This summary is based on the second quarter fiscal 2008 earnings call conducted by AT&T Inc. (T) on July 23, 2008.
Management:
Senior Vice President of Investor Relations: Brooks McCorcle
Chief Financial Officer, Senior Executive Vice President: Richard G. Lindner
Key Investors Issues
- EPS were 63 cents a share compared to 47 cents a share last year.
- Profit rose to $3.77 billion from $2.90 billion in the year-earlier period.
- Revenue rose to $30.87 billion from $29.48 billion a year ago.
Second Quarter Highlights
Consolidated revenues totaled $30.9 billion, up 4.7% versus reported results in the year-earlier quarter and up 3.6% compared with second-quarter 2007 pro forma revenues, which exclude merger-related accounting impacts on directory revenues.
- Compared with results for the year-earlier quarter, AT&T’s reported operating expenses for the second quarter of 2008 were $24.3 billion, down from $24.5 billion.
- Reported operating income was $6.6 billion, up from $4.9 billion and AT&T’s reported operating income margin was 21.3%, up from 16.8%.
- Net income totaled $3.8 billion, up from $2.9 billion in the year-earlier quarter, and reported earnings per share totaled 63 cents, up from 47 cents in the second quarter of 2007.
AT&T’s adjusted results exclude noncash merger-related amortization expenses.
- For the second quarter of 2007, adjusted results excluded merger integration costs, merger-related amortization expenses and a merger-related directory accounting effect.
- Compared with results for the year-earlier quarter, AT&T’s adjusted operating expenses for the second quarter of 2008 totaled $23.1 billion, versus $22.7 billion.
- Adjusted operating income was $7.7 billion, up from $7.1 billion and AT&T’s adjusted operating income margin was 25.1%, up from 23.9%. This margin expansion reflects revenue growth along with benefits from merger synergies and other productivity initiatives.
- Adjusted net income totaled $4.5 billion, up from $4.3 billion in the year-earlier quarter, and adjusted earnings per share totaled 76 cents, up from 70 cents in the second quarter of 2007.
Cash from operating activities totaled $8.5 billion, capital expenditures totaled $5.3 billion, and free cash flow (cash from operations minus capital expenditures) totaled $3.2 billion.
- Year to date through the first half of 2008, cash from operating activities totaled $13.5 billion, capital expenditures totaled $9.6 billion, and free cash flow totaled $3.9 billion.
- As it invests in the future of its business, AT&T continues to return substantial value to shareowners through dividends and share repurchases.
- Dividends paid totaled $2.4 billion in the second quarter and $4.8 billion year to date.
- Shares repurchased totaled 52.6 million for $2 billion in the second quarter and 164.2 million for $6.1 billion through the first half of the year. AT&T ended the second quarter with 5.9 billion shares outstanding.
AT&T delivered strong wireless growth in the second quarter with solid subscriber gains, continued rapid growth in wireless data revenues and improved margins. Highlights include the following:
- Total wireless revenues increased 15.8% to $12 billion, and wireless service revenues, which exclude handset and accessory sales, grew 14.8% to $11 billion. Wireless revenue growth was driven by solid subscriber gains and a greater number of customers choosing more advanced smartphones and integrated devices, spurring increased usage of data services. Retail postpaid subscriber ARPU (average monthly revenues per subscriber) was up 3.5% versus the year-earlier second quarter.
- Wireless data revenues grew 52% versus the year-earlier quarter to $2.5 billion, reflecting continued strong adoption of services such as Internet and data access, e-mail and messaging. Wireless Internet access revenues more than doubled versus results for the year-earlier second quarter, while revenues from e-mail, messaging and data access all delivered greater than 50% growth. Text messaging volumes tripled versus totals for the year-earlier quarter, and multimedia message volumes increased more than 170%. At the end of the second quarter, approximately 18% of AT&T’s postpaid wireless subscribers had an integrated device, up from 8% one year earlier. On average, these subscribers have ARPUs double the company average. AT&T expects continued strong growth in wireless data services as more customers choose data plans and advanced wireless devices such as the new iPhone 3G, which was launched as an AT&T U.S. exclusive on July 11. In the first 12 days following launch, sales of the iPhone 3G were nearly double levels achieved in AT&T’s 2007 iPhone launch.
- AT&T’s net gain in total wireless subscribers exceeded 1.3 million, down 123,000 versus results in the second quarter of 2007 and up 38,000 compared with the first quarter of this year. Retail postpaid net adds totaled 894,000, down 2% versus the year-earlier second quarter and up 26.8% from results in the first quarter of this year. This sequential postpaid improvement was achieved despite reduced iPhone sales ahead of the early July iPhone 3G launch. Retail postpaid churn moved down to 1.1% in the second quarter, the lowest level in the company’s history.
- On a reported basis, AT&T’s second-quarter wireless operating expenses totaled $9 billion, and operating income was $3.1 billion, up 91% from $1.6 billion in the second quarter of 2007. Adjusting for merger integration costs, wireless operating expenses totaled $8.4 billion, and operating income was $3.6 billion, up 38.9% from $2.6 billion in the second quarter of 2007.
- Strong revenue growth, network efficiencies and operational improvements continue to drive strong wireless margins. AT&T’s reported wireless operating income margin in the second quarter was 25.5%, up from 15.4% in the year-earlier quarter, and its adjusted wireless operating income margin was 29.9%, up from 24.9% in the year-earlier quarter. AT&T’s second-quarter wireless OIBDA service margin was 41.2%, up from an unadjusted 35.8% and an adjusted 37.5% in the year-earlier quarter. (OIBDA service margin is operating income before depreciation and amortization, divided by total service revenues.)
AT&T’s wireline results were highlighted by continued strong double-digit growth in business and consumer IP-based data revenues, a substantial turnaround in wholesale revenues and a further ramp in AT&T U-verse TV subscribers:
- AT&T further advanced the significant improvement in wholesale revenue trends it has achieved over the past year. Total wholesale revenues were $3.5 billion, down just 0.2% versus the year-earlier quarter. This represents a major step up from a year-over-year decline of 8.3% in the second quarter of 2007 and marks the company’s second consecutive quarter of sequential revenue growth in this category. This reflects solid demand from wireless carriers, Internet service providers, content providers and other customers, offsetting expected declines in local voice. AT&T and IBM last fall announced an agreement that calls for AT&T to become the primary global network management services provider to IBM. As a result, AT&T expects to receive up to $5 billion of additional revenues over the five-year term of the agreement, initially in the wholesale customer category. These revenues are expected to ramp further in the second half of 2008 and in 2009.
- Over the past two years, AT&T has delivered a major turnaround in enterprise growth rates, and in the second quarter results were highlighted by an 18.4% increase in enterprise IP data revenues, including areas such as VPNs, managed Internet services and hosting. Total enterprise revenues in the second quarter were $4.7 billion, down 1% versus results for the year-earlier quarter, and enterprise service revenues, which exclude CPE sales, were down 0.1%. Enterprise fundamentals in terms of closed sales, a strong sales funnel and new service adoption remain solid. AT&T expects to deliver positive growth in total enterprise revenues for the full year 2008.
- AT&T’s total regional business revenues increased 1.6% in the second quarter to $3.2 billion. Regional business data revenues grew 5.2%, led by robust growth in Ethernet services and 13.7% growth in IP data services, including double-digit gains in managed Internet, VPN and hosting services.
- AT&T U-verse TV, the company’s next-generation IP-based video service, continued its strong ramp during the second quarter, with a net subscriber gain of 170,000 to reach 549,000 in service. U-verse network deployment is on schedule, install times continue to decline and the attach rates for broadband service continue to be high. The company is on a trajectory to reach its target of more than 1 million AT&T U-verse TV subscribers by year-end 2008.
