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| T > SEC Filings for T > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as "we," "AT&T," or the "Company" throughout this document and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry in both the United States and internationally providing telecommunications services and equipment as well as directory advertising and publishing services. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2008. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.
Consolidated Results Our financial results in the first quarter of 2009 and 2008 are summarized as follows:
First Quarter
Percent
2009 2008 Change
Operating Revenues $ 30,571 $ 30,744 (0.6 )%
Operating expenses
Cost of sales 12,242 11,995 2.1
Selling, general and administrative 7,706 7,866 (2.0 )
Depreciation and amortization 4,886 4,903 (0.3 )
Total Operating Expenses 24,834 24,764 0.3
Operating income 5,737 5,980 (4.1 )
Income before income taxes 5,010 5,449 (8.1 )
Net Income Attributable to AT&T $ 3,126 $ 3,461 (9.7 )%
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Overview
Operating income Our operating income decreased $243, or 4.1%, in the first
quarter of 2009, primarily due to the continued decline in voice revenues along
with an increase in pension and other postemployment benefits (OPEB) expense,
partially offset by growth in wireless service revenues. Operating income also
decreased in part due to higher cost of sales in our wireless segment mainly
attributed to the sales of the Apple iPhone 3G introduced in the middle of 2008.
These factors resulted in a decrease in our operating income margin from 19.5%
to 18.8% in the first quarter 2009 as compared to the same period last year.
Operating revenues Our operating revenues decreased $173, or 0.6%, in the first quarter of 2009, primarily due to a decline in voice revenues of $1,187 along with declines in directory and other revenue of $149 and $156, respectively. These declines were largely offset by an increase in wireless service revenue of $1,041 due to continuing growth in wireless subscribers, and an increase in data revenues of $278 largely due to U-verse and broadband growth.
The decline in our voice revenues reflects continuing economic pressures on our consumer and business wireline customers. Our retail access lines continued to decline as customers disconnected both primary and additional landlines and switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data. While we lose the voice revenues, we have the opportunity to increase wireless service revenues should the customer choose us as their wireless provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.
Cost of sales expenses increased $247, or 2.1%, in the first quarter of 2009, reflecting higher wireless equipment costs driven by the continued success of the Apple iPhone 3G. Also contributing to the higher cost of sales was an increase in pension and OPEB expense due to lower expected return on assets and an increase in amortization of unrecognized actuarial losses, both primarily from investment losses in 2008. These increases were partially offset by force reductions, lower equipment sales costs for traditional equipment sales as well as a decrease in expenses due to the renegotiation of our agreement with Yahoo! and lower volumes for usage-based services.
AT&T INC.
MARCH 31, 2009
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts
Selling, general and administrative expenses decreased $160, or 2.0%, in the first quarter of 2009, primarily due to a charge in first quarter 2008 associated with an announced workforce reduction. Expenses also decreased due to force reductions in 2009. This decline was mostly offset by an increase in Pension/OPEB expense and higher residuals and upgrade commissions expenses associated with the Apple iPhone 3G. Also offsetting the decline were higher customer service costs due to wireless subscriber growth along with increased support for data services and integrated devices.
Depreciation and amortization expense decreased $17, or 0.3%, in the first quarter of 2009. Depreciation and amortization remained relatively stable as the declining amortization of identifiable intangible assets, primarily customer relationships, was offset by increased depreciation resulting from capital additions.
Interest expense decreased $16, or 1.8%, in the first quarter of 2009. Interest expense remained relatively unchanged with a decrease in our weighted average interest rate and higher interest charged during construction offset by an increase in our average debt balances. Future interest expense will continue to reflect increased interest during construction related to preparing wireless spectrum for advanced services.
Equity in net income of affiliates decreased $106, or 43.6%, in the first quarter of 2009 primarily due to foreign currency translation losses at América Móvil, S.A. de C.V. (América Móvil), Télefonos de Mexico, S.A. de C.V. (Telmex) and Telmex Internacional, S.A.B. de C.V. (Telmex Internacional).
Other income (expense) - net We had other expense of $15 in the first quarter of 2009 and $91 income for the first quarter of 2008. Results primarily included expenses of $102 related to asset impairment of investments under independent management that support certain benefit plans, partially offset by $58 gains on sales of a professional services business and Yahoo! shares, $13 interest income and $12 dividend and leveraged lease income. Results in the first quarter of 2008 consisted of a net gain on the sale of cost investments, interest income and other non-strategic investment activity.
Income taxes decreased $121, or 6.3%, in the first quarter of 2009. The decrease in income taxes in the first quarter was primarily due to lower income before income taxes. Our effective tax rate was 36.1% compared to 35.4% for the same period in 2008. The increase in our effective tax rate in 2009 was due to nonrecurring state income tax benefits and adjustments recorded in first quarter 2008.
Selected Financial and Operating Data
March 31
2009 2008
Wireless customers (000) 78,232 71,367
Consumer revenue connections (000) 1,2 46,847 49,340
Network access lines in service (000) 2 53,992 60,415
Broadband connections (000) 2,3,7 16,736 15,419
Video connections (000) 4 3,534 2,611
Debt ratio 5,7 43.2 % 39.5 %
Ratio of earnings to fixed charges 6,7 4.7 5.6
Number of AT&T employees 294,600 310,070
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1 Consumer revenue connections includes retail access lines, U-verse voice over
IP connections, broadband and video.
2 Represents services by AT&T's local exchange companies (ILECs) and affiliates.
3 Broadband connections include DSL (including U-verse high-speed Internet
access), satellite broadband and 3G LaptopConnect cards.
4 Video connections include customers that have satellite service under our
agency arrangements and U-verse video connections of 1,329 in 2009 and 379 in
2008.
5 See our "Liquidity and Capital Resources" section for discussion.
6 See Exhibit 12.
7 Prior year amounts restated to conform to current period reporting methodology.
AT&T INC.
MARCH 31, 2009
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts
Segment Results
Our segments represent strategic business units that offer different products
and services over various technology platforms and are managed accordingly. Our
operating segment results presented in Note 4 and discussed below for each
segment follow our internal management reporting. We analyze our various
operating segments based on segment income before income taxes, reviewing
operating revenues, expenses (depreciation or non-depreciation) and equity
income for each segment. Interest expense and other income (expense) - net are
managed only on a total company basis and are, accordingly, reflected only in
consolidated results. We have four reportable segments: (1) wireless,
(2) wireline, (3) advertising solutions and (4) other.
The wireless segment provides wireless voice and advanced data communications services.
The wireline segment provides landline voice and data communications services, managed networking to business customers, AT&T U-verseSM TV, high-speed broadband and voice services (U-verse) and satellite television services through our agency arrangements.
The advertising solutions segment publishes Yellow and White Pages directories and sells advertising in various media, including directory and Internet-based advertising, and local search.
The other segment includes results from Sterling Commerce Inc. (Sterling), customer information services and all corporate and other operations. The other segment includes our portion of the results from our international equity investments. Also included in the other segment are impacts of management decisions affecting the company for which management does not evaluate the individual operating segments.
The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in "Liquidity and Capital
Resources."
Wireless
Segment Results
First Quarter
Percent
2009 2008 Change
Segment operating revenues
Service $ 11,668 $ 10,645 9.6 %
Equipment 1,192 1,180 1.0
Total Segment Operating Revenues 12,860 11,825 8.8
Segment operating expenses
Operations and support 8,085 7,389 9.4
Depreciation and amortization 1,434 1,480 (3.1 )
Total Segment Operating Expenses 9,519 8,869 7.3
Segment Operating Income 3,341 2,956 13.0
Equity in Net Income of Affiliates - 2 -
Segment Income $ 3,341 $ 2,958 12.9 %
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Operating Income and Margin Trends
Our wireless segment operating income increased $385, or 13.0%, in the first
quarter of 2009, reflecting an increase in our customer base. With regard to our
postpaid customer base in particular, we are continuing to realize the benefits
from our Apple iPhone 3G customers in the form of higher average customer
revenues.
Our wireless segment operating income margin was 26.0% in the first quarter of 2009, compared to 25.0% in 2008. The higher margin was primarily due to revenue growth of $1,035, or 8.8%, partially offset by increased operating expenses of $650, or 7.3%. The majority of the improvement in our results was due to the increase in our customer base of 6.9 million since March 31, 2008. This increase includes 182,000 related to our acquisition of Edge Wireless, LLC in April 2008. As of March 31, 2009, we served 78.2 million wireless customers. Contributing to our customer base increase was improvement in the customer turnover (churn) rate. Wireless operating margins were pressured by higher costs of equipment, selling, general and administrative expenses due in part to strong sales of advanced integrated devices including the Apple iPhone 3G.
AT&T INC.
MARCH 31, 2009
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts
Average service revenue per user/customer (ARPU) in the first quarter of 2009 remained consistent with the first quarter of 2008. Data services ARPU grew 26.3% in the first quarter of 2009, offset by a decline in voice service ARPU of 7.4%. We expect continued growth from data services as more customers purchase advanced integrated devices, such as the Apple iPhone 3G, and laptop cards and as our third-generation network continues to expand. The decline in voice service ARPU is the result of a decrease in postpaid voice overage charges and international long distance; increases in our reseller customers, which have lower ARPU than traditional postpaid customers; lower roaming revenues due to in part acquisitions and ongoing rate negotiations as part of roaming cost savings initiatives as well as overall lower roaming volumes; slowing international growth and lower regulatory cost recovery charges. We expect continued pressure on voice service ARPU.
Our total churn rate decreased to 1.6% in the first quarter of 2009 from 1.7% in the first quarter of 2008. Our postpaid churn rate remained stable at 1.2% for both periods.
Operating Results
Service revenues are comprised of voice, data and other revenue. Service
revenues increased $1,023, or 9.6%, in the first quarter of 2009. The increase
in service revenues primarily consisted of:
ˇ Data revenue increases of $884, or 38.6%, primarily due to the increased
number of data users and an increase in data ARPU of 26.3%. Data revenue
growth was primarily driven by strong increases in wireless internet access,
messaging, e-mail and data access revenues. This primarily resulted from
increased use of more advanced integrated devices, including the Apple iPhone
3G, which can provide for the data services previously mentioned. Data service
revenues represented 27.2% of wireless service revenues, up from 21.5% in the
first quarter of 2008.
ˇ Voice and other revenue increases of $139, or 1.7%, primarily due to an increase in the average number of wireless customers of 9.8%, partially offset by a decline in voice ARPU of 7.4%.
Equipment revenues increased $12, or 1.0%, in the first quarter of 2009. The marginal increase was due to higher handset revenues reflecting a greater proportion of customer gross additions and upgrades to more advanced integrated devices than in prior periods.
Operations and support expenses increased $696 or 9.4%, in the first quarter of 2009. The $696 increase is primarily due to higher equipment costs of $250, Interconnect, USF and network systems expenses of $160, upgrade commission and residual expenses of $147 due to higher handset upgrade activity and customer service costs of $131. Total equipment costs continue to be higher than equipment revenues due to the sale of discounted handsets to customers.
Depreciation and amortization expenses decreased $46, or 3.1%, in the first quarter of 2009. Amortization expense decreased $124 or 21.8%, in the first quarter primarily due to lower amortization of intangibles related to our acquisition of BellSouth's 40% ownership interest in AT&T Mobility due to the use of accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases. These decreases in amortization were slightly offset by the amortization of intangibles related to our acquisition of Dobson Communications Corporation and other 2008 acquisitions.
Depreciation expense increased $78, or 8.6%, in the first quarter of 2009 primarily due to increased expense related to ongoing capital spending for network upgrades and expansion, partially offset by certain network assets becoming fully depreciated.
AT&T INC.
MARCH 31, 2009
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts
Wireline
Segment Results
First Quarter
Percent
2009 2008 Change
Segment operating revenues
Voice $ 8,708 $ 9,919 (12.2 )%
Data 6,536 6,205 5.3
Other 1,434 1,500 (4.4 )
Total Segment Operating Revenues 16,678 17,624 (5.4 )
Segment operating expenses
Operations and support 11,297 11,493 (1.7 )
Depreciation and amortization 3,240 3,181 1.9
Total Segment Operating Expenses 14,537 14,674 (0.9 )
Segment Operating Income 2,141 2,950 (27.4 )
Equity in Net Income of Affiliates 4 6 (33.3 )
Segment Income $ 2,145 $ 2,956 (27.4 )%
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Operating Income and Margin Trends
Our wireline segment operating income decreased $809, or 27.4%, in the first
quarter of 2009. Our wireline segment operating income margin decreased in the
first quarter from 16.7% in 2008 to 12.8% in 2009. Operating income continued to
be pressured by access line declines due to economic pressures on our consumer
and business wireline customers and increased competition, as customers either
reduced usage or disconnected traditional landline services and switched to
alternative technologies such as wireless and VoIP. Our strategy is to offset
these line losses by increasing non-access-line-related revenues from customer
connections for data, including VoIP and video. Additionally, we have the
opportunity to increase wireless segment revenues if customers choose AT&T
Mobility as an alternative provider. The decline in segment voice revenue was
partially offset by continued growth in data revenue. Also contributing to
pressure on our operating margins was increased Pension/OPEB expenses in 2009.
Operating Results
Voice revenues decreased $1,211, or 12.2%, in the first quarter of 2009
primarily due to declining demand for traditional voice services by our consumer
and business customers. Included in voice revenues are revenues from local
voice, long-distance (including international) and local wholesale services.
Voice revenues do not include VoIP revenues, which are included in data
revenues.
ˇ Local voice revenues decreased $632, or 10.8%. The decrease was driven
primarily by a decline of $501 attributable to a decline in access lines and
by a decline in revenues from AT&T Corp. (ATTC) mass-market customers of
approximately $40. We expect our local voice revenue to continue to be
negatively affected by the slowing economy and increased competition from
alternative technologies.
ˇ Long-distance revenues decreased $517, or 14.2%. The decrease was primarily due to lower demand for long-distance service from global and consumer customers which decreased revenues $369 and expected declines in the number of ATTC's mass-market customers, which decreased revenues $148.
ˇ Local wholesale revenues decreased $62, or 15.4%. The decrease was primarily due to declining number of Unbundled Network Element-Platform (UNE-P) lines sold to competitive providers.
AT&T INC.
MARCH 31, 2009
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts
Data revenues increased $331, or 5.3%, in the first quarter of 2009. Data
revenues accounted for approximately 39% of wireline operating revenues in the
first quarter of 2009 and 35% in the first quarter of 2008. Data revenues
include transport, IP and packet-switched data services.
ˇ IP data revenues increased $430, or 16.4%, primarily due to growth in consumer
and business broadband, virtual private networks (VPN) and managed Internet
services. IP data services, such as U-verse video and Managed Internet
Services, increased approximately $230. VPN increased approximately $119.
Broadband high-speed Internet access increased IP data revenues approximately
$76 primarily due to increased connections. The increase in IP data revenues
reflects continued growth in the customer base and migration from other
traditional circuit-based services.
ˇ Traditional circuit-based services which include frame relay, asynchronous transfer mode and managed packet services, decreased $119, or 17.4%. This decrease is primarily due to lower demand as customers continue to shift to IP-based technology such as VPN, DSL and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.
Other operating revenues decreased $66, or 4.4%, in the first quarter of 2009. Integration services and customer premises equipment (CPE), government-related services and managed services account for more than 58% of total other revenue for both periods. Managed services increased $69 due to ongoing agreements. Revenue from equipment sales and related network integration decreased by $117 primarily related to CPE.
Operation and support expenses decreased $196, or 1.7%, in the first quarter of 2009. Operation and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as salary, wage and bonus accruals. Costs in this category include our repair technicians and repair services, certain network planning and engineering expenses, operator services, information technology and property taxes. Operation and support expenses also include provision for uncollectible accounts; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees.
The major decrease was due to a $306 decline in expenses primarily due to the renegotiation of our agreement with Yahoo!, international long-distance costs related to lower international long-distance revenues, and lower volume of calls from ATTC's declining national mass-market customer base. Other cost decreases included CPE of $150, force decreases (net of wage increases), of $135, contract services of $95 and overtime reduction of $66.
Partially offsetting these decreases was an increase in Pension/OPEB of $439 due to lower expected return on assets and an increase in amortization of unrecognized actuarial losses, both primarily from investment losses.
Depreciation and amortization expenses increased $59, or 1.9%, in the first quarter. Depreciation increased $99 partially offset by a $40 decrease in intangible amortization.
AT&T INC.
MARCH 31, 2009
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts
Supplemental Information
Telephone, Wired Broadband and Video Connections Summary
Our switched access lines and other services provided by our local exchange
telephone subsidiaries at March 31, 2009 and 2008 are shown below and access
line trends are addressed throughout this segment discussion.
(in 000s)
Actual Actual
March 31, March 31, % Increase
2009 2008 (Decrease)
Switched Access Lines 1
Retail Consumer 29,575 34,178 (13.5 )%
Retail Business 2 21,364 22,632 (5.6 )
Retail Subtotal 2 50,939 56,810 (10.3 )
Percent of total switched access lines 94.3 % 94.0 %
Sold to ATTC 133 164 (18.9 )
Sold to other CLECs 2,3 2,813 3,258 (13.7 )
Wholesale Subtotal 2 2,946 3,422 (13.9 )
Percent of total switched access lines 5.5 % 5.7 %
Payphone (Retail and Wholesale) 4 107 183 (41.5 )
Percent of total switched access lines 0.2 % 0.3 %
Total Switched Access Lines 53,992 60,415 (10.6 )%
Total Retail Consumer Voice Connections 7 29,969 34,182 (12.3 )%
Total Wired Broadband Connections 5 15,436 14,647 5.4 %
Satellite service 6 2,205 2,232 (1.2 )%
U-verse video 1,329 379 -
Video Connections 3,534 2,611 35.4 %
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1 Represents access lines served by AT&T's ILECs and affiliates.
2 Prior period amounts restated to conform to current period reporting
methodology.
3 Competitive local exchange carriers (CLECs).
4 Revenue from retail payphone lines is reported in the Other segment. We are in the process of ending our retail payphone operations.
5 Total wired broadband connections include DSL (including U-verse high-speed
Internet access) and satellite broadband.
6 Satellite service includes connections under our agency and resale
agreements.
7 Includes consumer U-verse Voice over IP connections.
AT&T INC. MARCH 31, 2009 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Dollars in millions except per share amounts Advertising Solutions Segment Results . . . |
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