attention to Slide 4, which provides a financial summary. Reported earnings per share for the quarter was $2.08, which includes the $0.13 gain from the cash sale of Sterling Commerce during the quarter and another $1.40 gain from a previously disclosed tax settlement. Excluding these gains, EPS was $0.55. That's up about 4% versus EPS for the third quarter a year ago and up about 9% year-to-date versus the same period last year. That's our third consecutive quarter of EPS growth before significant items.

Consolidated revenues were $31.6 billion, up both year-over-year and sequentially. And that was led by strong growth in mobile broadband U-verse services and advanced business offerings. Even with record integrated device sales, our consolidated operating margin was essentially flat from the prior year, reflecting operational improvements in network and support functions and solid execution on cost initiatives.

And free cash flow continues to be strong, $4 billion in the quarter and $11.6 billion year-to-date. With that, I will now turn the call over to AT&T's Chief Financial Officer, Rick Lindner. Rick?

Rick Lindner

Thanks, Brooks. Good morning, everyone. Before we get into the highlights on Slide 5, let me first just say we're very pleased with what we accomplished in the third quarter. First off, we are excited about the trends that we're seeing with revenue growth. Not only did we have a solid consolidated revenue growth quarter that was fueled by double-digit Wireless revenue growth, but we also saw Wireline consumer revenues grow for the first time in more than two years. Second, we continue to see the benefits of our mobile broadband strategy. We had just an incredible Wireless quarter across most every metric.

New customers are choosing AT&T and existing customers are renewing their contracts in record numbers. And I think that speaks volumes about both the strength of our network and the ever-widening selection of devices that we carry. Ralph will give you more details in a moment, but we are very pleased with the improvement that we're seeing in revenue trends.

We also continue to see improving revenue trends in our business markets, and I'll speak to those in just a few minutes. But from my perspective, the thing I'm most encouraged by is that even with pressure on margins from integrated device sales, we delivered good, consolidated margins with earnings growth and continued free cash flow. And I think that puts us in great position to have a solid year in 2010 with good momentum going forward.

With that overview, let's take a look at revenues on Slide 6. Consolidated revenue totaled $31.6 billion. That's up nearly $850 million versus third quarter a year ago, and that growth is due to strong Wireless growth to solid U-verse gains and to improved business trends. Our overall revenue mix continued its transformation in the third quarter, with 73% of revenues coming from Wireless, Wireline Data and Managed Services. That's up from 68% a year ago and 62% two years ago. Combined, the revenues from these sources were up nearly 10% in the third quarter, and we expect this shift to continue, and it's one of the reasons we have a positive long-term view of the business going forward, as growth of Wireless and Data outstrips declines of legacy services.

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