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AT&T Inc. Q1 2007 10-Q Summary

Business Context and Reporting Period

This is the Quarterly Report (Form 10-Q) for AT&T Inc. for the period ended March 31, 2007. The reporting period is significantly impacted by the completion of the BellSouth Corporation acquisition on December 29, 2006. Consequently, AT&T now owns 100% of AT&T Mobility (formerly a joint venture) and YellowPages.com (YPC), consolidating their full results into the financial statements for the first time. Prior year comparisons are not directly comparable due to this change in accounting scope.

Key Financial Metrics

Margins: Operating income margin improved to 16.1% in Q1 2007 from 13.9% in Q1 2006, driven by the inclusion of higher-margined BellSouth operations and merger synergies.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 83.9% to $28.97 billion. This is primarily due to the consolidation of BellSouth and AT&T Mobility. On a pro-forma basis (assuming merger on Jan 1, 2005), total revenue growth was only 0.2%.
• Segment Performance:
  • Wireline: Revenues up 24.7% to $17.99 billion; Operating income up 76.6% to $2.90 billion.
  • Wireless: Revenues up 11.2% to $10.0 billion; Operating income up 88.5% to $1.52 billion. Customer base grew to 62.2 million.
  • Advertising & Publishing: Revenues up 56.3% to $1.44 billion due to YPC consolidation.
• Expense Increases: Operating expenses rose 79.2% to $24.3 billion, largely due to the acquisition. This includes $1.53 billion in amortization of intangible assets from the BellSouth and ATTC acquisitions.
• Interest Expense: Increased 88.1% to $873 million due to higher average debt balances from the consolidation of BellSouth and AT&T Mobility debt.
• Unusual Items: Recorded a $409 million gain (net of tax: $253 million) from a wireless spectrum license exchange with T-Mobile.

Guidance, Outlook, and Risks

• Capital Expenditures: AT&T expects capital expenditures for 2007 and 2008 to be in the "mid-teens" as a percentage of consolidated revenue. Specific guidance includes spending between $4,000 million and $4,500 million on U-verse TV network deployment and customer activation over the 2007-2008 period.
• Share Repurchases: The company plans to complete a $10 billion share repurchase program by Q3 2007. In Q1 2007, they repurchased 80.8 million shares for $3.0 billion.
• Dividends: Quarterly dividend increased to $0.355 per share (6.8% increase).
• Leadership Change: CEO Edward E. Whitacre Jr. announced his retirement effective June 3, 2007, with Randall Stephenson named as the new CEO and Chairman.
• Risks and Contingencies:
  • NSA Litigation: 21 pending class-action lawsuits allege AT&T assisted the National Security Agency in monitoring communications. The company intends to vigorously defend these matters.
  • Regulatory: Ongoing FCC and state proceedings regarding U-verse video services, broadband classification, and franchise fees could impact deployment costs and timing.
  • Tax Uncertainty: Adoption of FIN 48 resulted in a $50 million reduction to retained earnings and reclassification of $6.2 billion in unrecognized tax benefits. Ongoing IRS audits and disputes (including a refund suit filed in Q1 2007) present uncertainty.

Investor Verification Checklist

• Verify the pro-forma revenue trends to distinguish organic growth from acquisition-driven volume increases.
• Monitor the U-verse deployment progress and associated capital spend against the $4.0B-$4.5B guidance for 2007-2008.
• Track the status of the NSA litigation and potential financial exposure or operational restrictions.
• Review the debt maturity schedule, noting $7.1 billion in debt maturing within one year and the company's reliance on commercial paper and new issuances.
• Assess the impact of access line declines in the wireline segment and the success of wireless migration strategies to offset voice revenue losses.