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T > SEC Filings for T > Form 10-Q on 3-Nov-2011All Recent SEC Filings

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Form 10-Q for AT&T INC.


3-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts

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 wireless and wireline telecommunications services and equipment as well as advertising 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, 2010. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. 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 third quarter and for the first nine months of 2011 and 2010 are summarized as follows:

                                                  Third Quarter                            Nine-Month Period
                                                                  Percent                                    Percent
                                         2011         2010         Change           2011         2010        Change
Operating Revenues                     $ 31,478     $ 31,581           (0.3 ) %   $ 94,220     $ 92,919           1.4 %
Operating expenses
Cost of services and sales               13,165       13,605           (3.2 )       39,900       38,440           3.8
Selling, general and administrative       7,460        7,672           (2.8 )       22,308       22,522          (1.0 )
Depreciation and amortization             4,618        4,873           (5.2 )       13,804       14,472          (4.6 )
Total Operating Expenses                 25,243       26,150           (3.5 )       76,012       75,434           0.8
Operating Income                          6,235        5,431           14.8         18,208       17,485           4.1
Income from Continuing Operations
 Before Income Taxes                      5,585        5,043           10.7         16,406       16,691          (1.7 )
Income from Continuing Operations         3,686       11,616              -         10,812       18,241         (40.7 )
Net Income Attributable to AT&T        $  3,623     $ 12,319              -       $ 10,622     $ 18,775         (43.4 ) %

Overview
Operating income increased $804, or 14.8%, in the third quarter and $723, or 4.1%, for the first nine months of 2011. Operating income in the third quarter and for the first nine months reflects continued growth in wireless service revenue, driven mostly by our subscriber and data revenue growth, along with increased revenues from AT&T U-verse® (U-verse) services and Internet Protocol (IP) based business services. Also contributing to the positive operating income growth in the third quarter were lower wireless handset costs, lower employee-related charges and lower amortization expenses associated with the accelerated amortization of customer lists acquired in acquisitions. Partially offsetting the increase in the third quarter and for the first nine months were continued declines in voice and print directory revenues. Our operating income margin in the third quarter increased from 17.2% in 2010 to 19.8% in 2011, and for the first nine months increased from 18.8% in 2010 to 19.3% in 2011.

Operating revenues decreased $103, or 0.3%, in the third quarter and increased $1,301, or 1.4%, for the first nine months. The decrease in the third quarter reflects continued declines in wireline voice and print advertising revenues. Wireless handset sales also decreased in the third quarter of 2011 due to the late second-quarter 2010 iPhone 4 release and a later release of the newest iPhone model in October 2011. These decreases were mostly offset by wireless service revenue growth and higher revenues from IP-based wireline services.

The increase for the first nine months was primarily due to the continued growth in wireless service revenue, driven mostly by our increase in subscribers and data revenue, stemming from higher smartphone sales. Also contributing to the increase was higher wireline data revenue largely due to IP data growth, driven by U-verse subscriber growth and strategic business services. These increases were partially offset by lower wireline voice and print directory revenues.


AT&T INC.
SEPTEMBER 30, 2011

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Revenue growth continues to be tempered by declines in our voice revenues. For the first nine months of 2011, total switched access lines decreased 12.3%. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose wireline voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.

Cost of services and sales expenses decreased $440, or 3.2%, in the third quarter and increased $1,460, or 3.8%, for the first nine months of 2011. Decreased costs in the third quarter were primarily due to lower wireless handset costs resulting from the timing of iPhone release dates and lower employee-related charges. Increased costs for the first nine months were related to strong sales of wireless smartphones to new subscribers, a high number of customers upgrading their wireless handset and costs associated with transferring primarily former Alltel Wireless (Alltel) customers to our network. Lower employee-related charges during the first nine months partially offset these increases.

Selling, general and administrative expenses decreased $212, or 2.8%, in the third quarter and $214, or 1.0%, for the first nine months of 2011. These decreases were primarily due to lower financing-related costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses) and decreases in other employee-related expenses partially offset by expenses related to our pending acquisition of T-Mobile USA, Inc. (T-Mobile). The decrease for the first nine months was partially offset by higher wireless commission and sales related expenses.

Depreciation and amortization expense decreased $255, or 5.2%, in the third quarter and $668, or 4.6%, for the first nine months of 2011. The third quarter and year-to-date decrease was primarily related to lower amortization of intangibles for customer lists related to acquisitions.

Interest expense increased $160, or 21.9%, in the third quarter and $335, or 14.9%, for the first nine months of 2011. Increased interest expense was primarily due to no longer capitalizing interest on spectrum that will be used to support our Long Term Evolution (LTE) technology, partially offset by a decrease in our average debt balances for the first nine months. Effective January 1, 2011, we ceased capitalization of interest on spectrum for LTE as this spectrum was determined to be ready for its intended use.

Equity in net income of affiliates decreased $24, or 11.1%, in the third quarter and increased $20, or 3.2%, for the first nine months of 2011. Decreased equity in net income of affiliates in the third quarter is due to lower operating results at Télefonos de México, S.A. de C.V. (Telmex). Increased equity in net income of affiliates for the first nine months was primarily due to improved operating results at América Móvil, S.A. de C.V. (América Móvil).

Other income (expense) - net We had other income of $46 in the third quarter and $132 for the first nine months of 2011, compared to other income of $124 in the third quarter and $825 for the first nine months of 2010. Results for 2011 included interest, dividend and leveraged lease income of $17 in the third quarter and $71 for the first nine months. In addition, third quarter 2011 results included an $8 gain on the sale of nonstrategic assets along with foreign exchange gains of $7, while results for the first nine months of 2011 included a net gain of $66 from the sale of investments.

Results in the third quarter of 2010 included gains from the sale of investments of $121. In addition, results for the first nine months of 2010 included a $647 gain on the exchange of Telmex Internacional, S.A.B. de C.V. (Telmex Internacional) shares for América Móvil shares.

Income taxes increased $8,472 in the third quarter and $7,144 for the first nine months of 2011. The increase in income taxes for the third quarter and for the first nine months of 2011 was due to a settlement with the Internal Revenue Service (IRS) that occurred in the third quarter of 2010 related to a restructuring of our wireless operations, which lowered our income taxes in 2010 by $8,300. The tax benefit of the IRS settlement for the first nine months of 2010 was partially offset by a $995 charge to income tax expense recorded during the first quarter of 2010 to reflect the deferred tax impact of enacted U.S. healthcare legislation (See Note 1). Our effective tax rate was 34.0% for the third quarter and 34.1% for the first nine months of 2011, as compared to
(130.3)% for third quarter and (9.3)% for the first nine months of 2010.


AT&T INC.
SEPTEMBER 30, 2011

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

In July 2009, in the case regarding the tax treatment of Universal Service Fund (USF) receipts on our 1998 and 1999 tax returns, the U.S. District Court granted the Government's motion for summary judgment and entered final judgment for the Government. We appealed the final judgment to the U.S. Court of Appeals for the Fifth Circuit who affirmed the judgment of the District Court in January 2011. In October 2011, the U.S. Supreme Court denied our request to review the decision of the Fifth Circuit. The decision has no impact on our financial statements.

Income (loss) from discontinued operations, net of tax decreased $780 in the third quarter and $777 for the first nine months of 2011 due to our third-quarter 2010 sale of our subsidiary Sterling Commerce Inc., which resulted in a gain of $767.

Selected Financial and Operating Data
                                                      September 30,
                                                   2011          2010
Wireless customers (000)                           100,738        92,761
Postpaid wireless customers (000)                   68,614        67,688
Prepaid wireless customers (000)                     7,059         6,209
Reseller wireless customers (000)                   13,028        11,021
Connected device customers (000)                    12,037         7,843
Wireline consumer revenue connections (000)1,2      41,852        43,733
Network access lines in service (000)2,7,8          37,956        43,302
Broadband connections (000)2,3,7                    16,476        16,100
Video connections (000)4                             5,392         4,735
Debt ratio5,7                                         38.5 %        37.9 %
Ratio of earnings to fixed charges6,7                 5.41          5.38
Number of AT&T employees                           256,210       267,720

1 Wireline consumer revenue connections includes retail access lines, U-verse VoIP connections, broadband and video.

2 Represents services provided by AT&T's Incumbent Local Exchange Carriers (ILECs) and affiliates.

3 Broadband connections include DSL, U-verse High Speed Internet and satellite broadband.

4 Video connections include customers that have satellite service under our agency arrangements and U-verse video connections (of 3,583 in 2011 and 2,741 in 2010).

5 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and does not consider cash
available to pay down debt. 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.
8 At September 30, 2011, total switched access lines were 37,956, retail business switched access lines totaled 15,951 and wholesale and coin switched access lines totaled 2,206.

Segment Results

Our segments are 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. We make our capital allocations decisions primarily based on the network (wireless or wireline) providing services. Actuarial gains and losses from pension and other postretirement benefits, 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.


AT&T INC.
SEPTEMBER 30, 2011

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, U-verse TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements.

The Advertising Solutions segment includes our directory operations, which publish Yellow and White Pages directories and sell directory advertising and Internet-based advertising and local search.

The Other segment includes results from customer information services, our portion of the results from our international equity investments and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement plans.

In January 2011, we announced a change in our method of recognizing actuarial gains and losses for pension and other postretirement benefits as well as the attribution of those benefit costs to our segments. Historically, the total benefit costs were attributed to our various segments. As part of the benefit accounting change, the service cost and the amortization of prior service costs, which represent the benefits earned by active employees during the period, will continue to be attributed to the segment in which the employee is employed, while interest cost and expected return on assets are recorded in the Other segment as those financing activities are managed on a corporate level. Actuarial gains and losses resulting from the remeasurement of our pension and postretirement benefit plans, which generally occurs in the fourth quarter, will be reflected in AT&T's consolidated results only. We have adjusted prior-period segment information to conform to the current period's presentation.

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."


AT&T INC.
SEPTEMBER 30, 2011

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts


Wireless
Segment Results
                                                       Third Quarter                         Nine-Month Period
                                                                       Percent                                 Percent
                                              2011         2010        Change         2011         2010         Change
Segment operating revenues
Service                                     $ 14,261     $ 13,675           4.3 %   $ 42,379     $ 39,711            6.7 %
Equipment                                      1,345        1,505         (10.6 )      4,138        3,608           14.7
Total Segment Operating Revenues              15,606       15,180           2.8       46,517       43,319            7.4
Segment operating expenses
Operations and support                         9,367       10,032          (6.6 )     29,007       26,758            8.4
Depreciation and amortization                  1,619        1,640          (1.3 )      4,737        4,776           (0.8 )
Total Segment Operating Expenses              10,986       11,672          (5.9 )     33,744       31,534            7.0
Segment Operating Income                       4,620        3,508          31.7       12,773       11,785            8.4
Equity in Net Income (Loss) of Affiliates         (7 )         (6 )       (16.7 )        (19 )         14              -
Segment Income                              $  4,613     $  3,502          31.7 %   $ 12,754     $ 11,799            8.1 %

The following table highlights other key measures of performance for the Wireless segment:

                                                  Third Quarter                           Nine-Month Period
                                                                  Percent                                    Percent
                                          2011        2010        Change           2011          2010        Change
 Wireless Subscribers (000)                                                        100,738       92,761           8.6 %
   Gross Subscriber Additions (000)1       5,946       6,231          (4.6 ) %      17,154       16,367           4.8
   Net Subscriber Additions (000)1         2,123       2,631         (19.3 )         5,202        6,050         (14.0 )
   Total Churn                              1.28 %      1.32 %       -4 BP            1.36 %       1.30 %        6 BP

 Postpaid Subscribers (000)                                                         68,614       67,688           1.4 %
   Net Postpaid Subscriber Additions
(000)1                                       319         745         (57.2 ) %         712        1,753         (59.4 )
   Postpaid Churn                           1.15 %      1.14 %        1 BP            1.16 %       1.08 %        8 BP

 Prepaid Subscribers (000)                                                           7,059        6,209          13.7 %
   Net Prepaid Subscriber Additions
(000)1                                       293         321          (8.7 ) %         515          645         (20.2 )

 Reseller Subscribers (000)                                                         13,028       11,021          18.2
   Net Reseller Subscriber Additions
(000)1                                       473         406          16.5           1,282          545             -

 Connected Device Subscribers (000)2                                                12,037        7,843          53.5
   Net Connected Device Subscriber
Additions (000)                            1,038       1,159         (10.4 ) %       2,693        3,107         (13.3 ) %

1 Excludes merger and acquisition-related additions during the period.
2 Includes data-centric devices such as eReaders, home security monitoring, fleet management, and smart grid devices. Tablets
are primarily reflected in our prepaid subscriber category.


AT&T INC.
SEPTEMBER 30, 2011

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Wireless Metrics
Subscriber Additions As of September 30, 2011, we served 100.7 million wireless subscribers. Lower net subscriber additions (net additions) in the third quarter and first nine months of 2011 were primarily attributable to lower net postpaid additions and lower net connected devices additions. The declines in net postpaid additions in the third quarter and first nine months of 2011 reflect slowing growth in the industry's subscriber base, higher postpaid churn attributable in part to the integration of Alltel customers into our network, and the expiration of Apple iPhone exclusivity in the first quarter of 2011. The 4.6% decrease in gross additions in the third quarter of 2011 was primarily related to lower activations of postpaid smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) associated with a delay in the launch of the latest iPhone model, partially offset by higher activations of Android devices and other non-iPhone smartphones. The 4.8% increase in gross additions for the first nine months of 2011 was primarily related to higher activations of postpaid smartphones, sales of connected devices and tablets, and growth in our reseller subscriber base.

Average service revenue per user (ARPU) from postpaid subscribers increased 1.4% in the third quarter and 1.9% for the first nine months of 2011, driven by an increase in postpaid data services ARPU of 14.2% in the third quarter and an increase of 15.5% for the first nine months of 2011. Of our total postpaid subscriber base, 69% now use more advanced handsets (with 53% using smartphones), up from 57% a year earlier (with 39% using smartphones). Approximately 70% of our postpaid subscribers were on data plans as of September 30, 2011, up from 61% as of September 30, 2010. The growth in postpaid data services ARPU in the third quarter and for the first nine months of 2011 was partially offset by a 5.6% decrease in the third quarter and a 5.0% decrease for the first nine months of 2011 in postpaid voice and other service ARPU. Postpaid voice and other service ARPU declined due to lower access and airtime charges and roaming revenues. Continued growth in our FamilyTalk® Plans (family plans) subscriber base, which generates lower ARPU compared to ARPU for our traditional postpaid subscribers, has also contributed to these declines. The postpaid ARPU for both periods also reflected ARPU declines resulting from the inclusion of subscribers from the acquisition of Alltel properties.

Total ARPU declined 4.4% in the third quarter and 3.8% for the first nine months of 2011, reflecting stronger growth in connected devices, tablet subscribers, and reseller subscribers compared to postpaid subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid plans, which have voice and data features. Accordingly, ARPU for these subscribers is typically lower compared to that generated from our subscribers on postpaid and other plans. Data services ARPU increased 8.2% in the third quarter and 9.6% for the first nine months of 2011, reflecting subscriber growth trends. Voice and other service ARPU declined 11.1% in the third quarter and 10.5% for the first nine months of 2011. We expect continued pressure on voice and other service ARPU.

Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Churn rate is calculated by dividing the aggregate number of wireless subscribers who canceled service during a period by the total number of wireless subscribers at the beginning of that period. The churn rate for the annual period is equal to the average of the churn rate for each month of that period. Higher total, postpaid, and connected device churn rates in the first nine months of 2011 contributed to the decline in net additions for the period. Year-to-date postpaid churn increased as we transitioned former Alltel subscribers to our network. Reseller subscribers, who generally have the lowest churn rate among our wireless subscribers, partially offset the churn rate increases for the first nine months of 2011 due to their increasing share of net additions. A lower prepaid churn rate in the third quarter and the first nine months of 2011, due in part to the introduction of additional tablets to the marketplace after the first quarter of 2010, also partially offset a higher postpaid churn rate in both periods and contributed to the lower total churn rate in the third quarter.

Wireless Subscriber Relationships
The wireless industry continues to mature. Accordingly, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices. To attract and retain subscribers, we offer a wide variety of service plans in addition to offering a broad handset line. Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. We also offer data plans at different price levels to attract a wide variety of subscribers and to differentiate us from our competitors. Many of our subscribers are on family plans or business plans, which provide for service on multiple handsets at discounted rates, and such subscribers tend to have higher retention and lower churn rates. As of September 30, 2011, more than 85% of our postpaid subscribers are on family plans or business discount plans. Moreover, the vast majority of postpaid subscribers (including family plan users) are allowed to accumulate unused minutes (known as Rollover Minutes®), a feature that is currently not offered by other major postpaid carriers in the United States, and users would lose these minutes if they switched carriers. We also introduced our Mobile to Any Mobile feature, which enables our new and existing subscribers on these and other qualifying plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions.


AT&T INC.
SEPTEMBER 30, 2011

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In the first nine months of 2011, we continued to see a significant portion of our subscriber base upgrade from their current devices to smartphones.

We offer a large variety of handsets, including at least 16 smartphones with advanced operating systems from 10 manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual . . .

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