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AT&T Inc. 10-Q Summary: Quarter Ended September 30, 2006

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine-month period ended on that date. AT&T Inc. operates in the communications services industry, providing wireline and wireless telecommunications, directory advertising, and publishing services. The reporting period reflects the full integration of the AT&T Corp. (ATTC) acquisition completed in November 2005. The company is currently awaiting Federal Communications Commission (FCC) approval for its pending acquisition of BellSouth.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 51.8% in Q3 and 52.9% for the nine months, primarily driven by the inclusion of ATTC results. Data revenues grew 80.8% in Q3, while voice revenues grew 47.4%.
• Profitability: Net income rose 73.8% in Q3 and 73.0% for the nine months. Operating income margins improved to 18.7% in Q3 2006 from 19.0% in Q3 2005, reflecting realized merger synergies.
• Expense Management: Operating expenses increased 52.5% in Q3 due to the ATTC acquisition but were reduced by $246 million due to a change in vacation pay policy and workforce reductions of approximately 10,500 employees since year-end 2005.
• Wireline Trends: In-region retail access lines declined 3.5% year-over-year due to competition from wireless, VoIP, and cable providers. However, broadband connections increased 25.5%.
• Cingular Wireless: The joint venture added 58.7 million customers (up from 52.3 million in 2005). Cingular's operating income margin improved to 14.8% in Q3 2006 from 7.5% in Q3 2005.

Guidance, Outlook, and Risks

• Capital Expenditures: AT&T expects 2006 capital expenditures (excluding Cingular) to be at or slightly above the high end of the $8,000–$8,500 million target range. Approximately $4,600 million is allocated for the "Project Lightspeed" (U-verse) deployment through 2008.
• Share Repurchases: The company expects to repurchase between $2,000 and $3,000 million in shares during 2006, with a total buyback of $10,000 million through the end of 2007. In Q3 2006, 39.3 million shares were repurchased.
• BellSouth Acquisition: The $66 billion acquisition of BellSouth remains subject to FCC approval. The DOJ review was completed without conditions in October 2006.
• Regulatory and Litigation Risks:
  • U-verse Deployment: Potential delays or cost increases due to municipal franchise disputes and regulatory classification of IP video services.
  • Antitrust Litigation: The Supreme Court agreed to review the Twombly case regarding alleged anti-competitive behavior among local telephone companies; argument is scheduled for November 2006.
  • NSA Litigation: 21 pending lawsuits allege unlawful assistance to the National Security Agency; management intends to vigorously defend these claims.
• Accounting Changes: AT&T will adopt FAS 158 in Q4 2006, which will require recognizing the funded status of pension plans on the balance sheet, potentially reducing stockholders' equity by approximately $10,000 million.

Investor Verification Checklist

• Verify the status of the FCC review for the BellSouth acquisition and potential conditions imposed.
• Monitor the progress of "Project Lightspeed" (U-verse) deployment against the $4,600 million capital budget and regulatory hurdles in specific municipalities.
• Track the decline in wireline access lines versus the growth in broadband and data services to assess long-term revenue sustainability.
• Review the impact of the pending FAS 158 adoption on Q4 2006 balance sheet equity and pension obligations.
• Assess the outcome of the Supreme Court's review of the Twombly antitrust case and its potential financial implications.