AT&T Inc (T) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AT&T fourth-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. Miss McCorcle, you may begin.

Thank you, John, and good morning, everyone, and welcome. It's good to have you with us this morning. As John mentioned, this is Brooks McCorcle, head of Investor Relations for AT&T; and joining me on the call this morning are Randall Stephenson, AT&T's Chairman and Chief Executive Officer, and Rick Lindner, AT&T's Chief Financial Officer.

Before we get under way, let me remind you that 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 is www.ATT.com/investor.relations.

I also need to cover our safe harbor statement which is on slide 3; and that says that information set forth in this presentation contains financial estimates and other financial 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 also available on our website at www.ATT.com/investor.relations.

With that, it is my privilege to turn the call over to AT&T's Chairman and CEO, Randall Stephenson. Randall?

Thanks, Brooks. Good morning, everyone. Let me just start with a quick look at fourth-quarter highlights; and you are going to find these on slide 4.

As you can see, we delivered our second straight quarter now of 2 million wireless net adds. We had another very strong iPhone quarter. Wireless data growth, as you see, was very good; it was up better than 50%.

U-verse is scaling nicely and we passed the 1 million subscriber mark. Revenues from IP data services grew at a double-digit pace. We did sustain our wholesale turnaround. And despite iPhone earnings pressure, we maintained the best consolidated operating margins among our telecom peers.

At the same time, we returned more than $15 billion to share owners last year through buybacks and dividends. And I'm pleased to say in the fourth quarter we increased our dividend for the 25th consecutive year; and that is a record that is unmatched in telecom.

So we close the year with good progress across a number of key areas. But I'd tell you that from my perspective, more important than any of these metrics are the steps that we have taken in a tough environment to strengthen our business as we go forward. And as you see, those steps are paying off for us today and they will significantly improve our profile for 2009 and beyond.

I think the most important step that we took in 2008 was our iPhone 3G launch. In less than six months, we activated more than 4 million units, and 40% of those were for new customers to AT&T. And 100% of those were for high-value customers; these are data-intensive, they are ARPU, low churn, very high recurring margins.

Over the past year, we more than doubled the number of integrated devices on our wireless network, and we are the industry leader in integrated devices. And the iPhone is obviously a very big part of that.

So in simple words, what I'd tell you is we are winning at the high end. We lead in wireless data, which is the industry's best growth area. And the iPhone's short-term margin pressure is proving to be just that -- it's short term.

In the fourth quarter, our postpaid data ARPU moved up sharply, and we saw sequential margin expansion as well. We expect to deliver more wireless margin expansion as we move forward.

The second major thing we accomplished this past year were steps we took to future-proof this wireless network. We acquired premium spectrum. We now have great spectrum depth and spectrum quality. We expanded our 3G network to some 350 cities, and it is the fastest wireless network in the marketplace.

We are on a path to deliver even faster wireless speeds on our way to a full 4G. And because we chose to evolve on this global standard we can make significant improvement in wireless speeds without having to wait for a flash cut to 4G. This is an important advantage for us as we move forward in the next few years.

So when you step back and look at AT&T's wireless business, you see a business with $50 billion in annualized revenues. It's growing at a double-digit rate, while margins are expanding; and it's targeted to reach the mid-40% range on margins.

And don't forget, we also own 100% of our wireless business, and that is a big deal. It's great for our owners. It helps us run the business more efficiently. It's also a plus as we develop new integrated wireless/wireline services.

Now that brings us to the third major step we took last year which was to accelerate our U-verse ramp. In the second half in particular we really hit our stride here. Our subscriber gains ramp now every single quarter. Our U-verse network deployment doubled over the past year to reach 17 million living units.

U-verse offers a great service at a fraction of their cost required by other approaches. Customers love this service. In fact, every region where they included us U-verse took first place in J.D. Power's customer surveys. It is an all-IP network, which gives us a lot of opportunities in terms of new services down the road.

Then the fourth area where we have taken some significant steps is global business. We have invested in undersea capacity. We have significantly increased our IP network based hosting capacity. We have launched new services like synaptic hosting and telepresence this year.

We completed the world's largest deployment of 40-gig transport. That is the fastest Internet backbone technology available in the market today. It's across our entire US network.

Increasingly we are delivering business solutions that integrate wireless as the key component; and we have won a high percentage of the major global contracts that were available. It's with companies like Shell and Starbucks, Boeing and IBM, just to give you a few.

Let me add we have made progress in all these areas and we also continue to achieve industry-leading operating margins. We identified this economic pressure we are all experiencing early in the year last year. We have delivered on the merger synergies we promised. We have streamlined our organizational structure, and we made cost improvement a high priority.

So bottom line, during a very tough stretch for the economy, we have delivered solid results. We have returned substantial value to the share owners; and most important, we have improved our competitive position and expanded AT&T's growth potential.

So as we look forward into 2009, we do expect to grow consolidated revenues. We expect to further expand our wireless margins. Then before non-cash pension costs we will deliver stable earnings and consolidated margins.

We will manage costs aggressively, and we will execute a focused, disciplined capital program. You have come to expect that from us as we continue to invest in our core growth initiatives.

In summary, we understand the environment we have. We have a solid, achievable plan. And I like our business and our position in the industry. I am very confident in our ability to execute through this difficult time. So with that I want to turn the call over to Rick Lindner for more detail. Rick?

Thanks, Randall, and good morning, everyone. Let me start with our fourth-quarter earnings per share comparisons which are on slide 5. For the quarter, reported EPS was $0.41. We had $0.17 of merger-related costs; $0.12 of non-cash amortization; plus a $0.05 item for losses in an investment trust for employee benefits that we obtained through our BellSouth acquisition. The $0.05 reflects recognition of declines in the value of the trust in 2008, which were generally in line with the market.

We also had a $0.07 workforce reduction charge which we announced in December. The result of these items is an adjusted earnings per share of $0.64.

Other factors also impacted results for the quarter but are not adjusted. We had $0.05 of pressure from the success of our iPhone 3G initiative. That is down from $0.10 in the previous quarter and very much according to plan.

We had nearly $120 million of costs in the fourth quarter to complete repairs after the major hurricanes of the previous quarter; and another $0.01 of pressure in the equity income line from foreign exchange impacts at America Movil, Telmex, and Telmex Internacional.

Let's turn now and look at operational trends, starting with consolidated revenues on slide 6. As Randall said, despite the economy we grew revenues for the quarter and for the year. For the fourth quarter, total revenues topped $31 billion, and that is up 2.2%.

For the full year, consolidated revenues were just over $124 billion, up 3.4%. I think this growth speaks to the relative resiliency of our business and the strength of our growth drivers.

Overall, the economic effects we are seeing are largely in voice revenues and some legacy data transport. At the same time, wireless revenues grew better than 13% in the fourth quarter, and wireline IP data revenues were up more than 14%. This includes our consumer U-verse services and broadband as well as business products, such as virtual private networking and managed Internet service.

On the bottom left portion of this slide, we've included a pie chart to show our revenue mix. This mix is increasingly weighted to wireless, where we have excellent momentum and the advantage of 100% ownership. As well as business markets, where we are very well positioned with best-in-class networks and products.

Slide 7 has detail on wireless revenues and subscriber trends. I think when you look at our performance, the most basic takeaway is simply that as we ended 2008, wireless for AT&T is a $50 billion annualized revenue stream with strong double-digit top-line growth and a clear path to margin expansion over the next year.

We ended the year with very good wireless momentum, 2.1 million net adds in the fourth quarter; and for the full year we delivered the industry's best subscriber increase at 7 million.

I think what is most encouraging, we are seeing clear benefits from our wireless data strategy, which includes leadership in integrated devices and our investment in iPhone 3G. As Randall said, we are winning at the high end and we are growing postpaid ARPU.

Postpaid gross adds and net adds were up year-over-year. Our fourth-quarter postpaid net adds were the highest in the industry. Postpaid ARPU was also up at 3.9%, reflecting growth in wireless data. Our postpaid data ARPU was up nearly 36% year-over-year and 11% sequentially.

AT&T has the industry's highest postpaid data ARPU. Now I know not everyone has released results obviously, but my expectation is that in the fourth quarter we expanded our lead.

In that quarter, we delivered another quarter of 50%-plus year-over-year growth in wireless data revenues as we show on slide 8. Wireless data totaled more than $3 billion in the fourth quarter and nearly $10.6 billion for the full year. That represents better than $3.6 billion in incremental revenues over 2007.

We are seeing very strong growth across the product line -- Internet access, multimedia messaging, media bundles, and more. In a service that sometimes we tend to take for granted, our network carried nearly 80 billion text messages in the fourth quarter, more than double our total in the year-earlier quarter.

A big driver of data usage is the availability of 3G. The number of 3G devices and 3G active data users on our wireless network both more than doubled over the past year. 3G LaptopConnect cards in service also nearly doubled.

Slide 9 outlines the growth drivers behind wireless data. Those are a premier network, compelling devices, and an attractive array of applications. AT&T has all three; and in simple words, that is why we are winning in wireless data.

On the network front, we have the nation's fastest 3G network. We are the only US carrier to have HSPA broadly deployed. The next step is HSPA Release 7, which is expected to deliver peak speeds exceeding 20 megabits per second, largely achieved through a software upgrade.

These steps matter because they put AT&T in a great position over the next few years to reap the benefits of our decision to align our network with GSM. The GSM path to 4G is different in that it includes significant opportunities to further increase speeds while we are on the way to 4G. That is important. It's important for our customers, both consumer and business; and it's important for our ability to compete and win in the market.

The second key component for wireless data growth is a great device lineup, and we have that as well. The iPhone 3G and the BlackBerry Bold are exclusive to us and are delivering at the high end. Plus we have a broad selection of LaptopConnect cards including embedded devices in the Dell Mini and the Acer Netbook. For the mid and low-end customer we have a lineup of quick messaging phones with a full QWERTY keyboard.

We are also a leader in wireless access to data content and applications. We have the United States' largest catalog of mobile music, plus mobile TV and video share services, nagivation, and transaction services. We worked hard to put ourselves in this leadership position in wireless data, and that work is paying off for us today and will continue to drive growth in 2009 and beyond.

Now let me talk briefly about our experience with the iPhone and our integrated device strategy. The trends are on slide 10. Bottom line is that these devices are delivering what we expected. We are taking share at the high end and in doing so we are creating substantial value.

In the fourth quarter, roughly 60% of our postpaid net adds took integrated devices. Over the past year, we have doubled the number of integrated devices on our network. Across the category as a whole and for the iPhone in particular, these devices are delivering ARPUs that are 1.6 times the average of our postpaid base.

In our third quarter, you saw the iPhone get off to a great start; and in the fourth quarter the iPhone had great follow-through.

What we are seeing in terms of sales and customer characteristics is everything we had modeled and more. We had 1.9 million iPhone activations in the fourth quarter, and that adds up to more than 4 million for us in less than six months on the market. Approximately 40% of these activations are new customers for us.

And the iPhone profile has not changed. ARPUs are high, churn is low, recurring margins are high, and the net present value is compelling -- still more than 2 times our average postpaid base.

Slide 11 provides a look at our wireless margin trends. As we have outlined for you before, the upfront investment we are taking in iPhone customers has hurt margins in the short term. But given the customer profile we are getting, the iPhone will help expand margins in the quarters and years ahead. And that gives us a clear path to wireless margin expansion in 2009 and beyond.

You see the beginnings of this expansion in our fourth-quarter results. Typically, wireless margins decline sequentially when you are moving from third to fourth quarter simply because of the increased holiday selling costs. But this fourth quarter, our reported margins expanded sequentially by 230 basis points, from 33.5% to 35.8%, reflecting less iPhone pressure, more than offsetting typical fourth-quarter expense seasonality.

Over the past few years, you've seen our wireless margins climb more than 1,000 basis points as we executed merger synergies and delivered operational improvements. Those underlying drivers of improvement are still at work. And as the iPhone pressure turns, we expect to achieve wireless EBITDA service margins in the low 40% range by the end of 2009 and in the mid-40% range longer term.

Well, that is wireless. Let me turn now and cover trends on the wireline side of our business, starting with consumer on slide 12.

The wired consumer space is going through a transformation from a dependence on voice to a world driven by broadband connectivity and access to a variety of content and video. That is why we have made organizational changes to make sure wireless and wired consumer work together closely, particularly in the development of new integrated services.

Our wireline platform for this transformation is U-verse, which is ramping at a good pace. So while our year-over-year consumer revenues are down about 5%, driven by pressure on wired voice lines, U-verse and broadband are driving steady growth in consumer ARPU.

Growth in consumer IP data revenues -- that is broadband plus of U-verse services -- accelerated to better than 21% in the fourth quarter. Overall revenues per consumer household continue to climb, up 3.4% year-over-year.

U-verse continues to pull through with voice. In areas where we marketed U-verse for a period of time, we are seeing clear improvements in access line retention. U-verse also has a strong broadband attach rate, greater than 90% in the fourth quarter.

Slide 13 takes a look at our unified broadband results, which combined wireline broadband connections with wireless 3G laptop cards. Over the past year, we have added 1.5 million total broadband subscribers, 357,000 of them in the fourth quarter, to reach 16.3 million in service. That is up better than 10% over the past year.

This reflects a number of things including strong growth in U-verse broadband connections as well as 3G LaptopConnect cards. And we continue to see good growth in our wireless broadband bundles.

Customers increasingly choose broadband with the expectation of a range of wired, mobile, and portable choices. That is what AT&T is uniquely set to provide. We have an extensive wired broadband network; the nation's fastest wireless data network; and our wired broadband and wireless LaptopConnect subscribers and customers with devices like the iPhone all have access to our WiFi footprint, which is the United States' largest, encompassing some 20,000 hotspots across the country. And half of our wired broadband subscribers have wireless gateways in their homes and in their offices.

This broadband growth goes hand in hand with our ramp in U-verse TV. Slide 14 has an update. Whether you are talking about sales, operational improvements, or new service launches, I think it is fair to say that in 2008 U-verse proved to be a mass-market success. We completed the rollout of whole home DVR service and the second HD stream to the home. Both were key advances for the product.

Operational metrics continue to improve as technicians gain experience and improve processes. Our total construction cost per home passed continues to be in the low $300 range.

Independent surveys are confirming what we have known from our own research for some time. In the regions where U-verse TV was surveyed by JD Power it took first place in customer satisfaction. That is first place among all cable companies, other telco products, and satellite providers.

So it is not surprising the service is ramping nicely. We passed the 1 million subscriber mark in December. Penetration is hitting the midteens within 18 months after launch in a market area. Our network build now reaches 17 million living units. There is every reason to expect U-verse to become a multi-billion-dollar revenue stream for us over the next few years.

Slide 15 shows highlights from our retail business results. Then is enterprise and our regional business customers. Across both of these areas we are seeing some pressure from the economy, primarily in voice and legacy data services. At the same time, enterprise sales flow is solid, and adoption of new services continues to be strong.

As Randall mentioned, we have introduced new business products like synaptic hosting and telepresence. We are seeing more customers looking for wireless as a component of their enterprise solution, and that obviously plays to one of our strengths.

Enterprise revenues were down 3.7% year-over-year, reflecting softness in voice and data transport volumes. We continue to deliver double-digit growth in IP data revenues with VPN growth above 20%. Regional business revenues were down 0.9% year-over-year, also reflecting pressure on voice revenues.

IP data revenues were up better than 13% and data transport revenues grew in the mid-single digits, both consistent with recent results. In regional business, IP and ethernet together now make up more than 55% of regional business data revenues; and in the fourth quarter, their combined growth topped 18%.

I would also like to talk briefly about the trends in wholesale. The highlights are on slide 16. In 2007, we saw high single-digit declines in wholesale revenues as we absorbed the effects of industry consolidation, the decline in UNE-P, and merger concessions. Today, most of those impacts are behind us.

In the third quarter, we returned to year-over-year wholesale revenue growth and in the fourth quarter sustained that turnaround, with revenues up slightly.

Fundamental demand in wholesale is solid, driven by wireless carriers, Internet service providers, content providers, and others. We have connections with more than 600 carriers in 220 countries and territories, delivering everything from switched voice to the latest IP-based services.

A year ago, we formed an agreement with IBM that calls for AT&T to become its primary global network management services provider. Those revenues are providing a lift. Country by country we are steadily working our way through the operational steps to transfer network management and revenues. The process continues, and we expect a further ramp in revenues from our IBM relationship in 2009.

So despite economic pressures on volumes, which you would expect, wholesale continues to be a very good business for us.

With that overview of the business unit operational results, I would like to close with a look at consolidated margins and cash flow. Margin comparisons are on slide 17.

Our synergies and cost-reduction initiatives continue to be on track, and they are according to plan. As we have outlined, the major impacts on margins this quarter are near term in nature. Expense pressure from the iPhone initiative was approximately $450 million in the fourth quarter, but down significantly from the third quarter. And hurricane impacts totaled approximately $120 million. Without the storm and iPhone impacts, consolidated margins would have been in the 23% to 24% range and relatively flat versus the fourth quarter of 2007 and for the full year.

Slide 18 provides a cash summary. Cash from operations totaled $10.9 billion in the quarter and $33.7 billion for the full year. Our capital expenditures were $5.5 billion in the quarter and just over $20 billion for the full year.

Free cash flow before dividends was $5.4 billion for the quarter and $13.3 billion for the year. This cash flow gives us the flexibility to return substantial value to share owners; and in the fourth quarter we paid $2.4 billion in dividends. During the full year, our total dividends and share buybacks exceeded $15 billion.

Our balance sheet is sound. Debt metrics are solid. And in the second half of 2008, we reduced debt by $5.2 billion.

Cash is king for us. We are disciplined in operations in order to generate cash, and we are disciplined and its uses. In addition to funding key growth areas, our primary focus in 2009 will be on returning value to our owners through dividends and maintaining a strong balance sheet.

Now let me provide some additional details on our 2009 outlook, which are on slide 19. First, as you know, for the past few years while we have absorbed several major acquisitions, in addition to reported results we have also provided adjusted earnings each quarter, to show the effects of merger expenses. At this point, those large mergers are well behind us. The integration work is largely complete, so it makes sense to eliminate adjusted results, which will allow us to simplify our financial reporting.

So in 2009, we will provide reported results on a GAAP basis. The guidance we have this morning is based on that. Of course, we will always provide the detail you need on the items that go into our results -- no less information, just focusing our presentation of financials on reported numbers.

With that as background, in spite of a challenging environment we expect to deliver solid results in 2009. We expect to grow consolidated revenues in the low single-digit range, led by wireless and IP data services. We will keep an aggressive focus on cost management. And we will deliver a significant increase in wireless margins as the iPhone 3G customer base matures, with wireless service EBITDA margins in the low 40% range by the end of 2009 and in the mid-40% range longer term.

We expect to deliver stable consolidated earnings and margins, excluding increases in non-cash pension and retiree benefit costs. There will be approximately $0.19 of incremental pressure to reported earnings-per-share in 2009 due to these higher benefit costs. This reflects 2008 investment returns, which were consistent with the market environment and the performance of other large benefit funds.

It also reflects our consistent accounting approach that recognizes the effects of large changes in plan asset values more quickly -- in this case, creating higher early expenses. This is a conservative and, I believe, appropriate policy particularly in the current environment, because it puts expense recognition closer to economic reality.

Despite the 2008 valuation reductions, we don't anticipate significant pension funding requirements in 2009.

We will execute a disciplined capital program that focuses investment in key growth initiatives and key growth areas. Total capital expenditures for 2009 are expected to be down 10% to 15% versus 2008 levels.

As I mentioned earlier, our U-verse build is already well beyond the halfway point; and we expect to make continued good progress on deployment in 2009. But a portion of the planned build will be extended into 2011, a year later than our original plan.

With our operating view of the business and this capital program, we expect to deliver stable free cash flow in 2009.

We have a very attractive dividend yield. That dividend yield is supported by recurring revenue streams and solid cash flows. And we will continue our strong record of returning substantial cash and value to share owners.

Brooks, that concludes our prepared comments this morning. I will turn it back to you now for Q&A.

Thanks, Rick. John, I believe we are ready to open up the line for questions.

(Operator Instructions) Simon Flannery, Morgan Stanley.

Okay, thank you very much. Good morning. Turning to the earnings guidance for next year, you had about $0.65 of goodwill amortization, other merger, and other related charges. Can you give us a sense of what you think those items might be in 2009 that will actually be included in the earnings?

Also on the iPhone, you did $0.15 of dilution in '08. Previously you had said that it would be similar in '09 to '08. Is that still your expectation? Thanks a lot.

Morning, Simon. First of all, on the earnings guidance, as you know -- and I want to talk just a minute about the change we are making in terms of going back to a GAAP presentation. This by the way -- the change in moving back to GAAP is something we always planned to do. At the time, going back five, six years ago, we embarked on doing three significant mergers over three years, and the impacts of those from an accounting standpoint distorted results significantly.

As we moved into 2008, we took the first step in terms of eliminating any normalization of merger integration costs. So for the most part, we were just adjusting for amortization.

The amortization from our mergers were all done on an accelerated basis, so we were -- and these intangibles, by the way, are primarily related to the value of the customers we acquired in the acquisitions.

So amortization started at a very high level and then was declining; and then as we get out towards the tail it starts to flatten out. So as you look ahead into 2009, I would expect amortization to be in the $0.40 kind of range, $0.39 to $0.40 for 2009 from these mergers. And that will be down slightly year over year somewhere in about the $0.10 range.

In terms of other one-time items, it is always difficult to know from quarter to quarter. But certainly as we report results, we will point those out to you.

In terms of -- I'm sorry. The second part of your question?

iPhone dilution?

Oh, the iPhone dilution. You are correct, we had in total about $0.15 or a little under $0.15 of dilution in this year in the last two quarters from the iPhone.

My expectation going forward -- first of all, we had a little more dilution in the third quarter than we had originally anticipated in the plan. The fourth quarter was pretty much according to plan. We're obviously benefiting from those additional customers we added in the third quarter. We are seeing that in terms of our data revenue growth and we are seeing that in terms of contribution to margins.

As we go forward, we would expect that trend to continue. So I would expect some dilution in 2009 overall from the iPhone, but it will be down from the 2008 levels.

Okay. Just to clarify on the one-time items, are you including sort of some accrual, some expectation that there will be some one-timers in the guidance that you have given, but just don't know what they are yet?

Well, we have included in the guidance -- and the guidance is consistent with our plans. We always have contingencies that would cover some one-time items; so I guess to that degree there is some coverage for that.

Great, thank you.

John Hodulik, UBS.

Okay, thanks. Good morning. Rick, a question about the free cash flow guidance. I'm really just trying to sort of reconcile the guidance for flat free cash flow with our view of where EBITDA is going to shake out.

You've got CapEx coming down between $2 billion and $3 billion on a year-over-year basis, which would equate to about 6% of EBITDA. But I imagine there are some other issues in there, sort of moving from operating cash flow to free cash flow.

You mentioned that you would have some, or a small pension contribution; maybe that is part of it. But could you reconcile the two? Or is the majority of the difference really a change in EBITDA on a year-over-year basis?

John, there's always differences in terms of timing between earnings results and cash flows. And we will have some of that in 2009, some of which causes some pressure on operating cash flow.

For example, the workforce reduction charges we announced in December, that $600 million has been recognized in December but will be reflected in cash flows as we go through 2009. So you always have some items like that.

In addition, my expectation in 2009 is that cash taxes will be a little bit higher. This reflects just normal cycles, closing out audit years, and so forth.

The combination of a couple of items like that puts some pressure on operating cash flow in the year. We are offsetting that with some reductions in CapEx; and that is how you get to a relatively stable free cash flow outlook.

When you step back from the business on an operating basis, obviously we're going to grow wireless revenues, margins, and cash flow. At the same time, we will have some pressures on the wireline business, as some pressures from voice losses, primarily on both revenues and margins. Then, of course, we will continue to move forward with our U-verse build.

So in a lot of respects, then, the changes we are seeing or expecting in wireless, and the improvements in income and cash flow there are offset in some respects by what we are seeing in the wireline business, largely in voice revenues, and to some degree in our advertising solutions, directory business as well.

One quick follow-up on the CapEx. The decision to push out the U-verse buildout, is that a reflection of just attempting to sort of manage the cash flow? Or is it you've got enough growth given a slower buildout in front of you? Or just a little bit of color behind that decision would be great.

John, we've got 17 million households passed, and a lot of those were turned up in this past year. So we've got a pretty good base of homes to sell into now, to start with.

Between the homes we have already passed and what we will build in the next year or so, we are hitting the markets that are the highest priority for us. If I would tell you one area that certainly we want to expand the build in is in the Southeast. I think that is an area where frankly we will benefit from having strong video product to bundle in our offers. So you will see us do much more build and turn up in the Southeast as we go forward over the next year or two.

But what the build plan does now, it gets us to our 30 million homes, and it allows us to manage the build and the rollout of markets in a smoother fashion with our current resources and force.

So it allows us now to complete this build and this investment in this cycle without a lot of ups and downs in terms of the force required and the resources required to do it. So it's a little more efficient for us from a build standpoint.

That makes a lot of sense. Thanks.

David Barden, Banc of America.

Hey, guys. Thanks a lot for taking the question. I guess, Rick, I guess what a lot of the questions are going to aim at is trying to understand, given that we have a view of wireless margins and we now have a bogey at the EPS level, is trying to sort out really what you're trying to say about wireline margin in '09.

I think that the guidance that has been put out there is relatively well below where market expectations appear to be. And with the wireless margins doing well, it seems that it's all in the wireline side of the business. So if you could speak specifically to your wireline margin expectations and the forces that are at work there, that would be helpful.

Then as a follow-up to that, could you talk a little bit about how buybacks, if at all, are baked into the outlook? And also your expectations regarding the upcoming labor negotiations. Thanks a lot.

David, I will take a shot at the first two of those, and I will let Randall talk with you about the labor piece.

In terms of the guidance, first of all, I think it's important to realize that we are in an environment right now that it is difficult for all companies to project. It is one where, as you all have seen --and not just in our industry, but across industries -- as a result of that many companies are either not providing guidance or providing significantly less guidance.

We felt that it was important as we started this year to communicate with you and share what we felt our expectations were, given the environment. And that is what we have done. When you look at the business, as I mentioned a minute ago, obviously we have got -- continue to have very good opportunities to grow wireless revenues, margins, and for mobility to contribute to growth in EPS.

The challenges on the margin side for us tend to be in some of the transitions we are going through in products, primarily in the wireline business, but also in our advertising solutions business. In both cases we have some legacy products, voice revenues which are declining in the wireline business, and print revenues in directories. Those declines, I think you would agree, we've had declines in those areas over the last several years, and we have done a pretty good job of taking costs out of the business and balancing that on the margin, and maintaining margins as a result.

But in this economy, and you see it in everyone's results, the declines in some of those legacy products have accelerated. We will continue to be aggressive in taking costs out; but the net result is there will be some margin pressure there.

At the same time, we are focusing on growing products and growing some businesses that are still early in their life cycles. The acquisition costs associated with that and the lack of scale produces lower margins.

You find that true both in services like our U-verse products, as well as in the advertising solutions side, in the Internet Yellow Page space, which is growing very nicely for us.

We will get through this period, though, and we will get the scale in those products, and we will improve the margins. It just takes some time.

But in the near term, that transition causes some pressure, and I think that is what you see in the guidance, along with the fact that I think it is prudent to be conservative in this particular environment.

In terms of -- and following up really on that, on your second question related to the buybacks, as I mentioned in my comments our view right now in the current environment is we are going to approach this year conservatively. We are going to work very hard to generate stable cash flows. We are going to use those cash flows to continue to support our dividend and to continue to strengthen the balance sheet.

So I don't see, at least at this point in time, I would not give you an expectation that we will be doing significant share repurchase in this year. We're going to focus on those two areas.

One other thing I want to mention with respect to the dividends; I think this is important. I looked at some numbers the other day. When you look at our total share owner returns, even after a very, very difficult 2008; and you look at total share owner returns over the last five years, AT&T has provided positive, cumulative share owner returns over that five-year period in about the 38%, 39% range.

Certainly we would like that to be higher, but it's not bad, considering what we went through in 2008. Those returns, by the way, are significantly better than the overall market and significantly better than our peers.

But when you break it down, over three-quarters of that return is generated through dividends. That is why you hear us talking about our focus on cash flow and maintaining the financial strength and the flexibility to continue to support our dividend. I just think that's critical to providing the returns we want to provide to our owners.

Randall, do you want to talk about the labor piece?

Yes, hi, David. On labor, I assume you are talking about contracts coming up this spring and summer. We -- 180,000 organized workforce. There is always a labor negotiation of some kind going on.

We are in the middle of our wireless labor contract negotiating wages and expect to get through that in a reasonable time frame here.

Then come April will be our wireline labor contracts. No surprise; the key issue is going to be healthcare and how we pay for healthcare. We have very dated systems in terms of how we reimburse our employees for healthcare. We are going to work with the CWA to try to bring those approaches forward into this kind of a current-era type formula that is more efficient in terms of how we offer healthcare services.

If you look at the last three years, that has been a priority. In every labor agreement that we have reached in the last three years we have accomplished moving the ball forward in terms of modernizing how we compensate for healthcare. So that will be a priority come this April, and I am very optimistic we will be able to work our way through that with our partners in the CWA.

Thanks, guys.

Jason Armstrong, Goldman Sachs.

Thanks, good morning. A couple of questions. First, Randall, I guess we all derive a big benefit from you being on the line. Do you -- maybe just a question about M&A. You announced two smaller deals recently, Centennial and Wayport. With the balance sheet health you have and the cash flow strength, I'm just wondering if there is an opportunity or appetite for a larger deal.

And maybe as part of that question, just your early read on the political environment. You know, as the dust settles in Washington, how would you expect that to shape any potential M&A outlook?

Then second question for Rick on the enterprise side. Were there any FX hits that you can quantify here?

Then secondly just the outlook for that business. Relative to the trough from last cycle, how would you think about the puts and takes of how you would expect this business to trough and whether it is more or less severe. Thanks.

Yes, hi, Jason. On M&A, yes, we did do the Centennial and the Wayport deals this year. You will notice a common denominator for those. They are wireless-centric deals.

Wayport obviously giving us WiFi access to 20,000 hotspots across the United States, leveraging the capability that is in the iPhone and the BlackBerry Bold. So those were obviously very targeted.

They were value-creating acquisitions, particularly Centennial. We are very good at those types of acquisitions where we just enhance our footprint, enhance our coverage of 850 megahertz spectrum. So those have always been very attractive to us.

But in this environment, as Rick has been talking about, it is a highly volatile environment. We are being very cautious.

But wireless fill-ins are always something that we have executed very well and have created value for our share owners.

When you think of larger deals and the administration, I don't know. We kind of -- our meetings with this administration have been positive. They are inquisitive, particularly as it relates to what things would drive further investment in this industry. What are the things that would accelerate investment in this industry?

So there is a high level of inquisitiveness and there seems to be -- the people that have been put in place are very, very bright people. We have been impressed with them. We have been impressed working with them.

So we are optimistic that it will be a productive environment going forward for our industry.

Jason, on a couple of the questions you had, first of all on FX impacts. We had FX impacts in the quarter in a couple of areas. First of all in terms of enterprise revenues. We had impacts of the stronger dollar in the roughly $50 million to $60 million range.

Keep in mind that our global customers, some of them, pay for revenues that are generated to us offshore -- pay for those in dollars. Some pay in the foreign currency. So that is one reason. The impact there was not that significant, but it did have an impact on our revenue trends.

The other thing I would mention with respect to those impacts is, while they impact the revenue trends, we have pretty much a natural hedge given that some of our expenses -- certainly for access and for people that are in foreign countries -- are paid in those local currencies. So $50 million to $60 million in terms of revenue impacts in the quarter; not much impact bottom line.

Where we did have an impact bottom line on foreign exchange is just foreign exchange impacts, as I mentioned, in our investments, equity investments in Telmex, America Movil, and Telmex Internacional.

As far as EBS and business in general, let me step back and give you a couple of numbers here. As we talked about, enterprise revenues were down 3.7% in the quarter year-over-year. That was up a little bit from the last couple of quarters, where we have been in the range of about down 1% to 1.5%.

Part of that was some softness that we had, continue to see in voice revenues. Some of that was some softness in inwards and demand on data transport, which I think in both cases are economic impacts.

But we also had in the quarter across our business revenues -- and particularly in enterprise -- we had some reductions in CPE sales. So if you -- and there is not ever really much margin on the CPE products. So if you put those aside for a minute, our other revenues in enterprise were down about 2.7%, so a little bit better.

By the way, total business, when you combine enterprise, regional, and wholesale, were down slightly, down about 1.5%. Again, if you take the CPE out of that, it would be sub 1%. So all in all in this environment, not too bad.

In terms of where do we see the trough, it will depend on how the economy reacts going forward in 2009, obviously. But some of the -- our expectation right now at least starting the year is that we will be in a similar range to what you saw fourth quarter, as we start the year, first quarter, and maybe into second. And then we will see where it goes from there.

Compared to the declines that you saw in this business some years ago, early part of the decade, our expectation is not to see those. It's a different environment. It is a more rational competitive environment. Still very competitive on pricing, but you don't have the oversupply issues, I think, that the industry was facing back six, seven years ago.

So, you know, we are going to see some declines, but I don't think we will get to those levels.

Okay, that's great. Thanks, guys.

Mike McCormack, JPMorgan.

Hey, thanks, guys. I apologize in advance, Rick, for hitting you with what might look like pretty fuzzy math. But looking through the expectation for EPS, if we look at Wireline EBITDA from '07 to '08 down sort of 1.5 billion-ish, which I assume is mostly macro. And then going to '09, we have got another $1.7 billion in pension, which is about $3.2 billion in total. And I think the guidance implies somewhere around $6 billion to $6.4 billion or so in incremental pressure for '09.

Is that the right way to think about it? Is it $3 billion of incremental pressure in '09 versus '08?

Then secondly on the balance sheet, looks like debt maturities probably outpaced cash balance plus cash generation. Are you guys thinking about a refi at some point on some of that debt?

Well, I have to think through the EPS and EBITDA impacts as you talk through them in terms of the numbers, Mike, but --

I might have isolated too much of it in wireline; maybe there is some more in directory. But it just seems like a very significant uptick versus the '08 pressure, organically at least.

Yes, I mean we have identified for you the impact on pension and OPEB costs which obviously is significant, in the close to $2 billion range.

I think it really comes down to the impacts that I talked about earlier. We are going to grow EBITDA obviously in the mobility business. We are going to have some pressure in wireline and advertising solutions.

I think in terms of, as we said, in terms of our margins, our margins will be relatively stable. So in other words, those impacts will offset. The margins will be relatively stable, excluding the pension and benefit increase.

It looks like the implied pressure on the wireline is like maybe, just looking at the organic macro impacts, like 2.5 times the impact in '08. Is that the way you guys are thinking about it? Just sort of from an enterprise and consumer standpoint. We can take it off-line.

I'd have to go -- I have to think through the math, Mike. (multiple speakers)

That's fine. We can take it off-line.

I can't give you an intelligent answer on that at this point.

No, that's fine.

I am usually pretty good at fuzzy math, but we will have to get you off-line and kind of talk through some of that.

No problem.

I think what we -- the way I have described it is pretty much as we see it in 2009.

As I mentioned before to the earlier question, these are not easy times to do forecasts. So I think we are trying to be prudent in the environment, considering the environment and how it might progress over this next year.

On the debt side, clearly the debt markets in terms of the term debt markets were pretty difficult the last four months of 2008. And 2009 has started out better at least for good-quality credits.

Even though we didn't do much financing in the last part of last year, we actually reduced total debt and we reduced commercial paper. So we've got commercial paper balances down, I think, in a very reasonable range.

We do have some debt that is maturing this year; and we have some debt that is classified as current because they are puttable debt instruments, not all of which will actually be put this year.

So our view in the financial markets right now is they are improving and the capital markets are improving. And we will be opportunistic as we go through this year in accessing those markets and refinancing debt as we need to.

Great. Thanks, Rick.

Philip Cusick, Macquarie.

Hey, guys. I think I will try and back off into some a little more simple things. First of all on the wireless side, Verizon talked about some family plan and laptop card churn that ramped up in the year. Thinking about that on an economic basis, I wonder if you're seeing anything like that, and if you can just talk about trends in the quarter on the wireless business. Thanks.

This is Randall. As it relates to the laptop cards themselves, we did see a slowdown, which you are seeing businesses slow down their spend. And you saw that in the enterprise business revenue streams.

So we saw a slowdown. I wouldn't tell you we saw a spike up in churn; but we did see a slowdown in the uptake of laptop cards.

As it relates to wireless in general, the iPhone and the integrated devices are proving to be fairly resilient through what is a really tough environment right now. So at this stage, we are feeling pretty good about the wireless business.

I think our margin guidance that we gave you going forward reflects that we continue to have success in that area. So I right now feel pretty good about wireless.

As you look at that margin guidance, are you assuming some level of slowdown in growth that gets you partway there? Or is there a sort of continuation of the current run rate and then you've got the margin growth on top of that?

Well we haven't indicated what our growth expectations are in wireless. But we do expect to continue doing very well competitively.

You know we are taking share. In fact, I would tell you in the fourth quarter we ported positive against every single carrier in the US. So what we are demonstrating is we are competing very, very well in a tough environment, and we expect to continue competing very well as we move forward.

Great. Thanks, Randall.

Craig Moffett, Sanford Bernstein.

Hi, good morning. I had two questions if I might. First, your sequential revenue growth, I know it's hard to extrapolate too much from a single quarter; but your sequential consolidated revenue growth is now negative, which would suggest that in order to grow the business in 2009 something obviously will have to improve.

I am just wondering where you see that improvement coming from in '09 relative to the current run rate at end of '08.

Then I just want to make sure I understand the data numbers. Your broadband numbers, if I understand it, include laptop cards now. So that if we back those out -- if I assume something like an 85% to 90% attach rate for U-verse, then it would seem like legacy DSL is about zero. I just wanted to see if that math is correct.

And if so, I guess what is your sense of the competitiveness of the legacy DSL product ex the speed increases you get out of U-verse?

Craig, first of all on sequential growth, it's difficult, I think, to look at it sequentially from the standpoint that fourth quarter for a number of reasons is typically a quarter that comes down in revenues.

If you look at the key elements of revenues that we have, first of all in wireless, you tend to have higher revenues during the second and third quarters. Because you have people that are on vacation, traveling, and there's more long-distance roaming kinds of revenues and more roaming revenues that you are receiving from other carriers. So fourth quarter typically comes down a little bit.

Likewise on the wireline side, particularly as you look at business revenues and volumes, they are going to always be down in the fourth quarter because you have the holidays and you have less workdays.

So you know, our expectation as we go forward in terms of revenue growth is pretty modest, low single digits. But it's a combination of continued strong results in wireless that will be driven by wireless data, as well as some continued customer growth, certainly. And then on the wireline side, we will have some declines, primarily in voice. And we will offset -- at least partially offset those with growth in IP data.

You asked about broadband and DSL. First of all, if you separate -- we combined this quarter the wireline broadband and the LaptopConnect cards. Because I think increasingly as the wireless product becomes more robust, it becomes very -- it is very much the same type of experience when you connect via your laptop on a strong wireless network. And so that made sense to us. It is how customers, I think, buy and use the services.

But if you separate them out, what you saw is that in the fourth quarter our broadband net adds ramped up somewhat from third quarter. And third quarter obviously was better than second quarter, which was weak for us.

If you break it down, we are having -- the growth on the broadband side is primarily coming from U-verse and not from DSL. But I wouldn't read too much into that. That is just a function of rolling out U-verse and covering more geography with it.

The fact is when a customer buys wired broadband from us, they don't think about whether it is called U-verse or whether it is called DSL. It is a broadband connection to their home.

And at the same time we are rolling U-verse, we are ramping up our broadband speeds offered through DSL. So when we look at it and think about it, we just think of that wired product in total.

In reference to your question -- do we think that the product is competitive, Craig? Yes, we feel very good about the competitiveness of the product. I would tell you we also believe that the key variable as you move forward -- and we are seeing this now -- is not whether you get from 10 to 12 megabits, but whether it is mobile or not.

Can you access WiFi hotspots all over? Can you get 3G connectivity and have a mobile experience? That is really what we are seeing sell now.

So our focus is as much -- as we are trying to get more bandwidth, we are also wanting to ensure that it's a mobile experience for our broadband customers.

That's helpful, Randall. If I could just ask one follow-up question that digs in a little deeper onto the U-verse side. I know a lot of people have been quite focused on wireline margins today, and it looks like -- our estimate is that your guidance sort of implies that wireline margins will at least for '09 dip below 30%.

As you come out of this cycle, presumably the access lines that you lose during the cycle won't come back. Enterprise presumably will and U-verse will backfill. How do we think about the long-term wireline margins?

And for U-verse specifically, given how much more video-rich it is and therefore the programming costs, what kind of margins can we expect from the U-verse business? And what does that do to your long-term margin expectations on wireline?

Craig, I think as we come out of this, as you know, you have pressure from the voice revenue declines now. We are starting to add, by the way, voice on a VoIP basis over U-verse, so it is not reflected in our access line numbers, but we will start to retain some voice revenues there.

I think this next year, we kind of reached the point on U-verse where it is going to be less dilutive certainly on an EBITDA basis in 2009. As we kind of turn the corner there it will start to improve on an operating margin basis and on an EPS basis, probably just slightly more dilutive in 2009 just from depreciation, primarily of set-top boxes and in-home CPE, which we depreciate over a fairly short period.

But that is where we will have opportunities to retain and support the margins in the wireline business, as a result of both scale on the video side, which will improve our programming costs, better cover our fixed costs embedded in that business, and then as well just less customer acquisition and installation costs as a percentage of the total base and the revenues generated by that base.

So there is a fair amount of dilution to both EPS and margins embedded in our numbers right now from U-verse; and that is starting to turn and will turn over the next several years.

Thank you.

Michael Rollins, Citi Investment Research.

Hi, I just had a couple other questions on the wireline margin side. If we look at the fourth quarter of '08 versus fourth quarter of '07, it looks like for every dollar of wireline revenue loss you lost about $0.99 of OIBDA.

So I am wondering if you can break that down a little bit in terms of what reflected in the negative operating leverage of the business that you would normally expect; versus what might have been incremental from IP TV dilution or the foreign currency that was referenced earlier.

Then just the follow-up to that is, as you think about the headcount reduction that you have already announced, how should we think about those cost savings in terms of magnitude and timing coming through the P&L over the course of 2009?

Mike, on the wireline margin side there's a lot of moving parts. But essentially what you should think about is particularly in the local and regional wireline business, as we lose customers and access lines or we lose voice customers there, roughly two-thirds of the costs supporting those customers are relatively variable in nature. By that I mean we would be able to extract those costs from the business within a nine- to 12-month kind of cycle at any rate.

But what you are seeing in wireline right now across the business is this transition of services. So we are not just dropping some voice customers and taking costs out as a result of that. But at the same time, we are growing some business and we are investing in the growth of those businesses in IP-based services throughout, both from consumer all the way through regional business and enterprise business.

As we move forward, a key -- we are doing two things. We are taking costs out of the legacy parts of the business that are declining; and at the same time as we gain scale, we are working to improve the margins in the new products that are the growth products. So again, it is just a transition we are going through.

In terms of the headcount reductions, we would expect those reductions really throughout 2009 and probably a little bit front-end loaded, first half of the year.

If I just follow up on one other question, in terms of some of the synergy numbers that you have been targeting, is there any substantial amount of synergies that are left to achieve in 2010 from the larger mergers that were completed a few years ago?

If so, is there a magnitude that you could point us to on that?

I think there are some synergies that are still left on those mergers, but it's pretty consistent with the plans and the numbers that we have laid out for you before.

But I think what is more important is the synergies from these mergers that were identified early on and that we have been executing against, in a lot of areas were the low-hanging fruit. Now going forward, I don't think of them as much as synergies per se, but it is just continued improvement on the cost side and on the efficiency side of the organization. Continued migration to single platforms and processes. Better automation of processes. And that work continues.

Thank you.

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

Tom Seitz, Barclays.

Thanks for taking the question. Regarding the slowing of the U-verse buildout, can you help us think about the relationship with DirecTV? Does that mean that it's any more important?

I'm wondering if the policy is still going to be as it was a couple years ago, to keep cable out no matter what. Or whether you are going to sort of soft-roll DTV in areas where you eventually plan to have U-verse, given how happy you are with the customer response and the uptake.

As it relates to U-verse, Tom, we just have a few markets that we are going to let bleed over into 2011 to accomplish what Rick articulated earlier. We had a build plan that was requiring a rapid ramp in force, and then you would have to come down in force as you got to certain points in the build plan. It's a more elegant build plan is really all we have done here.

Now, as it relates to a satellite TV product, specifically DirecTV, it doesn't change our thinking of it at all. It is still a very, very important capability for us to have. You think about customers, how they buy -- TV and broadband they buy together. We are seeing that bundle is very important in the marketplace.

As Rick said in his comments, when somebody buys U-verse TV, the attach rate for broadband is approaching 90%. So broadband attached to TV is very critical to us.

We are also seeing broadband attached to wireless. Our standalone broadband with wireless is proving to be very, very important to us in the marketplace.

So DirecTV is really important. As getting to 30 million homes by 2011, that leaves a lot of our footprint uncovered with the TV product, and so we are going to be very aggressive with the DirecTV product and you won't see any slowdown from that standpoint.

Okay, that's helpful. Thank you very much.

You bet. With that, I will close and thank everyone for joining us on the call. We do appreciate your time and your interest in the business.

As I close, I just want to reiterate just a couple of points. First of all, we do understand the environment we are operating in. We recognize it's a tough environment; but we have demonstrated competence at managing through times like these and competing well in times like these.

And while we do that, we are building an even stronger Company, and we are committed to maintaining our financial strength, a strong balance sheet, returning value to our owners.

So when you look at the Company, we just think there are a couple of things that set AT&T apart. We have the strongest position in wireless, and that is in terms of spectrum, network quality, device lineup, technology evolution path. And we do own 100% of our wireless business.

As it relates to our U-verse platform, it is ramping. We're getting high marks from customers on the product. As Rick said, there is every reason to believe this will be a multi-billion-dollar business over the next few years.

Then when you get to our business side, the strength in our business products and portfolios, our global networks are unmatched. Our wireless solutions for enterprise are best-in-class. And finally, because of the quality of our assets and our scale, we continue to attract the best partners; and these are companies like Apple and IBM, Cisco and some others.

So these are some of the things we think set us apart. Despite this near-term environment I like how we are positioned. We do know how to execute.

And I thank you for your attention this morning, your interest in AT&T. Wish you all the best. Have a good day.

Thank you. Thank you, John.

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