AT&T Inc (T) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AT&T second-quarter earnings release 2008 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Brooks McCorcle, Senior Vice President of Investor Relations. Ms. McCorkle, you may begin.

Thank you, Michelle. Good morning, everyone, and welcome to our second-quarter conference call. It's great to have you with us. I'm Brooks McCorcle, Head of Investor Relations for AT&T. And joining me this morning on the call is Rick Lindner, AT&T's Chief Financial Officer.

As you know, we released second-quarter results earlier this morning and the purpose of this call is to provide you with additional background. Our release, investor briefing, supplementary information, and the presentation slides that accompany this call are all available on the investor relations page of the AT&T website, that's www.ATT.com/investor.relations.

Before we get started I need to cover you on our Safe Harbor statement which is on slide 3. 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 the 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 also available on our website at www.ATT.com/investor.relations.

With that covered, let me take you through our second-quarter EPS comparisons which are on slide 4. Reported EPS for the second quarter of 2008 was $0.63 which was up 34% versus the year-ago quarter. We had $0.13 of non-cash merger costs, the result is adjusted EPS of $0.76 which is up 8.6% from year-ago adjusted results. And on a year-to-date basis adjusted EPS was up 11.1%.

As a reminder, in 2007 our adjustments included cash merger integration costs. This year, starting with the first quarter, while we continue to have some cash merger integration costs, they're all at a lower level and we no longer exclude them from our adjusted results. With that background I'll now turn the call over to AT&T's Senior Executive Vice President and CFO, Rick Lindner. Rick?

Thanks, Brooks, and good morning, everyone. It's great to have this opportunity to talk with you again. And let me start with a look at the major highlights and a brief overview of the quarter. These are on slide 6.

I think when you step back and look at the quarter our results show a couple of things. First, they demonstrate the great strength of AT&T's assets. We continue to have the best set of assets in the industry. Second, I believe our results demonstrate our ability to execute. While the macro environment is certainly challenging our business is more resilient than most. We're running the business with focus and discipline and with a strong commitment to share owners.

Wireless continues to drive our results with continued midteens wireless revenue growth. Wireless data revenues up 52% and another step down in postpaid churn. The turn around in our wholesale business continues as we projected; this was our second consecutive quarter of sequential growth in wholesale revenues.

Enterprise fundamentals remain solid. In looking at the new contracts coming online we expect to deliver growth in enterprise in 2008. Our U-verse TV service continues to ramp nicely and we're on track to reach 1 million customers by the end of this year. We're also on track with our cost initiatives; that's reflected in our 25.1% adjusted operating margin for the quarter. And the telco reorganization we outlined for you in April will have more of an impact starting with the third quarter.

And we are returning substantial cash to share owners. Dividends and share repurchases in the first half of the year totaled $10.9 billion. So on what is always a seasonally difficult quarter we delivered solid results. Now let's step through these results in more detail starting with consolidated revenues which are on slide 7.

On a reported basis, second-quarter consolidated revenues were up 4.7%. And when you take out the merger accounting affects that lowered our 2007 directory revenues on a pro forma basis, second-quarter consolidated revenues were up 3.6%, and for the first half of the year they're up 4.1%. These results reflect strong wireless growth, substantial improvement in wholesale and double-digit growth in IP-based services in both business and consumer segments.

Second-quarter revenues also reflect the fact that we changed our Yahoo! relationship and sold a small directory resales operation. Those changes had a minor negative impact on our consolidated revenue growth rate.

Slide 8 provides details on wireless revenue growth. Service revenues were up nearly 15% and total wireless revenues were up close to 16% to $12 billion in the quarter. We had a very solid net add quarter, 1.3 million, and we delivered a high percentage of retail postpaid net adds which were up more than 26% from the first quarter of this year. And that's even with lower sales of the 2G iPhone in the several weeks leading up to the iPhone 3G launch.

We continue to have a very strong gross add flow share. Total gross adds were 4.9 million; postpaid gross adds were also strong at 2.8 million. And postpaid churn came down to 1.1%, that's down to sequentially and year-over-year to the lowest level in our history. Postpaid ARPU was up 3.5% year-over-year and up 1.5% sequentially.

These trends reflect outstanding growth in wireless data; the details are on slide 9. Our wireless data revenues grew 52%; this growth comes from strong increases in both consumer and business data usage. Internet access revenues more than doubled. Revenues from e-mail, messaging and data access all delivered greater than 50% growth. Text messaging volumes were nearly triple what we saw in the year-ago quarter and multimedia messaging volumes were up more than 170%.

With all of this wireless data is still in the early stages of growth; penetration is climbing but significant opportunity lies ahead. At this point we have only 13 million 3G devices in service and only 18% of AT&T's postpaid subscribers have integrated devices. The ARPU's for customers with integrated devices are roughly double the Company average, so we have great upside potential in wireless data.

And more to the point, we have a tremendous window of opportunity to define and develop wireless data as a major long-term strength for AT&T. It's an area that represents huge potential for us both in the consumer and business markets.

Over the past year we've done a number of things to seize the wireless data opportunity. Slide 10 lays out our strategy. First, we've assembled a truly outstanding spectrum position. When you put together the 700 MHz spectrum we acquired from Aloha Partners early in the year and the spectrum we acquired in the FCC auction, we have spectrum that is contiguous and unencumbered from a regulatory standpoint covering 100% of the top 200 markets. And across the top 100 US markets we have a total average spectrum depth of 90 MHz.

The second part of our strategy is the network. We have a clear technology path to LTE and 4G that provides a logical incremental steps for us to increase speeds and an easy transition for our customers. We have the nation's fastest 3G network today, that's based on independent tests. We currently cover 300 US markets, we'll have our 3G network in nearly 350 metros by the end of this year, and nearly half of all 3G sell sites will receive additional capacity by the end of the year.

In May 2009 timeframe the next step in our evolution is HSPA release 7 which we expect will deliver peak speeds exceeding 20 Mb per second. This will be largely achieved through a software upgrade. And beyond the 2010 timeframe we expect to move into LTE with peak speeds at high as 100 Mb per second. These steps are logical, all building on the same technology foundation. LTE will allow for backward compatibility to our GSM and HSPA networks which is a great benefit to customers who can move up the speed chain with us as their wireless data needs evolve.

The third part of our data strategy is to drive adoption and usage growth through breakthrough devices; the most notable being the iPhone 3G which was launched just 12 days ago. We've had great success with a number of exclusives in recent years and we're thrilled with the initial customer response to the latest iPhone. The response and the store traffic have been tremendous. Sales so far are nearly double what we achieved in the first days of the 2G iPhone launch last year. And in the first 12 days approximately 40% of iPhone 3G sales have been to customers that are new to AT&T.

Our wireless growth initiatives work hand in hand with productivity improvements which over the past three years have driven significant wireless margin expansion. We have an update for you on slide 11. Our adjusted wireless operating margin was 29.9%, that's up 500 basis points year-over-year, and our adjusted service EBITDA margin was 41.2%, up 370 basis points.

There are a number of drivers. First, we continue to have strong revenue growth, plus we continue to improve our network cost structure and realize efficiencies in areas such as billing and customer care. Offsetting these positive factors in the second quarter were strong gross add flow share and the fact that more of our subscribers are opting for advanced higher cost devices. We had a very good wireless margin quarter and, while the 3G iPhone will have an impact on margins going forward, we remain comfortable with our outlook for a full year wireless service EBITDA margin in the 39% to 40% range.

Let me turn now and cover our results in both wholesale and enterprise; the details for enterprise are on slide 12. A little over two years ago enterprise revenues were declining in the high single digits. Since then we've seen fundamental improvement in terms of demand, pricing and new service adoption and that improvement continues. While our growth rates in enterprise were down slightly this quarter the fundamentals of our enterprise business remained strong. The sales funnel and new product adoption all remained solid. We delivered better than 18% growth in enterprise IP data revenues.

We've seen some softness in LD voice and transport volumes, but at the same time many companies continue to look to advanced communications services as tools to improve productivity and that's an ongoing opportunity for us. In the second half of this year we have new contracts coming online that are set to ramp; the Shell contract for example in some of the Government contracts we've one which are all new revenues to us. So we continue to expect full-year growth in enterprise revenues in 2008.

The second area where we've seen a major turnaround is wholesale; the highlights are on slide 13. In 2007 we saw high single-digit declines in wholesale revenues as we absorb the effects of industry consolidation, the decline in UNE-P wholesale lines industry-wide, and merger concessions that affected pricing. Most of these impacts are behind us and again this quarter we saw significant improvement in year-over-year wholesale revenue growth rates. This was our second consecutive quarter of sequential growth in wholesale revenues.

Fundamental demand in the wholesale space is solid, driven by wireless carriers, Internet service providers, content providers and others. As you know, last October we formed an agreement with IBM that calls for AT&T to become its primary global network management services provider. We expect to receive up to $5 billion of additional revenues over the five-year term of the agreement, largely in the wholesale category at the outset and in enterprise as we build the business. We expect further ramp in revenues from our IBM agreement in the second half of this year and moving into 2009.

We also continue to deliver solid results in regional business; the highlights are on slide 14. In the second quarter total regional business revenues were up 1.6%; regional business data revenues grew 5.2% year-over-year lead by Ethernet and IP data services. And while it's apparent that, like consumer, the regional business space is seeing some pressure from the economy, we're doing a number of things to differentiate our products for small- and mid-sized business customers.

We're offering attractive bundles and term contract offers. We're helping these customers migrate to IP and in the second quarter growth in regional business IP data services increased nearly 14%, including double-digit gains in managed Internet, VPN and hosting services. We are doing much more with wireless, that includes offering family talk plans for small- and mid-size firms. When you think about it, wireless and mobility are the lifeblood of most small firms, so leading with wireless is important.

And starting in May our U-verse platform for high-speed Internet access is now available to small businesses in more than 40 US markets, allowing us to offer higher broadband speeds. Within the context of the macroeconomy when you look at the services we have to offer, we expect to continue to grow in the regional business space.

Slide 15 shows regional consumer trends. As we've outlined for you previously, our view is that the consumer space is going through a fundamental transformation from a dependence on legacy voice to connections driven by broadband, IP capabilities and mobility. The second quarter is always a seasonally difficult quarter for telecom companies because of end of school year disconnects. This year that was heightened somewhat by the economy, and you see that in our access line and broadband volumes.

The good news for us is that the transformation of consumer is happening quickly and AT&T is taking the lead in service choices that are centered on mobility, broadband and IP video. Our U-verse customer base continues to scale with a very high broadband attach rate. U-verse is also demonstrating that it has pull through with voice. In areas where we've marketed U-verse for a period of time we're seeing clear improvements in access line retention.

At the same time we're doing more with wireless in the consumer space including selling more broadband and wireless bundles. And in June we launched a bundle that includes AT&T high-speed Internet and laptop connect services in addition to free access to more than 17,000 WiFi hotspots; it's called AT&T Net Reach. New software automatically detects the strongest available AT&T signal from a nearby network, 3G, WiFi or an AT&T high-speed Internet connection at home, making connecting both simple and easy.

You see the impact of the new consumer world in a number of places. First, you see strong growth in consumer IP data revenues, which combine broadband and U-verse services, up over 19% in the second quarter. And second, U-verse and broadband continue to drive gains in consumer ARPU. As you see on this chart, average revenue per household served has climbed steadily, up 4.2% in the second quarter.

Scaling U-verse is a major initiative for us and we continue to be pleased with the progress we're making as we move forward with the network deployment. Slide 16 provides an update. Our U-verse network now reaches more than 11 million living units with service available in 53 markets. Penetration is growing nicely and we're getting to more than 10% penetration in less than 12 months.

We now have 549,000 subscribers in service and we're comfortable with our trajectory to reach more than 1 million in service by year end. Churn is low, customer satisfaction is high and processes are improving. Average install times are down nearly 15% since the fourth quarter of last year.

U-verse TV is a premier service that works great today and we continue to add new services and features. We've rolled out U-verse voice service in a number of markets. Our migration to offering a second HD stream will be complete in the third quarter. Every set-top box we install is HD capable, so we cost effectively grow without CPE cost or technician dispatches as our customers adopt more HD.

Total home DVR is now in trials and we expect to roll out that enhancement by the end of this year. We've said before we believe U-verse will be a multibillion dollar business for us over the next few years. Our success with the technology and with customers has reinforced our confidence in that view.

As we ramp new growth platforms we've also taken cost out of our operations and expanded margins. Slide 17 provides an update on margins. Our second-quarter adjusted operating income margin was 25.1%, up both year-over-year and sequentially. This reflects continued improvement in wireless as well as merger synergies and other cost initiatives.

In April we announced plans to restructure our regional wireline operations away from our historical geographic approach to defined by the old RBOC boundaries to a single national approach which is allowing us to streamline staff functions and implement consistent best practices across operations. While these changes take time we've made good progress on the restructure and the full benefits will be realized in the second half of 2008.

Excluding the hiring we're doing to ramp U-verse and additional force that we've taken on from IBM as part of our new agreement with that company, since the end of 2007 force levels are down more than 8,000. Looking ahead to the remainder of the year, including the margin impact we expect from iPhone sales, we continue to anticipate a full-year adjusted consolidated operating margin of around 24%. Cost reduction and productivity improvement is a continuous process for us and with our scale and a technology-based industry our view is that there will always be ongoing opportunities to operate better and more efficiently.

Let me close with a few comments on cash flow, balance sheet and yield; the data is on slide 18. Cash from operations in the quarter was $8.5 billion and in the second quarter we returned substantial cash to investors, $2.4 billion in dividends and $2 billion in share repurchase. Our free cash flow yield continues to be attractive at 6.7%. Our free cash flow outlook is strong; the third and fourth quarters are typically our best in cash flow. Including iPhone impacts we continue to expect to deliver full-year cash flow in the $16 billion range.

From an investment perspective I think this is a compelling set of facts and metrics. We have a long history of exceeding our expected returns with low volatility. We have a long history of creating value and returning that value to shareowners. We consistently lead the industry in return on invested capital. We have a strong track record of disciplined management that delivers on commitments.

Over the past few years we've delivered a huge turnaround in wireless like nothing else this industry has seen. We've delivered a huge turnaround in enterprise and we're doing the same in wholesale. We're well positioned in the growth areas of our industry with terrific assets and we have a great balance sheet and strong cash flow.

With that let me wrap up with a couple of comments on the strength of our business looking ahead to the second half of this year. First we obviously have very good momentum in wireless; we couldn't be more thrilled with the initial respond to the iPhone 3G and the types of high-value customers it's bringing to AT&T. Our enterprise business is on a good track, solid fundamentals and new contracts that are expected to show further ramp in the second half.

The turnaround in wholesale is great to see. It's a terrific business with strong margins and with a major improvement in growth trends. U-verse continues on a good trajectory; our cost reduction efforts are delivering benefits; and we continue to deliver strong free cash flow which allows us to return substantial cash to shareowners while investing in the future of the business. With that, Brooks, at this point I think we're ready to open up the phone lines and take some questions.

Okay. Michelle, can you open up for our questions, please?

(OPERATOR INSTRUCTIONS). Simon Flannery, Morgan Stanley.

Could we talk about the use of the free cash flow in the second half? You've obviously been active with buybacks; we have a dividend decision coming up in December. You obviously had a double-digit increase last year. How are you thinking about balancing dividends versus buybacks looking where the stock is now, thinking about the opportunities? And related to that is other sources of cash flow, will there be any changes to your CapEx trajectory? Any thoughts about M&A that we might see second half or next year? Thanks.

You crammed a lot of questions in there, Simon. I'll try to get at most or all of those. First off in terms of free cash flow, we have in the first half of the year, as you know, we've been very active in share repurchase. We had a very strong dividend increase at the end of last year, so a very strong dividend increase that we're seeing this year.

In the first half of the year, in addition to being very active in share repurchase, we have, as you know, a 400 million share authorization. We already repurchased about 164 million shares under that authorization in just the first six months. And in general we put kind of a two-year timeframe around those 400 million shares.

Plus in the first half of the year, in addition to investing in key projects for us like U-verse, expansion of our 3G wireless network and some key projects in enterprise we also invested heavily in wireless spectrum which, as we talked about in the presentation, positions us well for the future.

In the second half of this year, as a result of those expenditures, particularly the wireless spectrum and the share repurchase we've done, we've increased debt levels in the first half of the year. And one of our priorities in the second half of this year will be to bring those debt levels back down. So that will be one use of free cash flow in the second half of this year which, again, will be the strongest part of our year in terms of free cash flow.

We'd certainly like to do more repurchases given where we currently are in terms of the stock price. But having spent what we did on both spectrum and repurchase in the first half, as I said, our priority in the second half will shift somewhat toward bringing down those debt levels.

In terms of dividends I would just say there's really no change to our thought process with respect to dividends. We are committed, as you know, Simon, to providing a strong yield to our shareowners in dividends and providing consistent growth in dividends and there's no change to that policy or thought process.

As we normally do, we'll make the decision on dividend increases in December, we'll do it at that time based on having an updated view of our business plans and forecasts out over the next several years. We'll do it based on looking at our dividend payout ratios and looking at our dividend yields. But we'll make that decision on the same basis as we always have in the past.

Okay. And anything new on CapEx?

CapEx, let me say this related to CapEx. Nothing new, Simon, in terms of our guidance. Our guidance since the beginning of the year is that CapEx would be in the mid teens as a percent of revenues. We still expect to be in that range. We are not going to -- even in this environment we're certainly not going to slow down in areas that we think are important to future growth and those are primarily with respect to our U-verse ramp and build, with respect to the build in our 3G wireless networks and the projects -- some key projects we had going on supporting the enterprise and wholesale businesses.

However, we are on an ongoing basis looking at all other capital projects and, frankly, are looking to trim some of those projects, have been doing that throughout this year. But I would tell you that the impact of that effort is really -- is more in the hundreds of millions of dollars, not billions of dollars. We had a pretty strong CapEx quarter in the second quarter and when you look at the major projects, particularly U-verse and our 3G wireless networks, I would expect spending in the second half that is similar but probably at a slightly lower level, and that's just the timing of the build in both of those projects.

That's very helpful. Thank you.

Craig Moffett, Sanford Bernstein.

Good morning, Rick. Good morning, Brooks. If I could just follow up a little bit on the wireline discussion that you had in your presentation. In light of the access line losses your wireline margins were actually better than expected and very good. Is that coming from margin expansion in the enterprise business or is it better cost control in the telco? And then a follow-up question is in your regional business you highlighted the economy. Are you seeing cable competition in that segment or is it still at this point mostly an issue of a soft macro environment?

Greg, first on the wireline margins, yes, we're pleased with second quarter. I think we had a good second quarter. I know sometimes as analysts you all would prefer to see kind of nice, steady trends and sometimes margins are not quite like that. They can be a little lumpy from quarter to quarter, and so when you look at first quarter of this year our margins were a little bit lower than we would like in the wireline business and we were a little better in the second quarter. But overall year to date we're at about 35.5% wire EBITDA margins. That's right in our guidance range and right where we expected to be.

Some factors that influence that first of all can be weather. We had more challenging weather, more overtime in the first part of the year. It also is impacted by, in some cases, the particular projects that we're working on, not just in our networks but in particular in IT. We had a number of projects in the first part of the year that were in the early stages where the resources tend to be expensed, and then as the projects develop you reach a stage where you begin to capitalize some costs. So we had some impacts there as well.

We're pleased with enterprise margins and some of the cost controls and cost initiatives we put in there, not just in terms of improving processes in force, but taking access costs out of that business which is a key for us. And overall I think the level of cost control in the second quarter was very good. As this year has gone on and as frankly we've seen more impacts from the economy and we're anticipating I think, a weaker economic environment, at the same time we've put additional cost controls in place and I think you saw some of the benefits of that in the second quarter.

With respect to the regional business trends, cable has rolled out now I think in just about all of our markets from a regional business perspective. Up to this point, while we are seeing some impacts, I would tell you the impacts are relatively small. When we look at voice share for example, they have about a -- in our view at least about a 2%, 2.5% voice share, so it's pretty small.

In broadband for the regional business segment, that's an area they've been active in frankly for a longer period of time, but the share there is right around 20%. But as we've looked over the last couple of quarters, while they are making some progress at this point to us it looks pretty small.

The trends we're seeing in regional business I think reflect a couple of things. First of all, in anticipation of additional competition in the regional business area, for the last year we've been working to bring our small/medium business customers under term contracts. We've been offering more attractive bundled pricing to them.

And so as that has gone through our base it's had some impact in the revenue growth rates. And then secondly from an economic standpoint as you look across the country today you're seeing lower employment levels and you're seeing reductions in small business, new small business formation and certainly you're seeing increases in bankruptcies. So there are some economic pressures that play there as well.

Are you seeing those same trends in enterprise? I know Randall talked about a lengthening of the contract cycle, but the enterprise segment so far seems to have held up pretty well in the face of the weakening economy. Is that still the case or are you seeing any change in trends there?

I think enterprise has held up well. I'm not certain -- it might have been another competitor talking about lengthening contract cycles. I'm not certain we've necessarily seen that. We're very pleased with what we're seeing in new contracts and contract wins.

I think if there's any impact that we have seen in the enterprise pace in the second quarter, I think we saw a little bit of softness -- and I mentioned this in the presentation I think -- we saw a little bit of softness in long distance minute volumes and we saw a little bit of softness in the growth rate in transport circuits. We're still seeing growth in transport circuits, but the rate of growth with a little lower than we had been seeing over the last year or so.

But in terms of new contracts and new revenues coming online, and that's really what gives us confidence in terms of growing enterprise in the second half of the year. We've got contracts that we know are coming online in terms of Shell, in terms of some of the government contracts, the treasury contract we won, for example, under the networks contract structure. So overall I would tell you I think enterprise is holding up pretty well in this environment.

Thanks, Rick. Very helpful.

David Barden, Banc of America.

Good morning, guys. A couple of questions if I could. Just first, Rick, could you talk about the voice ARPU side of the equation in wireless? Obviously we kind of had the first year-over-year downtick in the overall ARPU picture in sometime -- it was kind of a surprise for me to see it tick down that sharply. I was wondering what was going on in the voice market that could have moved the base, adjusted the trajectory and the base that much?

And the second question I had was just more parsing the economic effects that you've been talking about. Are you seeing these effects more homogenously distributed across your footprint or are there real pockets of weakness in markets like California for instance where things are bad now and they could flatten out in a reasonable hurry? Thanks a lot.

Sure, David. On the ARPU, when you look at our total wireless service ARPU year over year it's basically flat. And couple of factors impacting it. One has been that the mix of our customers year-over-year has changed slightly. We've got a little bit higher mix of resale and prepaid. So from a mix perspective that's impacting the total wireless service ARPU number.

By the way, part of what we're seeing is kind of interesting. I think it's a positive development really. In the last couple of quarters is we're beginning to see some growth in what I'd call nontraditional resale which is customers that are -- it's primarily a machine to machine type of usage, alarm monitoring, it's meter reading and things of that nature. We started to see that grow in the last quarter or two. And while that's lower ARPU it tends to be very good margin business and fairly low traffic on the network, particularly during peak hours. So we're encouraged by that frankly.

And does that count as a subscriber, Rick?

It counts as a resale subscriber. In terms of the ARPU, I think the other thing that's impacted total wireless service ARPU is the fact that as we've done a couple of acquisitions, Dobson certainly and Edge Wireless as well, those were two roaming partners for ours. And so post acquisition the revenues we used to record from them for their customers roaming on our networks are now eliminated. So economically we also take some costs out because of the expense we used to recognize for our customers roaming on their networks. But net net when you eliminate that it does put some pressure on revenues and ARPU.

I think a better way to look at the ARPU and kind of get a judge of the strength of the business is looking at postpaid ARPU and postpaid ARPU for us was up 3.5% and essentially there, we do see some continued reductions in voice, primarily the overage charges associated with voice usage. And much of that is simply customers managing their plans and making sure -- and managing their usage to make sure that they don't have significant overage costs.

And so that's an ongoing process and that's primarily what has, over the last few years, driven lower voice revenues in wireless. But on the other hand we continue to see data growth that's more than offsetting it. So at 3.5% year over year that postpaid subscriber ARPU is still showing a nice increase.

Okay, great. Thanks very much.

I think with respect to the economy, clearly on the wireline side of the business in areas where housing is more stressed, where there are more foreclosures, less new construction, less new home sales, that has an impact obviously on access lines and broadband net adds. But as we go forward I think the good news for us is in some of those areas the economy comes back and as the real estate market comes back I think we'll see a nice bounce there.

One other thing impacting both access lines and broadband to a degree is -- and let me take access lines as an example. I think we've seen more of a percentage loss in our southeast region. Some of that is economy related in Florida, some of it reflects the fact that we're very early in the build of U-verse in these Southeast.

And one of the things we've seen in, for example, the Midwest and the Southwest regions where we've had U-verse in the market for the longest period of time and where we have a larger footprint is we're seeing much better performance in revenue connections and overall revenue performance in those regions and I alluded to it or mentioned it in the presentation. But we're seeing with U-verse some nice retention impacts for voice and we're seeing very high attach rates for broadband. So it just goes to the importance of having video and a strong video product in our mix and so as we continue to roll U-verse I think that will help us as well.

Okay, guys. Thank you very much.

John Hodulik, UBS.

Thanks, good morning. I guess, Rick, just to follow up on that question, just the overall impact of cable versus the economy, especially in the residential market. Obviously the primary voice subscribers accelerated and you saw declines in the broadband net ads and it would appear that, based on at least what we're looking at, that the market share of broadband is going to really shift in cable's favor this quarter. Are you seeing increasing aggressiveness just roll out but in terms of pricing and promotion? And are you getting feedback from the regions that that's having more of an impact on the residential business?

That's a good question, John. I think when you look at both access lines and broadband this quarter, I think you see primarily two things. You see seasonality and seasonality can impact typically in the second quarter, can impact access line loss and broadband net adds by 200,000 or more, maybe as high as 300,000.

If you look at last year I think, first quarter to second quarter access lines were impacted about 210,000, broadband net adds were impacted about 290,000. So I think that's a gauge of just the normal seasonality. Beyond that I think we are seeing some economic impacts. We're not seeing significant increases in nonpaid disconnects or in churn. We're seeing some very small impacts -- nonpaid disconnects I think year over year are up just about 2%. It's just not a huge number.

But we are seeing more weakness in terms of inward orders and we're seeing some impacts, frankly, where we've had customers that are disconnecting broadband and indicating in their reasoning for disconnecting that they're not going to a competitor. I think these tend to be more customers that are in the value segment, customers that have more incidental usage of broadband and Internet in the home and as a cost-cutting measure are just saying we'll use wireless access or we'll use Internet access through our work and they're just doing it to cut costs.

In terms of cable, when you look at broadband, for example, over the past couple of years really, and when you look at it particularly in our territory, I think what you see is that the market share has been split fairly evenly. We go through a period of time where maybe there are a couple of quarters where we're a couple of percentage points in flow share greater and we may go through a quarter or two where we're a percent or two less, but overall the market share is pretty evenly split.

And obviously both we and our cable competitors always have different offers and promotions in the market and those things are being adjusted. But we'll have to see as everyone reports and just see how the market share turns out this quarter. I would tell you the last couple of quarters I think in our territory we've actually been a little bit ahead of cable in flow share.

Now this quarter may have slipped a couple of percentage points the other way, but we'll see when it comes out, but I don't think that's a big factor. I think we're looking primarily at seasonality and we're looking at some pressure and weakness on the consumer in the overall market.

Do you think the price increase on the DSL side had any impact or was it more di minimis on the volume?

I think it is more di minimis frankly, because when you look at our offers, we still provide I think -- in our view we still provide the best value in terms of price points and the dedicated speeds that we offer at those price points. So I don't think that had a big impact.

Great, thanks.

Tim Horan, Oppenheimer.

Sorry, I got cut off for a second. Rick, could you just step back a minute and, looking at your overall guidance, I notice you didn't make any changes here. But looking at the second quarter versus the first quarter the trends maybe peaked a little bit on revenue. And I'm just curious what you're thinking now you can do at this stage if the economy stays where we're at in terms of revenue growth.

And maybe how much more flexibility do you have on the expense front particularly? Because it does seem like, particularly on the wireline side, you still have a very, very high head count there relative to the trends and you're still spending a lot of CapEx in that business. Maybe it's a longer-term question, but kind of your thinking for the remainder of '08, maybe '09 too? Thanks.

Sure, Tim. In terms of overall guidance, I think what you saw from us today and in the presentation is that we're not making and haven't made changes in our overall guidance. Obviously we did make a change from an earnings perspective a month or so ago with the iPhone announcement, but in other areas I think our guidance is pretty consistent.

As far as revenue growth for the balance of this year, I'd just reiterate some of the things we said in the presentation. We continue to expect strong growth in wireless and we expect to see some -- that growth certainly strengthened by and supported by the iPhone launch.

In both wholesale and enterprise, as we mentioned, as contracts that we've already closed and announced as the installations and the revenues from those contracts ramp I think that will give us some lift in both enterprise and wholesale. Enterprise from Shell and some of the government contracts wholesale from IBM in the second half of the year. So I would expect their second-half performance to be good.

And in terms of the consumer and regional wireline business, we expect the regional wireline business to continue to be positive in growth in the second half, probably at levels that you've seen in the first part of this year. So probably more low single-digit kinds of growth, but we expect it to be positive. And consumer we will continue to see some pressure, but I think we're doing a pretty good job of offsetting declines from both access lines as well as some slower growth in broadband doing a pretty good job of offsetting that with growth in U-verse. And we actually expect, in terms of customer net adds, U-verse to ramp a little stronger in the second half of this year as we roll out more cities and expand the footprint.

So when you put all of that together, year to date we're at a little over 4% in pro forma revenue growth. Second quarter was a little bit lower. A couple of things that we mentioned in the second quarter though did have some impact. The change in our Yahoo! agreement and the sale of some of the independent line of business, LM Berry business as part of directory. That probably impacted us by 30 basis points or so. And so, as we go forward I think we'll continue to be in that kind of a range.

That's real helpful on the revenue side. And maybe what you think on the flexibility in terms of expenses. I know you hinted on it quite a bit on the call. Maybe both operating expenses on wireline and maybe CapEx either this year or next year, how you're feeling about it?

Tim, to be very honest, we are working real hard at managing both expense and capital. As I said on the call, we're not going to do things that impact some of the areas that we think are important for us for future growth. And some of those things both increase capital as well as increase force. So for example, obviously on the capital side the U-verse build and the 3G wireless network build will continue. Probably overall CapEx levels for those a little bit less in the second half than in the first half, as I mentioned earlier. But we're looking at all other projects and areas as opportunities to cut some dollars in CapEx.

In terms of expense, we are hiring people to handle the U-verse ramp and the build and it's primarily sales and service reps in our call centers and help desk support as well as obviously the technicians to do the installation. And we'll continue to do that as the product ramps. We also, as part of our IBM agreement, as we bring business in and bring countries in, we are also picking up some employees from IBM. So both of those things have impacted our employee numbers.

If you put those two aside though, excluding additions for U-verse and excluding additions to force as a result of our IBM agreement and you look at everything else in the business, everything else in the business is down over 8,000 in the first half of the year. And we'll continue to work to manage force as we go forward in the back half of the year.

And then finally, the telco reorganization that I mentioned, most of it by the end of June was complete from a force perspective. We will have some additional reductions from that effort in the second half of the year, but most of it was done by June, although it was done probably very late in the quarter in terms of being complete. So we'll see more of the benefits and impact from that as we go into third and fourth quarter.

Thanks so much.

Michelle, I think we have time for one more question.

Jason Armstrong, Goldman Sachs.

A couple of questions for you, maybe a little off the beaten path. Dish obviously had a big downtick in sub adds this quarter and recently put bonds back to the company, just a number of things that at least on the surface here seem to point to a bit of a souring of the relationship. Can you offer any more color here on what's going on?

And then second question on pension accounting, can you help us frame the earnings sensitivity to pension and OPEB changes? that's obviously maybe looking a little bit too far into the future, but if we think about '09 and we get say a down 10% to 15% year in the S&P this year, obviously there's some sort of smoothing effect that goes into pension accounting. But how should we be thinking about the earnings sensitivity in '09 if we continue along the lines of the market performance we're seeing right now?

Okay, I'll try to answer both of those, Jason. In terms of Dish, a couple of things that occurred in the second quarter. One is we are calling a note that we had with Dish that frankly if anything is more my call than anyone else's. And it doesn't reflect changes in the relationship as much as I think it just reflects the fact that I think our relationships with partners should be -- particularly partners the size of Dish -- should be good, solid commercial relationships. But that we're generally not in the business of using our balance sheet debt that way to provide capital to other companies, particularly companies the size of Dish. And so it was just in the agreement we had this window of opportunity to bring those funds back in and it just financially I think made sense to us.

The other thing that occurred obviously is we exercised some contract termination notices, that's just a normal part of the contract and contract process and we'll continue to work with dish throughout this year and we're working toward renewing relationships on the satellite side of the business by the end of this year. Even with U-verse and, frankly, as we continue to roll U-verse that has some impact on the sales and the gross adds that we contribute to Dish.

However, even when we are fully built out there's still some 40% to 50% of our footprint that we want to have a video solution for. And so we'll continue to be -- we'll continue to have a desire to be active and have a satellite partner there. So these are just kind of normal contractual relationships and we'll work through this through the end of this year and then have a direction going forward.

Rick, was there any change in the promotional or the marketing activity as it relates to the Dish co-bundled product this quarter? Because the drop off in the sub adds is pretty dark.

I don't believe there was any change with respect to our existing agreement and the marketing and so forth and promotions with Dish. We did have, if you're looking at our total satellite numbers, we did have a reduction in satellite customers with DirecTV and that was in the base that was in the Southeast. And as you know, what we've done there is we have moved to Dish as the provider in the Southeast. We still have an existing base with DirecTV.

And so what's happening there is simply we're not adding new customers to that base, so as customers attrition off we're having some reductions there. And I think the other thing it reflects probably in total is just again some seasonal weakness in satellite and in TV subscriptions, just their version of the second-quarter impact.

In terms of pension accounting, Jason, there are two factors primarily that will impact our pension costs as we go into next year. One is the amount of earnings we have on our pension fund this year and to the degree we are under the accounting estimate or accounting annual benchmark which for us is 8.5%, to the extent we're under that then we would potentially have some impacts of that being smoothed in or of just having a lower asset base to earn on in next year and that would put some pressure on expense.

The other thing that impacts the pension expense for us to a large degree are the discount rates that were used and those are pegged to rates in market rates in effect at the end of the year. And in general as interest rates have increased and are projected to increase as we go forward to the end of the year, that actually helps reduce and mitigate some of that pension expense increase.

So those are the two factors that are right now moving in different directions. Overall frankly in this environment I think our pension fund has performed very well. We're not seeing much income toward the 8.5% benchmark, but we are at about breakeven to a small positive number in this environment that's been pretty good.

We'll see how those two factors end up at the end of this year and we'll have that as we go into providing guidance for '09. But I don't expect it to have significant impacts on our business. It can move EPS by a few cents one way or another from year to year, but I don't expect it to have a huge impact.

That's really helpful. Thanks, Rick.

If I could, folks, I'll just close with a couple of comments. First of all, there's no doubt that we and every other business and every other industry is operating today in a pretty challenging macro environment. I think overall at AT&T we're managing through that pretty well. We're cutting costs and managing costs to help mitigate revenue pressures where we see them. We're continuing to invest in the projects that I think are most important for future growth. And certainly when you look at our business, wireless continues to be a bright spot.

We have a wireless data opportunity that I think is just tremendous and we're positioned well to take advantage of future growth in wireless data. And I would ask you not to lose sight of this. I think when you look at how we're positioned and you compare that to other carriers that we're competing with, I think we're in a very good spot. We have a strong spectrum position; we have, we believe, the right technology and we're on the right technology path; and we continue to work to have the best lineup of devices.

And when you think about wireless data those are the three key ingredients. You have to have the spectrum to handle the volume, you have to be on the right technology path, one that provides future improvements and future growth, one that the handset manufacturers and the network providers are investing in, and one that is an elegant transition path for your customers and our technology path provides all of that.

And then obviously you have to have the devices and the openness to applications to really make wireless data a compelling value for your customers. And despite, frankly, impacts from the economy that we continue to see, probably more pronounced in our wire line business, as we look forward towards the second half of this year in both enterprise and wholesale with new contracts coming on board and incremental new revenues coming on line, we continue to be encouraged in the enterprise and wholesale space.

We're also encouraged with the ramp up U-verse and we will continue to push that forward in the second half of the year, not just in terms of video growth and data growth, but also the impact it has on our ability to retain voice revenues. And as always in the business, we make a commitment to the share owners to manage the business with a strong commitment to our share owners and we'll continue to do that.

So we thank you for your time today and your participation on the call and, as always, we thank you for your interest in AT&T.

Thanks, everyone. Have a great day. Thank you, Michelle.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.