AT&T Inc (T) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AT&T fourth-quarter earnings release 2007 conference call.

(OPERATOR INSTRUCTIONS).

Please note that this conference is being recorded.

I will now turn the call over to Mr.

Rich Dietz, Senior Vice President Investor Relations.

Mr.

Dietz, you may begin.

Great.

Thank you and good morning to everyone.

Welcome to our fourth-quarter 2007 conference call.

It is great to have you with us this morning.

Joining me on the call this morning is Rick Lindner, AT&T's Chief Financial Officer.

As you have seen, this was another strong quarter for AT&T, and the purpose of this call is to provide additional background on the results that we published earlier this morning.

Our release, investor briefings, supplementary information and presentation slides are all available on the Investor Relations page of the AT&T website.

That is AT&T.com/investor.relations.

Before we get started, I need to cover our Safe Harbor statement.

Information set forth in this presentation contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results may differ materially.

A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission.

AT&T disclaims any obligation to update or revise statements contained in these presentations based on new information or otherwise.

This presentation may contain certain non-GAAP financial measures.

Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on our website, AT&T.com/investor.relations.

Okay.

With that covered, let me quickly cover our fourth-quarter EPS comparisons which are on slide four of the presentation materials.

This quarter marks AT&T's 11th consecutive quarter and our third straight year of double-digit growth in adjusted EPS.

Reported EPS this quarter was $0.51.

We had $0.19 of merger integration costs and non-cash amortization of intangibles.

The result is $0.71, a 16.4% increase from year ago results.

With that background, I will now turn the call over to AT&T's Senior Executive Vice President and CFO, Rick Lindner.

Rick?

Thanks, Rich, and good morning to everybody on the call.

I would like to begin with a few brief highlights which are covered on slide six.

Our results this quarter are a continuation of the trends we have had in our business for sometime.

They are in line with what we outlined for you at our New York Analyst Day, and they reinforce the confidence we have in our 2008 outlook.

First, we had an outstanding wireless quarter.

Gross adds were a record $6 million.

We had 2.7 million net adds, the best ever by any US provider.

ARPU is up, and churn is down.

Data revenue growth continues to be robust, and total wireless revenues grew better than 16%.

All-in-all just a terrific wireless quarter.

We also took a significant step up in enterprise service revenue growth.

Our sales funnel is strong, and we have solid enterprise momentum heading into 2008.

Our regional revenue trends are stable, and with these dynamics, we are on track to deliver mid single digit growth in consolidated revenues in 2008.

We continue to deliver on merger synergies.

Our margins are solid, free cash flow is very strong, and we are returning substantial value to shareowners, more than $19 billion in dividends and share repurchases in 2007 with a double-digit dividend increase heading into 2008 and the expectation for continued substantial share buybacks.

With that as a backdrop, I would like to cover now the quarter in a little bit more detail.

Slide seven shows our earnings per share growth and margin expansion.

As Rich mentioned, before merger-related effects, our fourth-quarter EPS was $0.71, our 11th straight quarter of double-digit growth and adjusted EPS.

Our fourth-quarter adjusted operating income margin was 24%, up nearly 600 basis points year-over-year, and for the full year, our adjusted operating margin was 23.8%, well above our original outlook of 21 to 23% and at the top end of our more recent guidance of 23 to 24%.

Given our expectations for revenue growth and cost initiatives, we expect our full-year adjusted operating income margin will expand further in 2008 to the 25 to 26% range.

And we expect to deliver continued double-digit growth in adjusted earnings per share.

In part, our expectations for margin expansion are based on continued merger synergies and new expense savings opportunities which continue to be substantial.

Slide eight has a synergy update similar to what we've provided to you throughtout 2007.

We continue to run ahead of schedule on AT&T Corp and BellSouth merger synergies.

In 2006 we achieved $1.1 billion of savings from our AT&T integration.

That is a combination of both expense and capital.

In 2007 we moved that run-rate up to $4 billion with 75% expense and the remainder in capital savings.

This reflects good progress on network and traffic consolidations, labor savings and rebranding.

Our BellSouth and Cingular brand migration work is largely complete at this point.

That includes vehicles, retail locations and advertising.

Most important, we have a great deal of headroom in terms of cost reduction.

There is more upside ahead on synergies as shown on this chart.

And, as we outlined for you at our analyst conference, we're also underway with operational initiatives that we expect to generate significant eventual expense savings above these synergies.

When you put the two of them together, our total operating expense savings run-rate will increase by approximately $2 billion in 2008.

We have good plans on the cost side.

They are built into our operating targets, and in addition, given our size, our expectation is to achieve continuous productivity improvements going forward.

We also have substantial opportunity for topline growth, and as I said, we're on a good trajectory to deliver mid single digit revenue growth in 2008.

Slide nine provides a look at our trends.

This chart shows total revenue versus pro forma results for 2006.

The slight decline in the rate of revenue growth this quarter versus last quarter reflects the impact of enterprise CPE or equipment sales, which had an effect on our revenue comparisons this quarter.

Starting in 2007, we deemphasized stand-alone equipment sales in enterprise shifting our strategy to focus on CPE as part of total solutions that pull through service revenues.

As a result of this change, fourth-quarter 2006 had 180 million more in CPE revenues than our current run-rate.

Going forward, we expect year-over-year comparisons for equipment sales to be much more stable.

Adjusting for enterprise CPE, our fourth-quarter year-over-year revenue growth was 3.5%, and the drivers are continued solid midteens wireless growth, further improvements in enterprise and stable regional revenues.

In addition, going forward we expect wholesale trends to stabilize as we move through 2008, and there are number of factors driving this.

Traffic migrations from industry consolidation are nearing completion.

The year-over-year impact of merger conditions will be behind us by midyear, and we expect new revenues from our IBM alliance will begin to provide a lift to wholesale results.

Also, national mass-markets will become a smaller part of our overall revenue picture.

This is the legacy AT&T stand-alone long distance business.

It is already less than 3% of total revenues, so the drag we have experienced from that area of our business will be reduced as we move forward.

Given these factors, we remain confident in our mid single digit revenue outlook.

Our number one driver of revenue growth continues to be wireless, which we show on slide 10.

As I said, we had a great wireless quarter.

Total wireless revenues were up 16.3%, and wireless service revenues were up 15.7%.

The first driver is terrific subscriber growth.

In the fourth quarter, excluding the Dobson acquisition, we set industry records for both gross adds and net adds.

And for the full year 2007, we added more than 7 million subscribers, and that is before acquisitions.

The second driver is ARPU growth.

Total ARPU was up nearly 2% in the fourth quarter.

It was our sixth consecutive quarter of year-over-year ARPU growth.

And postpaid ARPU was even stronger, up more than 5%.

Our network coverage is excellent, and it is getting better everyday.

Our sales presence is strong.

We're setting the pace with cutting-edge handsets, and these are all contributing to strong wireless momentum.

Slide 11 shows the details on wireless subscriber growth.

Fourth quarter versus a year ago, gross adds were up by more than $0.5 million, nearly 10%.

Net adds were up 13.5% to $2.7 million, and virtually all of the year-over-year increase in net adds came from postpaid were net adds were up 37%.

And postpaid churn dropped by 30 basis points.

At the end of the year, we had 70.1 million wireless subscribers, and we've provided a table to show the math, adding in the subscribers from our Dobson acquisition.

That acquisition closed in November and did not have a meaningful effect on our net add total for the quarter.

The other big driver behind our wireless performance is explosive growth in data.

The highlights are on slide 12.

Year-over-year wireless data revenue growth was up 57.5%, taking us to more than $2 billion for the quarter.

This growth reflects strong increases in both consumer and business data usage.

Internet access revenues were up more than 40%, messaging up more than 50%, e-mail growth exceeded 60%, and revenues from data access and media bundles were both up more than 70%.

Data now represents close to 20% of our total wireless service revenues and $12 of our postpaid ARPU.

And yet there remains a huge upside to data growth.

Only 37% of our postpaid subscribers are on a monthly wireless data plan.

Adoption of smart phones and integrated devices is on the rise, but the fact is we're still very early in the adoption curve.

At this point about 12% of AT&T's subscribers have these devices, and ARPUs for those customers are more than double the average.

Data growth is also driven by an increasing number of subscribers using AT&T's 3G network, which now includes more than 260 US Metropolitan areas.

At the end of the year, we had more than 9 million customers using 3G devices, almost all of them added during the past year.

We continue to be a leader in bringing to market a rich selection of both devices and services, and a few of our latest and most exciting are pictured on slide 13.

We have expanded our lead in PDAs with devices such as the Pantech Duo, a 3G global smart device available exclusively in the US from AT&T; the BlackJack II, which brings the personal computer experience to a compact wireless device, and additionally AT&T is the world's largest provider of BlackBerry service.

We have made a point of leading in feature-rich handsets with AT&T exclusives such as the Apple iPhone, which continues to generate very strong sales.

40% of customers who buy the iPhone are new to AT&T, and iPhone subscribers have very attractive ARPU characteristics, significantly higher than our postpaid average.

And the iPhone experience continues to get richer.

As you may have seen, Apple has announced a number of enhancements to the iPhone, including the ability to create up to nine customizable home screens, location-enabled maps, multiple address messaging and iTunes movie rentals.

And one of the Web-based applications users can place on their iPhone home screen now is YellowPages.com, our own electronic search service.

Also, in the fourth quarter, we launched the Samsung Slim.

That's Samsung's newest lightweight mobile phone with music and multimedia capabilities.

The Slim features Napster Mobile, a new service that lets customers purchase and download from a catalog of 5 million songs.

AT&T is the only national provider to enable customers to purchase full track songs over the air from both Napster and eMusic, the world's largest retailer of independent music.

We're also working with Wachovia and SunTrust, and together we have launched a mobile banking service that will enable consumers to view account balances and history, transfer funds and pay bills from their AT&T mobile handsets.

Our scale, combined with our GSM platform, makes us an attractive partner, both for device makers and service partners of all sorts.

That is evident in the lineup we offer as we make the wireless experience richer to drive subscriber loyalty, usage and revenues.

In terms of financial performance, one of the big opportunities we have in wireless is further margin expansion.

The highlights are on slide 14.

As you know, wireless margins in the fourth quarter typically show a sequential decline due to higher gross adds.

With our record gross adds this fourth quarter, that is again the case.

With that being said, our wireless margin trends are quite positive and continue the strong trends we have established over the past three years.

Versus the year earlier fourth quarter, our adjusted wireless operating margin was 25.7%, up 680 basis points, and our adjusted service EBITDA margin was 38.2%, up 380 basis points.

There are a lot of drivers which we've covered with you in the past.

We continue to improve our network cost structure.

The IT systems migration and shutdowns that we outlined as part of our merger integration are now complete.

And the shutdown of our TDMA network will take place at the end of February.

We have moved 390,000 subscribers off that network in the fourth quarter and about 390,000 remain, roughly two-thirds of them being wholesale customers.

We have significant potential for wireless margin expansion going forward.

In 2008 we expect a full-year adjusted EBITDA margin in the low 40% range, trending towards the mid-40s by the end of the year.

Now let me turn to another key area where we saw substantial improvement, and that is in enterprise.

The details are on slide 15.

The chart here is the one we've provided for the past several quarters.

It shows year-over-year growth rates for enterprise revenues, excluding CPE sales and M&A impacts.

We have had a very strong two-year climb.

Last quarter we moved into positive territory at 0.3%, and this quarter we stepped that up to 1.8%, and the momentum is good.

Demand continues to be solid.

Data transport volumes are strong.

IP services, which include virtual private networks, managed Internet service and hosting grew 21% year-over-year.

And we're winning contracts.

When you look at sales results for the second half of 2007 versus the first half of 2007, our net new orders for products such as VPN, DS1 and DS3 grew by double-digit rates.

And for 2008 our new sales projections continue to look good.

When you take into consideration that new sales can take three to six months to close and that we have seen no evidence of enterprise customers paring back on capital and project-related spending versus 2007, we feel confident in our ability to continue growing enterprise revenues throughout 2008.

As we outlined at our analyst event last month, the dynamics behind our global business are positive, and that includes both enterprise as well as wholesale.

Slide 16 outlines the key trends.

First, we have a premier global network serving nearly 120,000 customers in 164 countries.

We have 38 data hosting centers around the world, and we're making smart aggressive moves to advance that network overseas and here in the US where we are underway with the nation's most extensive OC768 deployment.

Second, we're seeing good fundamental demand in volume trends, driven by wireless and application services.

With strong demand in applications management, we're seeing the shift to IP deliver faster revenue recovery times than we had anticipated.

And third, when you look ahead at our wholesale and enterprise business, there are additional incremental drivers that we expect to help growth rates going forward.

In October we formed an alliance with IBM that calls for AT&T to become their primary global network management services provider.

As a result, we expect to receive up to 5 billion of additional revenues over the five-year term of the agreement, largely in the wholesale customer category at the outset and in enterprise as we build the business.

These revenues are expected to begin ramping in mid-2008.

This week we announced a three-year marketing agreement with SAP America.

We will serve as SAP's primary independent hosting services provider for business customers headquartered in North America.

As we add to our business through alliances such as these, we're also seeing reduced impacts to wholesale from the traffic migration that has occurred due to industry consolidation.

That process is nearing an end.

And the year-over-year impact of merger conditions on wholesale results will be behind us by midyear.

When you take these factors together, it leads to our outlook not only for enterprise growth in 2008, but for a return to wholesale growth as well.

We also had solid results in regional business.

Slide 17 provides a quick update.

Our regional business revenues grew by 2.8% in the fourth quarter.

Revenues from small and midsize firms continue to be solid.

They were up 5%, consistent with recent results.

Regional business data revenues grew 4.2%, led by mid single digit growth in data transport and double-digit growth in IP data revenues, including areas such as VPNs, broadband and managed Internet services.

Regional business voices revenues also continue to grow in the low single digits both local and long distance.

And at this point, nearly 50% of our small business customers at risk to cable competition have bundled services and have signed new term contracts with us, and our activity in this area is reflected in the growth rates.

Our product sets with strength in data services in key growth areas such as VoIP, IP data and application services gives us an excellent opportunity in regional business.

We expect that it will be an ongoing area of strength for us with mid single digit growth.

Slide 18 shows regional consumer trends where we continued to deliver stable revenues consistent with results over the past several quarters.

Broadband penetration of consumer primary lines now approaches 39%.

In our West region, California and Nevada, broadband penetration is above 45%.

Consumer video penetration moved up to 7.6%.

That is satellite and U-verse TV.

With gains in broadband and video more than offsetting declines in traditional voice lines, over the past year we've had a net gain in regional consumer connections of 568,000.

And our consumer ARPU based on primary lines was up 4.9%.

I mentioned at our December 11 analyst event in New York that we had seen some evidence of economic softness on consumer, primarily in access lines and broadband net adds.

We have this level of economic softness baked into our business plans, and as a result, there is no change to our outlook at this time, which is for continued growth in regional consumer driven by broadband in ramping video revenue.

Slide 19 shows our broadband results where we continued to deliver solid double-digit growth in both revenues and subscribers.

We had a net gain in the fourth quarter of just under 400,000, and over the past year, we've had a net gain of 2 million broadband connections.

That includes a significant ramp over the past quarter in broadband sales without a traditional wired voice line, either stand-alone or more often in our wireless broadband bundle, which we launched in August of 2007.

And we continue to deliver solid double-digit growth in broadband revenues, up nearly 14% in the fourth quarter.

We believe there continues to be substantial opportunity ahead in broadband as we add more features and options in the first quarter, including free Wi-Fi access to subscribers who take speeds at 1.5 megabits or above.

As you know, we have the largest Wi-Fi coverage of any US provider.

Plus, in the first quarter, we're adding a new 10 megabit broadband service on our U-verse platform.

The other driver in our consumer business is video, and we continue to see a solid ramp in U-verse as we show on slide 20.

Since our last quarterly update, we have added new markets.

We're now in 41.

We have expanded coverage in existing markets, and our install rates have climbed.

In mid-December our last good preholiday week we had approximately 12,000 installs, above the 10,000 per week target we've set for the end of the year.

Our technicians are gaining experience and expertise.

We're seeing further reductions in installation times.

Churn continues to improve, and customer response is very positive.

We have expanded our deployment plan to include the Southeast region with the target of reaching up to 30 million homes by 2010.

We have just launched our U-verse Voice over IP service in Detroit and will continue to roll that out to additional markets in 2008.

We expect a continued strong ramp, and as we said at our analyst conference, we expect our installed base to exceed 1 million by the end of 2008.

I would like to close with a few comments on cash flow on slide 21.

For the full year, cash from operations totaled $34.1 billion, free cash flow totaled $16.4 billion, and we returned substantial cash to shareowners, $19.1 billion when you combine more than $10 billion in share repurchases with our dividends paid.

As a result, our free cash flow yield has grown and exceeds that of our peers.

And as we laid out for you before, we have a strong balance sheet.

We intend to keep our credit metric stable with a debt to EBITDA multiple in the 1.3 to 1.5 range.

And our strong and growing free cash flow gives us the flexibility to both invest in the future of our business and return substantial value to shareowners.

As you know, we have grown our dividend every year in our history, including a 12.7% increase announced in December, and we expect to continue share repurchases.

We announced a new repurchase authorization for 400 million shares, which is about 6.6% of our year-end shares outstanding, and we expect to exhaust that by the end of 2009.

So with that, let me close with a quick recap.

I think we had a very solid fourth quarter.

We're seeing accelerating momentum across some key growth areas in our business in wireless, in enterprise and in video.

What we're seeing in the economy is consistent with our 2008 operational plan, and we're confident in our ability to execute on that plan as we discussed in our December analyst meeting.

We expect to ramp revenue growth in 2008 to the mid single digit range.

We expect to expand our consolidated adjusted margins into the 25 to 26% range, and we will continue to be a strong free cash flow company, which allows us to invest in the business and return cash to shareowners.

We have a deep management team, one that is financially disciplined and with a strong record of delivering on targets.

That is AT&T today.

With that, Rich, I think we're ready to open up the lines for some questions.

Great.

Thank you, Rick.

If you would, we're ready to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

Simon Flannery, Morgan Stanley.

I wanted to ask about U-verse if I could.

Can you give us some sense of the dilution in the quarter?

Any early learnings about things like churn and also the updated timing on getting a second HD stream.

And then on the iPhone, if you could give us some iPhone numbers where we stand at the end of the year and any commentary on the business pricing that was rolled out this week?

Thanks.

Sure.

Good morning.

Let me try to address your questions there.

First of all, we feel very good about U-verse results in the fourth quarter.

They were right where we had targeted them for the quarter.

Churn rates, any new product churn rates are a little bit misleading because you don't have much of a base there.

But our churn rates in U-verse are very good.

They are comparable right now to what we are seeing in access-line and broadband kinds of churn.

And I actually believe they will decline from there.

I would expect they would decline to sub-2% levels as we start to build the base further.

But churn and customer response to the product continues to be good.

Dilution for the year in U-verse was right at $0.11.

That is right where we had projected it for the year.

And going forward, there is no change to our outlook or guidance from that standpoint.

I think, as we go into 2008, we ramp and launch additional markets, increase our gross add activity.

I would expect incremental dilution next year in the $0.12 to $0.14 range.

But the product is moving along very well.

We do have, as you noted, we have got some product enhancements slated for 2008 that I think will be key, including whole home DVR capabilities.

Second, HD stream.

And we would expect to have those -- begin rolling those out in the market around midyear.

And then a third enhancement that will be, frankly, important to us going forward because it will enable even additional HD streams will be where they are required will be pair bonding, which we expect late in 2008.

So solid results continue I think on U-verse.

With respect to the iPhone, results continue to be very good.

We had very solid sales results in both October and November, and in December, as you would expect from kind of the normal monthly run-rate, we had almost double the sales in December.

I think clearly as we go forward, Apple will continue to enhance the product.

We see some software enhancements being announced and planned for 2008.

So I think it will continue to be a very strong product for us.

ARPUs on the iPhone are very good as you would expect.

The people that acquire that phone, first of all, tend to have strong voice ARPUs, but then in addition are putting data packages on top of it.

And so similar to what we see in our entire smart phone and integrated device lineup, we're seeing ARPUs that are nearly double what average ARPUs are in the rest of the base.

Can you just help us reconcile the 4 million number that Apple gave to what you might be seeing in terms of both how much of that is overseas and how much of that is being bought for locking?

Yes, it is difficult to reconcile those numbers, and it will become increasingly more difficult going forward as Apple expands into more overseas markets.

But essentially we had -- we have finished the year.

We were just at or just slightly under 2 million iPhone customers in the base.

And if you start to try to reconcile those numbers, the big reconciling items will be, first of all, there are devices that we have purchased that are in inventory.

There are devices that have been sold and shipped, some of them online, but were not activated at that point.

So that creates a reconciling item.

And then third, there are certainly some devices that are being purchased through channels in the US or purchased through online channels that are actually going to international markets.

So that creates another reconciling item there.

But when you look at a device that has been in the market for six months basically, a half a year, and it is 2 million devices out of a -- and you have to back it up to largely our postpaid base, that is pretty significant growth in a short period of time, and we continue to see it as a very strong product.

David Barden, Banc of America Securities.

Maybe two related questions I guess just talking about the economy obviously.

The stock is down about 13% from Randall's comments at the beginning of the month talking about the softness that could creep into the consumer business.

Although it was not apparent to me that we actually saw it coming full force in the fourth quarter.

I guess the concern here, though, is that the expectations that have been laid out for 2008 encompass some positive economic scenario, which if the data starts to deteriorate, AT&T just will not be able to live up to.

And that seems to be the bet that the market is making.

So, Rick, I was wondering if you could kind of just discuss the tolerances around the economic scenarios that you have baked into the '08 expectations?

How much more unemployment?

What kind of GDP growth expectations are the minimum necessary to expect that enterprise can continue to grow, that consumer revenues can continue to grow, etc.?

And then I guess the second part of that would be that whole discussion has extended to the wireless arena where data revenue growth has been the biggest driver of it.

There is an argument that maybe that is a discretionary component of the business, and therefore, it could not possibly be as strong in a softer economic climate.

Counterbalancing that is the fact that you only have 12% of your devices are smart phones, and there's a large component of wealthy new people who could be using it but are not.

So I guess if you could kind of talk about those issues as we look into '08, that would be very helpful.

Thanks.

I would be happy to do that, David.

As you all know, there has been an awful lot of noise in the market and the media about the economy.

What I would first say is, if you go back to the comments that we have made, first of all, going back to our analyst conference in December, I made comments in my presentation in December that we were seeing a little bit of softness in some of our consumer metrics, and in response to some questions at the conference, we talked about some increases in nonpay disconnects and things that, frankly, you would expect I think somewhat given trends in the overall economy.

In January our Chairman, Randall Stephenson, made very, very similar comments.

What caused those comments suddenly in January to be more of a media event than the similar comments we made in December I cannot say.

But putting that aside, let's talk about it and look at the results we had for fourth quarter.

Where we saw some softness as we have mentioned is in access-lines where the rate of switched line loss increased somewhat in the fourth quarter, and we saw it in some slowing in broadband net adds.

In both of those cases, both of those products are impacted by some of the things we see in the housing market, some slowdown in home sales, slowdown in new construction.

They are impacted by as well some small uptick in nonpay disconnects, and to put it in context, it is for both products in the neighborhood of about 10 basis points of additional churn nonpay related that we saw in the fourth quarter of this year versus fourth quarter of the prior year.

Those were trends that we were seeing in December.

We've baked those into our operational plans, and they are reflected in the guidance that we have given.

As you look across the rest of the business, we are clearly not seeing any impacts in our wireless business at this point.

Wireless continues to be very strong both in customer growth and in ARPU growth.

And to some degree, it reflects I think changes in terms of the way people are communicating today versus maybe 10 or 15 years ago or if you go back to any last consumer economic softness we have had.

And that is simply that wireless in terms of access and connectivity is very important to people today.

We're not seeing any impacts as we said at the analyst conference and I think as you see in our results in sales to business customers and particularly in sales to enterprise business.

And if you think about the products we're selling there and the focus in that business and the movement of customers and traffic to IP, that is something even in a difficult economy when companies are looking to reduce costs, that is actually a service that facilitates and helps them provide more bandwidth and more productivity within their business at lesser costs.

And so it is not surprising actually that as you look at the results and look at the fourth-quarter results the strength we have had in IP-based revenues there.

So when you put all of that together, David, I think we still feel good about our guidance and our plan for 2008.

The economy is always a risk, but I think when you look across our business, we are relatively I think defensive in nature in these kinds of downturns.

And wireless particularly for the reasons that you mentioned and some of the things I mentioned in the presentation, the fact that the ARPU growth is being driven by data and that data growth is being driven by new devices, new smart phones, new integrated devices, and it is being driven by the move to 3G.

And together those things are opening up a whole new host of applications that I think will be -- bring value and be very interesting to our customers.

I think that makes us feel very good about the outlook for wireless as we go into 2008.

So the economy is something and the impact on our business is something we monitor.

We will watch every quarter as we look at our results across each of the business units.

But at this point what I have described to you is what we have seen, and it is just some limited impact in our access-line and broadband results.

And I would tell you, even in broadband, while we certainly would say that fourth-quarter broadband net adds were a little lower than we had seen in prior quarters, when you annualize the broadband net adds we had in fourth quarter, they are still growing at better than a double-digit pace.

So we're still seeing pretty nice growth there.

And Rick, just to follow-up real quick, just the difference between December and January was I think that the market became much more convinced that there was less of a debate about the economy actually softening.

So can you just kind of reiterate that with respect to all the incremental data that has come out to this point your conviction level is still there that you have kind of baked in the appropriate baseline economic environment within a range of reasonable assumptions into the numbers?

I think if I understand your question, David, you are asking with any incremental data we have seen in January, are we seeing trends that support our outlook?

And the answer to that is yes.

Keeping in mind that we are only talking about a few weeks of activity, but generally what we have seen so far this year relative to fourth quarter as we have actually seen I think in these first few weeks, we have seen broadband improve somewhat over the run-rates we had in fourth quarter.

And we have seen access-lines certainly be in terms of our run-rate be at or maybe a little better than we saw in the fourth quarter but certainly no worse.

John Hodulik, UBS.

Two questions.

First, in terms of consolidated revenue growth, it looks like CPE had a larger than expected headwind or impact on the numbers this quarter.

Is that 3.5% growth rate without CPE sort of a good starting point as we look out into '08?

I realize the guidance is 4% to 6%.

You went over what are the drivers to get us to accelerate.

But are there any other issues that could sort of surprise us from a negative standpoint besides the economy?

We have seen the growth in wireless.

I think it seems like you have good visibility on enterprise.

I'm just wondering if there's anything else that we're not -- just sort of some idea of how you expect the growth to trend over the next few quarters.

And then on wireless, it looks like the margins were a little lighter than we bought.

Can you talk a little bit about the strategy in the fourth quarter and how that plays out in the first quarter in terms of promotions and subsidies and maybe the rate of upgrades you saw in the quarter?

Do we still expect a nice bump in the first quarter with the turndown in the TDMA network?

Okay.

Starting going back to your first question on revenue growth, first of all, you are right.

Excluding CPE, revenue growth was 3.5%.

It has had an impact on us in just about every quarter in 2007.

But the fourth quarter was bigger in terms of impact.

And the reason for that is really kind of simple.

As we went through 2006 and we started looking at products and services and what products we were selling, throughout 2006 particularly -- and let me just talk about the enterprise business and enterprise sales.

We were selling equipment that we kind of divided into two buckets.

There are some equipment sales that we make that facilitate and pull-through network services, and they are sold as part of a package service, and that is something that we feel good about, and we like the economics on.

And it is just business that makes sense to us.

In 2006 we also saw that we had some CPE sales, and it was as much as 20, 30% of our CPE sales that when we looked at them, they were stand-alone sales, did not pull through network services, and they really did not have any margin to them.

And we decided at the end of 2006, that is not where we wanted our resources and our focus and our sales force to be focused on.

So we did a couple of things.

We made some changes to pricing in terms of how we were going to sell CPE, and probably more importantly, we made changes to our commission plans.

The fourth quarter -- and both of those changes, by the way, had the desired impact.

And so what we have seen in 2007 generally are lower levels of CPE sales, but the CPE we're selling is part of package deals and is carrying with it reasonable margins.

And so we have got the desired result from it.

But then you compound all of that with the fact that fourth quarter is typically a higher quarter for equipment sales, and that is why you saw the impact in the fourth quarter.

When you look at -- when I step back from it and say, okay, how do we get comfortable with the run-rates we are on and the move to mid single digit revenue growth?

First of all, the impact from CPE I think as we go into 2008 versus 2007 will be much more on our current run-rate.

We will not have the delta that we had between 2007 and 2006.

Secondly, one of the factors that I think is significant to us is we do see that wholesale, which has throughout 2007 had a year-over-year decline in the 7% to 8% range, we feel will stabilize in 2008 and begin to grow for the factors I mentioned in the presentation.

That we are nearing the end of consolidation of traffic which has impacted wholesale.

That by midyear 2008 we will be at the one year point for some of the price reductions that we put in place as part of our merger conditions.

And so that will cease to be a drag.

And then finally, the IBM agreement as it begins to phase into 2008 will provide a lift to wholesale revenues.

And then the third factor from a revenue growth standpoint is just the math and the mechanics of the national mass-market business, which at the end of the year was really down to around 2.5% or 2.6% of our total revenues.

The drag from that national mass-market decline will be less going forward in 2008 than 2007.

So, as I look at other issues in revenues, obviously the other thing that mid single digit revenue growth hinges on is just maintaining the trends we have seen in the business.

And we're actually seeing some acceleration of trends in wireless, which is good to see.

We're seeing some acceleration of trends in enterprise, and we're seeing, despite the economic impacts, continued stable trends in regional.

So, as we move forward, I think because of those factors it all gives us comfort in continuing to ramp up revenues.

Finally, when you look at wireless margins, as I said, it is not unusual to have wireless margins pull back a little bit in the fourth quarter.

When we look at fourth-quarter results, it is almost entirely due to increases in acquisition costs, selling costs, equipment costs, as well as upgrade cost.

Fourth quarter is also a high upgrade quarter.

So we had about 8.5% of the base upgrade in the fourth quarter, which drives it as well.

I think going forward in wireless, it was a typical fourth quarter I think in terms of pretty aggressive promotions around devices and handsets.

But, as we see the results from particularly the higher end devices we're selling, the results in terms of ARPU is very strong.

So it gives me a lot of comfort in terms of what we're doing with those devices.

I think a key will be how the market continues in the first quarter.

Typically January, or the first part of January, you continue with some pricing and some promotions you had over the holidays, and then the question will be, how does the market develop after that?

But we will get lift.

We will get lift from the TDMA shutdown.

I would not look for that necessarily in the first quarter.

I think we will see that begin to ramp more in the balance of the year.

We will shut that network down in the first quarter, but then we still have to remove equipment from sales sites, and we have to get relief from the rents we are paying on the equipment on those sites.

We will have to adjust our transport, our infrastructure between the switches and sell sites to reflect removal of that equipment.

So there is a lot of work to be done to get the remaining TDMA costs out of the network.

So you will see that, but you will see that as we go forward in 2008.

David Janazzo, Merrill Lynch.

You have spelled out the cost-cutting synergy opportunities, other operational initiatives, and obviously U-verse is going to be a little more dilutive.

But I noticed that headcount is increasing.

And how does that square with some of the cost cutting and other initiatives?

Yes, we have had some increase in headcount.

I would put them -- it's in a number of buckets.

One is certainly we are at the same time we're taking force out of the business related to the merger synergies and the other cost initiatives, we are adding force in some areas.

For example, we are adding force primarily in terms of technicians and installers for U-verse.

And so we're starting to ramp that up, and there's a leadtime to that.

We have got to hire people, get them trained and get them on board as we start to launch new markets.

So that has been one factor.

We have also as part of our merger conditions, we had made some commitments to bring some jobs back that had been outsourced to bring some jobs back into the country.

And so we're following through on those obligations.

So there you may see some headcount increases.

We're trying to do it in such a way that we can minimize any cost increase from it.

So we are eliminating outside contractor costs as we're doing that.

And then finally, we've got some increases that are related to transactions that we have done.

So part of the increase is to bring in about 2500, for example, from the Dobson acquisition in November.

We're also bringing people on as part of our IBM agreement.

As we takeover the network management, much of which or some of which had been done in-house at IBM, we're bringing some employees in there to handle that business.

And finally, we have got some contracts that require us to provide some staffing.

For example, we have a government contract in support of the passport offices, for example, and they have had high volumes, and so we have staffed up there.

But there is corresponding revenues to go with that.

I think those are the major things that have impacted force.

But our force initiatives related to both the synergies and the other cost initiatives continue to be on track.

Chris Larsen, Credit Suisse.

A couple of questions.

First, on the CPE sales, do you have a sense for where those customers are shifting their purchases?

Are they buying them directly from the OEMs, or are they going to some of your competitors who are still heavily discounting those products?

Secondly, the Apple ARPU do you report it net of any payments that would go to Apple in your wireless revenues?

And then third, probably and the more important of the questions, I'm assuming in your stock buyback you're in a window where you cannot buy back.

When does that window open up?

And if you look at your after-tax cost of borrowing, it is now meaningfully below your yield.

And how do you think about leverage in the short term in terms of buying back stock relative to your cost of debt?

Okay.

Chris, I will try to knock those off one at a time.

In CPE part of the reason for us deemphasizing sales of stand-alone CPE, as I said, is there's very little margin.

We found very little margin in that business.

Because there are a number of alternatives for companies to purchase essentially whether it be a server or a router or whatever it is, the same piece of equipment.

And what you find yourself is you are competing with other dealers of that particular equipment, and you're competing in many cases with the manufacturer itself.

And so I cannot give you any data in terms of where those purchases have gone.

But there is a pretty broad range of alternatives available, and that is why it is just not for us a very attractive business.

In terms of ARPU on the iPhone, the iPhone ARPU is reported gross, and sharing or payments are reflected in expense for the iPhone.

And that is not different from other relationships we have that we have had for years.

For example, our agents typically as they sell new customers for us, they receive a commission on sale, but they also receive some residuals, some share of revenue, and those are always reported and expensed.

And finally, on stock buyback we have not been in the market in January because of the cause of the earnings release.

And so we will resume our share repurchase program starting tomorrow.

And certainly we will take advantage of both where borrowing rates are, as well as where the share price is.

We have a plan, as you know, to repurchase 400 million shares we spread over this year and next year.

But part of the plan includes increasing leverage, not necessarily reducing our credit metrics, but increasing leverage as our cash flow continues to improve.

So we will be as we did in 2007, we will be increasing some leverage in 2008, and we will be using that for share repurchase.

So our expectation, as I said, is to be back in the market tomorrow.

Jason Armstrong, Goldman Sachs.

A couple of questions.

First, on wireline.

In the prior cycle, you guys were really the first to flag the weakness on the consumer wireline side of the business.

In large part I think it's due to geographic diversity in the business.

So related to that, the step up in access-line loss here I know you sort of characterize it between non-pay housing starts, but can you talk about it geographically?

Is a lot of this tied to Midwest, sort of Ameritech markets, or is it more evenly distributed?

And then the second question, just sort of a follow-up on numerous economic questions.

It seems like the economic base case here is still similar to the Analyst Day, which you termed at the time sort of soft landing.

If you hypothetically assume that we move to the hard landing scenario, which I'm sure you have run some scenarios on, how would that change your approach to the business?

Maybe specifically on the cost side, what are the levers?

The CapEx reductions?

The reduction at buybacks?

Maybe you can step us through how you would think about the levers at that point if we reached it.

Thanks.

Sure, Jason.

First, on the impacts we're seeing in wireline, I have looked at the data, I have looked at it by state and by region, and to be honest with you, I'm not seen any clear patterns by region in terms of changes in the trends.

There is certainly some weakness geographically in the Midwest states, Upper Midwest.

But if you take some cities there, Detroit for example, they have had issues there for sometime related to the auto industry.

So I cannot say what we are seeing is an increase in a particular area at this point.

So I don't see any particular patterns there.

I think it's more spread across the geography.

And again, when you're talking about a 10 basis point impact on nonpay churn, that is not a huge impact.

So you're cutting it pretty fine to try to see it by state or region.

Right now from an economic standpoint, we have got experts that are much more qualified to talk about this certainly in the country than I would be.

But we have got experts kind of on both sides in terms of predicting what the economy will do in 2008.

What I would tend to focus on or what I tend to focus on more is what impacts we're seeing in our business.

And, as I said, there is -- there are some impacts we have seen as we've talked about in consumer and in access-lines and broadband, but they are not very severe at this point.

And I think for us that continues to point to more of the defensive nature of our business.

And in consumer, whether you're looking at wireless or wireline, consumers still are going to want to stay connected.

They are going to want to stay connected through voice service, and they are certainly going to want to stay connected for data and broadband service.

And then on top of that, because we're a new entrant, we've got lots of opportunities there on the video side.

As you start to work into business customers, I think the kinds of products we're offering and the solutions we can deliver in IP are really answering problems or issues or challenges that businesses are facing in terms of how to provide greater levels of bandwidth, greater numbers of applications and connectivity throughout their business and to try to do it in a cost-efficient way.

That just naturally drives customers to IP, which is a sweet spot for us.

So I think for me what then says as I think of our business continues across the spectrum to be pretty defensive in times like this.

In terms of cost levers, one of the things that we have gotten I think very good at is knowing how and when to tighten our belts on the cost side.

And something that I think is still surprising to people overall is the level of costs in our business that tend to be variable.

We are reviewed often times as a large network based very fixed cost business.

But when you look at the cost in our business, the largest element of cost in our business is force.

But when you take that down to the next level, and this surprises people sometimes, it is not force supporting our network, but it is force that is involved in sales and in customer service and in our call centers.

And those areas tend to really regulate themselves versus the volumes we're seeing in the business.

So as volumes decline, calls into the centers decline.

There is always regular attrition in those jobs, and so we are able to adjust our force in those areas pretty easily.

And even on the network side, think about the amount of force there that is tied to activity, either installation or repair activity.

And so again, as volumes decline, that is pretty self-regulating.

The second-largest area of expense in our business is access, which again also tends to fluctuate with volumes.

And so when you put it all together, about 60 to 70% of our expenses are relatively variable with revenues and volumes.

So I think that is the other thing that gives us comfort as we go into into a period of time where there's some questions about the strength of the economy.

This will have to be our last question, this next question.

Mike McCormack, Bear Stearns.

Just a question on -- again, I hate to beat the horse on wireline cost saves, but it looks like the sequential drop in cost of service or cost of sales was fairly dramatic.

I'm just trying to get a sense for if there was any sort of onetime impact to the quarter?

And then looking forward, if we have that kind of expense saving run-rate, maybe just your thoughts on if we have wholesale revenue getting more stable with continuation of these cost saves, it seems like margin expansion could ramp towards the back half of the year.

Maybe within the wholesale revenue piece of that, can you give us any sense for what percentage might be wireline carrier revenue?

And then secondly, a little more clarity on the merger anniversary.

Is there going to be some special access pricing change?

I will hit you with one more before I go, which is on postpaid wireless adds.

It was a good quarter overall for the adds, but within postpaid still trailing your other competitor out there with a quarter that Sprint put up that was dismal by most measures.

Just your sense on how we can take more share of those postpaid subs going forward?

Sure, Mike.

First of all, on wireless cost to service, there is no --

Wireline, Rick, sorry.

I'm sorry, wireline cost of service.

There is no big drivers there.

In fact, when I look, and maybe we need to get into some of the numbers with you individually in more detail.

When I look at the wireline business third quarter to fourth quarter, the margins were relatively flat, if you look at EBITDA margins, relatively flat between third quarter, fourth quarter.

And what we're seeing there is continued improvement in terms of merger synergies and the other cost initiatives offset by in the fourth quarter I think primarily two factors.

One is certainly the continued ramp in U-verse provided a more expense and a little more dilution in the fourth quarter versus third or second quarter of last year.

And then secondly, the fourth quarter typically is a little bit lower in terms of revenue simply because of wireline business just lower business days due to the holidays.

So fourth quarter would typically be a lower margin quarter for us.

We held it about flat this year, and that was primarily due to improvements in the cost and merger synergies.

I guess the surprise there was typically you have margin pressure because presumably you have a relatively fixed cost base with those fewer business days.

You certainly saw it with AT&T Corporation, and I guessed I was surprised by the strong cost reduction this quarter.

Well, we had a nice ramp in some of the merger synergies areas, and we had some I think a very good cost focus in our wireline business, particularly in the regional wireline business.

So I think that helped us in the fourth quarter.

In terms of wireless, the postpaid adds, as you said, showed a nice increase year-over-year.

And we feel very good about our postpaid sales activity and the volumes we're seeing and the store traffic we're seeing.

I think the challenge for us and what we have to do as we go forward into 2008 is to continue to migrate churn levels down.

And certainly as we get beyond the TDMA shutdown, I think that will help churn levels reduce.

And we need to take another over time another 20 basis points or so out of our postpaid churn, and that will make I think a huge difference.

Do you see opportunity on the Dobson churn as well?

Yes, I think overall I think Dobson will help us.

I think we will be able to improve overall Dobson results because we can offer customers in the Dobson areas I think a much more robust product portfolio.

And secondly, we will see some churn improvement because we will be taking some -- or we will see some margin improvement because we will be taking some roaming costs out.

And just having those areas and being able to better tie them into our networks, we will spend a little money on improving network quality in some of those areas, and that will drive better churn for us as well.

A good example is Dobson has an area north here of San Antonio, and it is an area where a lot of people in the San Antonio Metropolitan area travel to.

And so I think the ability to tie that into our network will provide a better customer experience and better churn rates there.

Do you have anything on the wholesale revenue for us and what percentage might be coming from that wireline carrier revenue base?

I don't have that percentage for you, Mike, but generally the wireline carrier base revenues have been declining because that is where in effect you see the impact of consolidation in some areas.

We're continuing to see very good growth in wireless, and we're seeing some growth in international.

I think where we have opportunities going forward, it is going to be in some of the things we mentioned and in particular the IBM agreement.

Okay.

Well, that will conclude our question-and-answer session.

Rick has some closing comments before we adjourn for the morning.

Rick?

Thanks, Rich, and thanks to all of you for being on the call with us today.

I just reiterate I think we had a very good fourth quarter, certainly terrific wireless growth.

We're very excited about what we saw in the fourth quarter from a wireless standpoint.

Excellent momentum continues in enterprise, which I think is a good sign for us, as well as stable revenue trends in regional operations.

We continued to focus and push cost synergies, and they continue to run ahead of schedule, and all of that contributes to continued double-digit growth in adjusted EPS and strong free cash flow.

Along with that free cash flow, we're happy to report more than $19 billion return to shareowners in 2007 through dividends and stock buybacks.

I think as you can tell overall we're very proud of the 2007 results.

But I think what is more important, frankly, today is I believe the opportunities that still lie ahead for us.

We have good momentum in some key areas of the business that will allow us to ramp topline growth.

We continue to have substantial opportunities to remove costs.

We're on track with the initiatives that we outlined for you in December, and all of that gives us confidence in reaffirming our outlook and our ability to drive strong results in 2008.

As I said at the analyst conference last month, I think AT&T today has a very strong financial profile.

We're a financially disciplined Company.

We're capable of sustained double-digit growth and adjusted earnings per share.

We are a strong free cash flow Company and a Company that is committed to returning value to shareowners with a strong dividend yield.

And I think that profile, along with some of the defensive characteristics of the business that we talked about today, makes us especially attractive in the current economic and market environment.

I want to thank you all again for taking part in the call today and as always for your interest in AT&T.

Great.

Thank you, Rick, and thank all of you.

That will conclude our call for today.

Thank you.

Thank you, ladies and gentlemen, for participating in the AT&T fourth-quarter earnings release 2007 conference call.

This concludes your conference for today.

You may all disconnect at this time.