AT&T Inc. (T)

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AT&T (T)

Q2 2011 Earnings Call

July 21, 2011 10:00 am ET

Executives

Brooks McCorcle - Senior Vice President of Investor Relations

Wayne Watts - Senior Executive Vice President and General Counsel

Randall Stephenson - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

John Stephens - Chief Financial Officer and Senior Vice President

Analysts

Christopher Larsen - Piper Jaffray Companies

John Hodulik - UBS Investment Bank

Craig Moffett - Sanford C. Bernstein & Co., Inc.

Michael McCormack - Nomura Securities Co. Ltd.

Philip Cusick - JP Morgan Chase & Co

Jonathan Chaplin - Crédit Suisse AG

Michael Rollins - Citigroup Inc

Simon Flannery - Morgan Stanley

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 Second Quarterly Earnings Release 2011. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Senior Vice President of Investor Relations, Brooks McCorcle. Please go ahead.

Brooks McCorcle

Thanks, Keeley. Good morning, everyone, and welcome to our second quarter conference call. It's really great to have you with us this morning. As Keeley mentioned, this is Brooks McCorcle, Head of Investor Relations for AT&T. And joining me on the call today are John Stephens, AT&T's Chief Financial Officer; and Wayne Watts, AT&T's General Counsel. John will cover our results, and Wayne will give us an update on the AT&T, T-Mobile merger process, then we'll follow with Qs and As.

Let me remind you that our release, investor briefing, supplementary information and the presentation slides that accompany this call are 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 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 the 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. And again, that's at www.att.com/investor.relations.

Before I turn the call over to John, let me quickly cover our consolidated financial summary, which is on Slide 4. Earnings per share for the quarter was $0.60, consistent with last year's EPS before a onetime gain, and up more than 5% sequentially. Our reported EPS this quarter includes $0.02 of pressure from Alltel integration costs and storm costs in the Southeast and Missouri. As we mentioned earlier this year, Alltel integration costs impact margins, Wireless churn and subscriber numbers. After this quarter, these impacts will be largely behind us.

The fundamental trends in our business continue to be quite solid. Consolidated revenue continues to grow for the sixth quarter in a row, up 2.2% year-over-year thanks to strength in mobile broadband, U-verse and advanced business offerings. Even with another quarter of record smartphone sales, our consolidated operating margin remained relatively stable with the prior year and was up sequentially. Cash flow continues to be strong, with cash from operating activities for the quarter totaling $9 billion and free cash flow of $3.7 billion.

With that quick overview, I will now turn the call over to AT&T's Chief Financial Officer, John Stephens. John?

John Stephens

Thanks, Brooks, and good morning, everyone. It's great to have you with us today. Much of the public discussion of late has centered on our planned acquisition of T-Mobile USA, and AT&T's General Counsel, Wayne Watts, will be along in just a minute to provide an update on the approval process. But while that has been going on, we have done an excellent job in executing on our strategies and growing the business.

Let me share a few highlights that are on Slide 5. Consolidated revenues were up year-over-year and sequentially, led by strong Wireless growth and increasing stability in our Wireline revenues. Earnings were solid even when including Alltel integration and storm-related costs. Margins expanded sequentially across the board, Wireless, Wireline and total, and were generally stable from a year ago. Free cash flow was strong, and we continue to expect growth for the year.

Driving these financial results was another incredible quarter in mobile broadband. Smartphone sales set another quarterly record. Postpaid ARPU grew for the 10th consecutive quarter, a record unmatched in the industry. Mobile data growth remains strong and is now an annualized $22 billion revenue stream. We also had solid net adds, with growth in every subscriber category, including having our best quarter yet in branded computing devices. And our Wireline business is showing signs that it soon will be growing again.

U-verse continues to be strong, adding subscribers, increasing triple-play ARPU and is now a $6.5 billion annualized revenue stream. In fact, fast-growing consumer IP data now represents about half of our total consumer revenues. That's right. Our Consumer Wireline business now has over half of its revenues from IP data.

And strategic business services had almost 20% revenue growth. It's best performance in 6 quarters, driving sequentially stable business Wireline revenues even without significant economic recovery.

With that quick overview, let's take a look at detailed results starting on Slide 6. Consolidated revenues totaled $31.5 billion, up $687 million versus the second quarter a year ago due to continued strong mobile broadband growth, U-verse revenue growth of more than 50% and increasing stability in Wireline business revenues with strategic business service revenues growing almost 20%.

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