AT&T Inc (T) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the AT&T third quarter earnings release 2009.

For the conference today, all the participants are in a listen-only mode.

However, there will be an opportunity for your questions, and instructions will be given at that time.

(Operator Instructions).

As a reminder, today's call is being recorded.

And with that being said, I'll turn the conference over to Brooks McCorcle, Senior Vice President of Investor Relations for AT&T.

Please go ahead.

Thank you, John.

Good morning, everyone.

Welcome to our third quarter conference call.

It's great to have you with us this morning.

As John mentioned, this is Brooks McCorcle, head of Investor Relations for AT&T.

Joining me on the call this morning are Rick Lindner, AT&T's Chief Financial Officer, and Ralph de la Vega, AT&T's President and CEO for Mobility and Consumer Markets.

In a minute, Rick and Ralph will cover our results, then we'll follow with questions and answers.

Before we get underway, let me remind you that our release, investor briefing, supplementary information and the presentation slides that accompany this call are all available in the Investor Relations page of the AT&T website -- that's www.ATT.com/investor.relations.

I also need to cover our Safe Harbor statement, which is on slide three.

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

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

AT&T disclaims any obligation to update or revise statements contained in this presentation 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.

Before I turn the call over to Rick, let me call your attention to slide four, which provides a consolidated financial summary.

EPS for the quarter was $0.54, very much in line with results for the first half of the year; versus third quarter last year, EPS includes $0.04 of pressure from incremental non-cash pension [OpEx] expenses.

In addition, this quarter EPS benefited by $0.03 from the resolution of tax issues, which were offset by $0.02 of pressure due to severance charges.

Consolidated revenues were stable at $30.9 billion.

That's up slightly on a sequential basis for the second straight quarter.

This reflects strength in wireless, AT&T U-verse, and strategic business services offsetting economic pressures.

Our consolidated operating margin was also relatively stable, reflecting solid cost performance in both wireless and wireline.

Free cash flow continues to be strong, $5.5 billion in the quarter and $13.9 billion year-to-date, both up substantially over comparable periods a year ago.

This reflects solid cost efforts, lower capital expenditures, and the timing of cash tax payments.

With that quick overview, I'll now turn the call over to AT&T's Chief Financial Officer, Rick Lindner.

Rick?

Thanks, Brooks.

Good morning, everyone.

Before we get into the operational details, let me take just a brief minute to comment on the business overall and to put some perspective on the quarter.

When we talked with you in January, we outlined our expectations for the year; and like everyone, we knew we faced a tough economy and a challenging business environment.

So we laid out for you a clear set of objectives for 2009.

The first was to be aggressive and persistent in improving our cost structure, to preserve margins and to drive cash flow.

And second, we committed to continued investment in an expansion in the industry's key growth areas.

Number one among those is wireless data and the explosion of capabilities that are enabled by wireless broadband.

Number two is our all-IP U-verse platform for our redefined consumer market built on integrated TV, broadband, and voice.

And number three, we wanted to expand and drive growth in our most advanced business capabilities, including products like virtual private networks, ethernet, hosting, IP conferencing, and application services.

I think what you've seen from us throughout 2009, and particularly in our third quarter results, is that we've delivered against these top priorities.

The highlights are on slide five.

Now, Ralph is going to give you all the details in just a minute, but I have to say we had just a terrific wireless quarter -- 2 million net adds; our best postpaid 3G integrated device quarter to date; strong ARPU growth; record low churn; and on top of it, margin expansion.

We had another solid U-verse quarter, with continued high voice and broadband attach rates.

I expect U-verse revenues this year will top $2 billion, with more growth ahead.

Strategic business service revenues were up better than 16% and more than 5% sequentially; and as Brooks noted, free cash flow continues to be strong.

So from my perspective, the execution continues to be good across the business and we're delivering what we outlined to you.

Now, with that as an overview, let's turn now to revenue trends, which are on slide 6.

Consolidated revenues for the quarter were $30.9 billion -- that's down slightly versus the third quarter a year ago, which was our peak revenue quarter, and up slightly from the second quarter of this year.

This reflects continued good growth in wireless and in wireline data.

Wireless service revenues were up better than $1.1 billion or 10% with 3.5% sequential growth.

Wireline data revenues were up 5.4%, right in line with our growth rate in this category over the past few quarters, and up 2% sequentially.

Wireline IP data revenues were up better than 18%, also consistent with recent trends, and up 4.7% sequentially.

These drivers in large part offset continuing pressures in wireline voice.

And as we show in the pie chart on this slide, our revenue mix is increasingly weighted to the growth areas of wireless, data, and managed services.

In the second quarter, 68% of our revenues came from these categories, and that's up 1,000 basis points over the past two years.

Consistent with the results in the third quarter and year-to-date, we expect revenues for full-year 2009 will be slightly below 2008 results, due primarily to economic pressures on sales to business customers.

So that's a snapshot of our consolidated revenues.

And at this point, let me turn to Ralph de la Vega, who runs our wireless and consumer channels, for an update on those areas.

Ralph?

Thanks, Rick, and good morning, everyone.

It's great to have this chance to talk with you again.

As you've seen, we've delivered strong wireless growth in the third quarter.

We continue to have good traction in U-verse, and I'm confident we're doing the right things to continue delivering solid growth in the quarters ahead.

Before I cover the details, there is one key point that is very important to underscore, which is outlined on slide seven -- is that in both our mobility business and in our consumer markets, we're well along executing major transformations.

In mobility, growth is rapidly becoming data-centric.

In simple words, our view is that wireless broadband is one of the industry's great growth opportunities, and so we've taken the initiative to deliver on a potential.

You see the benefits of this strategy in our wireless results in the third quarter -- 2 million net adds; our best integrated device quarter to date; record low churn; the best ARPU growth we've seen in quite some time, all reflected in robust wireless data growth.

We have a strong and focused commitment to leadership in mobile broadband.

That's why we undertook an aggressive integrated device strategy led by the iPhone.

It's why we're out in front taking the leadership position with emerging devices like eReaders, netbooks, navigation devices and more.

It's why we've invested to be the leader in WiFi coverage, and it's why we're pushing aggressively to increase wireless network speed and capacity with our HSPA 7.2 deployment ahead of 4G.

We're executing a parallel transformation for our wireline consumers, with AT&T U-verse now deployed to more than 20 million living units.

We now have more than 1.8 million U-verse TV subscribers in service.

More than three-fourths of our U-verse TV subscribers are taking a triple or quad play.

And with these dynamics, we're seeing consumer revenue per household growth and better customer retention.

With that overview, let me drill down and cover wireless results, starting with subscribers and revenues on slide 8.

In the third quarter, we accelerated both service revenue growth and subscriber growth.

Service revenues were up $1.1 billion or 10% versus the year-ago quarter.

That compares with 9.4% growth in the preceding quarter, with an even stronger sequential improvement of 3.5%.

The first driver of revenue growth is subscribers, and this was our strongest third quarter ever for net adds, with a gain in total subs of 2 million.

To add some perspective, this was the third quarter out of the past five that our total net adds have been near or above the 2 million mark.

And over the past year, we've increased our base by 6.7 million.

While we're the first ones to release this quarter, I am confident that's well ahead of our peers.

Third quarter postpaid net adds totaled 1.4 million, up 20% from the second quarter this year and the second-highest total in our history.

These results clearly demonstrate the benefits of our integrated device strategy, with a network built for data, cutting edge devices, and access to a rich array of applications.

Because of these things, we're winning more customers, and more customers at the high-end who have great ARPU and churn characteristics.

The details on ARPU and churn are on slide 9.

In the third quarter, postpaid ARPU was up 3.8% year-over-year, and we've now delivered seven straight quarters of year-over-year growth in postpaid ARPU, and it was up 1.7% sequentially.

We're also seeing outstanding progress in churn.

This was a record low for us in terms of total churn.

In postpaid, this was our lowest third quarter churn level ever.

In some markets, we're seeing churn levels well below 1%.

I love to see churn go down because churn is driven by the fundamentals, and these churn improvements show that our network improvements are working, delivering benefits to customers.

When you look at our net adds, our ARPU gains, and our churn improvements, it's clear that our subscriber metrics have never been better and they continue to move in the right direction.

One of the key drivers behind our wireless growth is our integrated device strategy, which has contributed to our strong data growth.

The details are on slide 10.

We determined early on that getting integrated devices in our customers' hands would pay off with increased usage, and would spur a huge amount of innovation in terms of applications and functionality.

That strategy has paid off for us in a big way.

Independent data shows twice as many smartphone customers have chosen AT&T over any other competitor.

In the third quarter, we added 4.3 million postpaid 3G integrated devices to our network -- our highest quarterly gain to date.

We now have more than 26 million integrated devices in service and that number has doubled over the past year.

These numbers include 3.2 million iPhone activations; also our highest quarterly total ever; and nearly 40% of these were for customers who are new to AT&T.

Integrated device subscribers are some of the best you can have -- high ARPU and [low] churn.

And we have seen no drop-off in the attractive profile we're getting with the iPhone and with integrated devices in general.

Our iPhone customers continue to have a very strong net present value, or NPV, more than twice our average postpaid subscriber, and that has not changed.

And as you all would expect, integrated device subscribers are data-centric, and we're seeing more and more customers sign up for data plans.

As a result, our wireless data revenue growth continues to be strong, up nearly $1 billion, or 33.6% versus the third quarter last year.

Our network today handles more integrated devices and more data traffic than any of our competitors.

Now we're also taking the lead in emerging wireless devices -- things like eReaders, navigation devices, netbooks, monitoring devices and more.

Slide 11 highlights some of the emerging devices we have in our portfolio.

Emerging devices represent the next wave of wireless growth.

Some time ago, we set up an organization devoted specifically to developing new products and new ideas in this space, and their work has paid off.

We are well-positioned for success in every emerging device category.

We are a leader in eReader connectivity.

We recently became the wireless broadband provider far Amazon's Kindle with US and international wireless connectivity.

We're the 3G provider for the Sony daily edition of eReader, and the Plastic Logic eReader will be on our network when it is launched in 2010.

We also just announced that the new Barnes & Noble eReader will also use our network.

We're also number one in personal navigation devices, with recent agreements to provide network connectivity for new devices from market leaders TomTom and Garmin, plus we offer a host of netbooks, including devices from Dell, Acer, Lenovo, and the new Nokia Booklet 3G, which was launched just a few days ago.

You'll continue to see us lead in the emerging device space.

In concert with all we've done with devices and data services, we have undertaken an aggressive program of investment to further enhance our wireless network.

These efforts are on schedule and they're delivering clear benefits to customers, and the highlights are on slide 12.

Our 2009 action plan includes the addition of some 2,000 cell sites; roughly 100,000 new circuits to strengthen backhaul.

We've doubled our number of fiber serve cell sites this year, and we're beefing up backhaul with ethernet connectivity.

We're expanding 3G to 4,400 cell sites.

And by the end of this year, our 3G network will reach 372 markets.

We're aggressively deploying high quality 850 spectrum in our 3G service areas.

As you may know, 850 megahertz is the original cellular spectrum.

It has fantastic propagation characteristics and provides strong in-building coverage.

Both our drive test and our customer satisfaction surveys show immediate improvement as the 850 carrier is turned up.

Deployment is better than 90% complete today, with local rollouts now completed in New York, Atlanta, Houston, and Denver.

We're working through the process of fine-tuning the network.

We will complete 850 deployment in our final city before the end of the year.

All of these allow us to deliver premium service as we handle explosive growth in data volumes, and our metrics are moving in the right direction.

3G dropped calls are down 12%; 3G blocked calls are down 30%; and over the past 10 months, our composite quality index is up 25%.

That's an overall view of our 3G network performance that measures call success, as well as our customers' ability to access and remain on our 3G network.

These are great numbers and I am pleased with the impact they're having on our customers as a whole.

Each market has its strengths and special issues, though.

For those markets that the network is performing well, we're making them even better.

For those markets where our performance is not to our standards, we're giving them the resources to improve.

That's a summary of what we're doing and what we're achieving for customers for this year.

Now let me provide a quick update on the next steps in our wireless technology path, HSPA 7.2 and 4G.

The highlights are on slide 13.

Our HSPA 7.2 initiative will provide improved capacity and will essentially double the current 3G speeds, and will do it ahead of 4G.

We'll be in six markets in the fourth quarter.

We expect to be in 25 of the top 30 US markets by the second quarter of next year, and we plan to cover 90% of our 3G pops with HSPA 7.2 and fiber backhaul by the end of 2011.

HSPA 7.2 is available now.

We have numerous handsets that are already 7.2 compatible, including the iPhone 3GS.

We will launch additional 7.2 capable handsets this year.

And in addition, all embedded netbooks currently available in our AT&T retail stores are 7.2 capable.

Most important, HSPA 7.2 provides the best transition to 4G.

It will provide the best default speeds as network and customers transition to 4G.

And much of the work we do to deploy 7.2 is the same work we do to build out 4G; so there's natural progression and a clean, efficient technology path.

And regarding 4G, we are actively developing and will begin testing LTE in our labs and in market trials next year, and we'll begin deployment in 2011.

We'll be using our 700 megahertz and AWS spectrum exclusively for LTE.

This spectrum will cover 100% of the top 200 markets and 87% of the US population.

We're being aggressive and smart, and we have a plan that will be great for customers, and we're excited about the road that includes both HSPA 7.2 and LTE.

As Rick mentioned, one of the most gratifying things about our third quarter wireless results was our ability to expand margins.

Even with record iPhone activations, our wireless margin summary is shown on slide 14.

Our third quarter wireless service EBITDA margin was 38.5%, up significantly versus third quarter of '08, when we had a large iPhone quarter, and up sequentially, even though we had roughly 750,000 more iPhone activations than in the second quarter.

If you want one metric to show that our iPhone strategy is paying off as we expected, this quarter's margin expansion is it.

It reflects strong revenue growth, a growing high-quality subscriber base, and operational improvements as we continue to improve efficiencies.

We expect continued margin expansion, and these results do nothing but reinforce the confidence we have in our long-term wireless margin outlook for the mid-40% range.

Let me turn now and talk about our other major initiative, AT&T U-verse.

Slide 15 has an update.

We had a solid net add quarter with an increase in U-verse TV subscribers of 240,000, bringing our total to 1.8 million, up more than 1 million over the past year.

Across all eligible [end] units, our U-verse TV penetration is now above 12%, and in areas marketed [to for] 24 months or more, overall penetration rates are now more than 20%.

U-Verse is great TV.

You may have seen that once again we ranked highest in the JD Power survey in the west and south for residential TV customer satisfaction.

And we continue to add features, including multi-view, which lets you watch three additional channels in addition to your primary choice.

Those of you who are football fans will absolutely love it.

And beyond the great TV experience, U-verse is proving itself as what we envision from the outset -- a powerful IP platform for integrated services.

Our U-verse broadband attach rates continue to run above 90%.

The attach rate for U-verse voice, our VoIP service, continues to be above 60%.

And more than three-quarters of our U-verse customers were triple or quad play, combining TV, broadband, voice, and wireless.

U-Verse is helping redefine the consumer space, as you see on chart 16.

Our total consumer wireline IP revenues in that U-verse services plus non-U-verse broadband grew better than 30% this quarter.

U-Verse TV subs are up more than 1 million.

U-Verse voice connections are up 631,000 and consumer wireline broadband connections are up 821,000.

These products are driving a significant shift in our wireline consumer revenue mix.

A year ago, consumer wireline IP revenues made up 23.2% of our consumer wireline total.

In the third quarter, these products represented nearly one-third of consumer wireline revenues, and that's a 920 basis point shift in just four quarters.

Where we have U-verse deployed and marketed, access line decline trends are better; revenues per household are better; and brand perceptions are better.

And in terms of overall consumer trends, U-verse does a couple of things.

First, it drives up revenues per household.

We posted our seventh consecutive quarter of year-over-year growth in consumer revenues per household, up 2.5%.

And second, U-verse helps retain customers.

In the third quarter, we had a 27.5% smaller decline in consumer connections than the third quarter a year ago.

Consumer service revenues were down 5.5% year-over-year -- that's versus a 6.4% decline the quarter before.

It marked the second straight quarter we've seen an improvement in our year-over-year rate per consumer.

[That's] U-verse gross, we're starting to see a directional change.

Rick, that covers our wireless and consumer.

I'll turn it back to you.

Thanks, Ralph.

Before we close this morning, let me give you an update on business customer trends.

Those are on slide 17.

The fundamental trends underlying our business results have not changed.

They are consistent with what we saw in the first half of the year.

The economy's impacts are fairly straightforward, and are felt across business product lines and customer segments.

The largest impacts are volume-related in traditional voice and legacy data.

At the same time, some of the areas where we've seen volume pressure carry traditionally lower margins -- products like equipment sales and international long distance.

So, the fixed cost reductions we've been able to achieve have kept overall business margins relatively stable.

The improvements we're making in cost structure will provide operating leverage, as the economy rebounds and revenue growth returns.

Total business revenues were down 7.6% year-over-year and down 6.4% excluding equipment sales, but they were down just 1.3% sequentially.

We continue to see good growth in our most advanced business products.

For example, IP data revenues were up 6.8%, with stronger sequential growth at 3.1%.

Revenues from strategic business products were up better than 16%, with a sequential increase of over 5%.

These are capabilities that lead our most advanced solutions -- ethernet, VPNs, hosting, IP conferencing, and application services.

Competitively, we continue to do well in the market; and while we expect the macro environment to stay with us for a period of time, the sequential trends this quarter provide some measure of encouragement.

We expect some flattening and, potentially, some improvement in year-over-year comparisons, as we move into the fourth quarter.

And longer-term, our view of business continues to be very positive.

Let me close with a quick look at margins and cash flow.

Consolidated margin comparisons are on slide 18.

We said at the beginning of the year, we expected our 2009 consolidated operating income margin, before incremental pension and retiree benefit costs, would be stable with 2008.

Year-to-date, our consolidated operating margin is 18%, and it's approaching 20% when you exclude the incremental pension and retiree costs.

This reflects solid progress in both wireless and wireline.

Consolidated operating expenses were down 1% year-over-year and wireline operating expenses were down nearly 3%.

Our major cost reduction initiatives are on track and ahead of schedule.

Total force declined by nearly 4,000 in the quarter and by approximately 18,000 year-to-date.

Looking ahead, we continue to have significant opportunity to improve operations and operate more cost efficiently.

Along with solid margins, we also continued to deliver strong free cash flow, which has allowed us to further improve our balance sheet metrics.

Slide 19 provides a cash summary.

Over the first three quarters of 2009, cash from operations totaled $25.5 billion.

That's up from $22.8 billion a year ago.

Capital expenditures were $11.6 billion.

Free cash flow before dividends was $13.9 billion, and that's up $5.9 billion compared with the first nine months of last year.

Dividend payments year-to-date totaled $7.3 billion.

We expect to continue this positive free cash flow in the fourth quarter and expect to end the year well above our 2008 levels.

In the third quarter, we reduced debt by $4.1 billion.

Over the past five quarters, we've reduced debt, net of cash on hand, by $12 billion.

Our balance sheet is sound; debt metrics are solid; and we have the flexibility to retire additional debt as it comes due, while returning substantial value to shareholders through dividends.

Slide 20 now provides a quick recap for the quarter.

And again, it was just a terrific wireless quarter -- record net adds; service revenue growth accelerating; a significant step up in ARPUs; churn is down; our wireless metrics in total have never been better.

We expanded wireless margins, and we did that in a record iPhone quarter with approximately 750,000 more activations than the preceding quarter.

Wireless network initiatives are on track and they're delivering good results.

We're excited about HSPA 7.2 and our path to 4G.

We continue to grow U-verse and the platform is performing very well.

U-Verse is driving a redefinition of our consumer market.

In business, despite a difficult environment, growth in IP data and advanced business products continues to be solid, and business margins are stable.

So, to sum it up, again, we're delivering what we said we would.

We're managing costs aggressively, which supports our profit margins and earnings.

We continue to invest and expand in key growth areas and to position the Company for the future.

We're generating strong free cash flow to fund investments and dividends, while maintaining a sound balance sheet.

Brooks, I think we'll stop here.

And I think we're ready to take some questions.

Okay, great.

John, we're now ready to open up for questions.

Certainly.

(Operator Instructions).

John Hodulik, UBS.

If we could just dig into the margins a little bit, both on the wireless and the wireline side, as you summed up -- up sequential margins, even with the strong iPhone quarter.

What's going on there below the subsidies?

And I guess, given a consistent level of iPhone ads in the fourth quarter, would that suggest that we should continue to see some improvement there?

And then I think more interesting on the wireline side, there seemed to be a number of moving parts.

But with the improved outlook for pension, given the new union contracts, and it seems like the language we heard from you guys is that the business market may be getting better and even the consumer market may have bottomed.

What are the implications for margins in the wireline business, net of any pension effect, as those items potentially turn here?

John, this is Ralph de la Vega.

Let me first address the wireless margins and then I'll turn it over to Rick to comment on wireline.

But what we were able to do this quarter is exactly what we had planned.

If you compare quarter-over-quarter, year-over-year, what we did is we grew the top line by over $1 billion while we held expenses essentially flat.

So if you look at our cost of service quarter-over-quarter, year-over-year, you'll see that cost of service was essentially flat.

And actually selling, general and administrative costs were actually down quarter-over-quarter, year-over-year.

So it was just the basics of us making sure that while we grew the top line, we held cost of service constant and then actually saw a little bit of a decline in general, selling and administrative expenses.

And nothing fancy but just watching and tightly controlling expenses and improving processes while we grew the top line.

I think to add to that, John, Ralph and his team have done a terrific job managing the various components of the wireless business.

So I think they were very smart this quarter when you look at overall -- managing overall acquisition costs, knowing that we were generating a lot of traffic in the stores, and would have higher sales and upgrades as a result, at least partially, to the new iPhone launch.

They manage other areas of acquisition costs very well.

And on top of that, we're seeing benefits from some of the consolidation that we're doing in network IT, procurement and other support functions in John Stankey's organization, where we're combining and consolidating what were previously some separate support functions in those areas.

And that has helped particularly, when you look year-over-year, at the network and the cost of service components.

On the wireline side, I'm very pleased with what we've been able to do in wireline.

As you know, we're going through a significant transformation in the business, both with respect to consumer and business customers, where we're seeing declines in voice and some legacy data services, but we're seeing some substantial growth in broadband and IP-based and managed services.

So part of what we've got to navigate through is, as these legacy services, which have higher margins, as those decline, number one, we've got to take costs out of those.

And at the same time, we've got to build margins in the services that are growing.

I think what you're seeing in wireline reflects a couple of things.

It reflects the fact that, number one, we got started early.

Knowing that this would be a challenging year, we started at the end of last year in terms of identifying areas where we could improve costs.

And we've done two things I think well this year.

One is in areas where business volumes have declined, we've been very active in taking costs, the variable costs, out of those areas.

And then secondly, this same consolidation occurring in our operations functions across wireless and wireline has enabled us to take additional fixed costs out of the business.

Going forward, I think there's still substantial opportunities there.

We're going to still continue to be aggressive in managing costs.

I think as you go into the fourth quarter, there is probably some typical seasonal pressure in our wireline business that we'll see somewhat; but longer term, we're going to continue to work hard to manage costs, to manage through this transition, and to maintain good margins in our wireline business.

Jason Armstrong, Goldman Sachs.

A couple of questions.

First, Rick, the bond yield versus equity dividend yield relationship is really as wide as it's ever been.

But should we step back here, the market is implying complete confidence around your balance sheet, your ability to refinance but much lower confidence in the outlook for dividend sustainability.

I guess, with this as the backdrop, why are you still focused on deleveraging as opposed to buying back shares?

And when can we expect that to flip?

And the second question for Ralph on wireless.

I guess the concern broadly in wireless is that all the disruption we've seen around pricing in the lower and middle segments in the market will have to make its way into cannibalization of the higher end base.

I think your results seem to diffuse that logic to some extent, but I'm wondering if you can maybe give us specifics as you think through your churn.

Are you seeing a shift in where people are going as they leave AT&T?

Is there any reason to believe that there's something going on beneath the surface where there's an increasing migration downward?

Thanks.

Jason, on the balance sheet and use of cash questions, the priorities that we have with regard to use of cash haven't changed.

We have, as you know, coming up, we've got about $5 billion of wireless acquisitions that are pending.

So we've been strengthening and improving the balance sheet and have some cash balances that are available to complete those acquisitions.

And then secondly, we are still somewhat outside of the target range of our credit metrics.

So we'll work to bring the metrics back within those ranges.

The good news is that we've -- I think with the cash flow we've seen this year and the strong cash flow continuing into the fourth quarter, we're further ahead of where we expected to be at this point.

And the metrics are improving.

So once we get the wireless acquisitions done and we've moved back within our ranges, then we've got flexibility with cash to do a number of things, including reconsidering share repurchase and putting that back in the mix.

And Jason, concerning migration and the pricing in this competitive industry, we have not seen a lot of downward migration.

In fact, as I mentioned in my opening comments, what we see is people signing up for our data plans in record numbers.

Even with our own products where we've -- as you probably know, launched an all-you-can-eat prepaid product earlier this month.

The product is doing well, but we're not seeing any migration from postpaid to prepaid.

So I know that these are very competitive times and competitors often come up with new plans.

But so far, what we have seen in our customer base is very steady and no significant migration downwards.

Simon Flannery, Morgan Stanley.

Ralph, thanks for the data on the network performance metrics.

That's very helpful.

There's been a lot of focus here on the data demands and clearly, you continue as fast as you're putting new circuits in, you continue to add new data customers.

There's a lot of new devices, particularly laptops and tablets and things that are going to put a lot of strain on the network.

So where are we on usage-based pricing or pricing tiers that we've seen discussed somewhat, to deal with particularly the small percent of your users that are using a very high amount of data?

And related to that, there's a lot of concern amongst investor community about what happens if and when you lose exclusivity on the iPhone.

Perhaps you can touch on that as well.

Thanks.

Yes.

As everybody knows, we're saying a data explosion that we have never seen, at least in my history in wireless.

And as I've mentioned in earlier public comments, a lot of that usage is being driven by a small percentage of the customers.

So we're actually experimenting and doing a lot of customer focus groups to find out the best way to handle that phenomenon.

And how do you get a small percentage of the customers to carry their weight, if you will, without imposing on the majority of the customers, something that perhaps is detrimental?

So we continue to look at pricing options and other network management processes in order to hold down the usage.

And of course, all of this will be impacted by whatever rules come out from the FCC concerning net neutrality and the capability we're going to have to manage our networks.

So that whole area is a little bit influx.

But I'm pretty confident that we're going to be able to come up with ways that kind of mitigate the impact that we have seen, especially by a small number of customers driving an inordinate amount of usage.

And I'm not in a position to give you those details today.

Our work is still ongoing, but you'll see something from us that addresses this concern in a very good way, I think, in the near future.

In terms of the iPhone, the iPhone continues to be a good source of new gross additions for us.

But when you look at the gross additions for the third quarter, the iPhone made up about one-third of our total gross additions.

So there's still two-thirds of our gross additions in the quarter are driven by the great portfolio of devices we have in our Company.

And we have a legacy for continuing to have a great portfolio of products, Simon.

We know that's going to continue after the iPhone is no longer exclusive to us.

And we think that we'll be able to continue that growth with the iPhone and with other products that we think will be very attractive to customers.

And I'm very confident that we'll continue to drive growth, as you've seen us.

David Barden, Banc of America-Merrill Lynch.

A couple of questions, if I could.

Just the first one, to your point, Ralph, about the explosion in data, and just trying to tie that to Rick's comments about the focus on the balance sheet and expectations for strong cash flows next quarter.

It does seem like CapEx has been running on the right side.

It seems like it would be a stretch to get to the upper bounds of your guidance for this year in that $17 billion to $18 billion range.

I wonder if you could talk a little bit about the puts and the takes of keeping CapEx tight and where you think we're going to wind up for the year officially.

And the second question I have is just obviously the FCC meeting is going on in net neutrality today.

There's a lot of shouting about the topic.

But Rick, it would be helpful, I guess, from an analyst standpoint, to -- as you look at your income statement, if net neutrality breaks one way or the other, how do you think about it from a financial context?

Is there really any way that it matters to the numbers at the end of the day?

And if I could, just a last housekeeping point.

Could you just give us for the 2010 numbers, the pension one-timers this year and the customer list amortization that will come out of the numbers for next year?

That'd be great.

David, let me take a stab at all of those.

First of all, in terms of capital expenditures, we still expect to be in the guidance range that we provided, so roughly $17 billion to $18 billion in CapEx.

I know that implies and results in some ramp in the fourth quarter.

We had some ramp in CapEx this quarter; we'll have a little bit further next quarter.

Many of the things Ralph talked about in terms of wireless always require planning, preparation, preparatory work that gets done at the cell sites prior to CapEx dollars, harder dollars being spent.

And so some of this is just reflective of normal timing.

But we expect to be in that range; our guidance hasn't changed here.

And that reflects, by the way, all the things that Ralph talked about in his presentation in terms of improvements in our wireless infrastructure.

With respect to net neutrality, I think first of all, I think -- Ralph actually, a couple of weeks ago, at his presentation at CTIA, made a great case for why we believe, in the competitive environment that we're in, that additional regulation over the wireless business, and for that matter, additional regulation over broadband and the Internet in total, is unnecessary at this time.

I think the risk with respect to unnecessary or intrusive regulation in any industry is always with the unintended consequences of that regulatory policy.

And that's something I think the FCC will need to be very mindful of and I think we'll be mindful of.

Certainly no one in the economic environment that we're in right now wants to have, due to regulation, wants to create any disincentive for investment in infrastructure and the jobs associated with that.

So we'll continue to make that case with the FCC and continue to work with them through this process.

And I think, at the end of the day, I think it will be a constructive process.

With respect to pension and post-retirement medical costs, we've got -- we're not yet in a position I think where I can give you guidance for 2010.

We still have some things that have to be done and some things that we have to see with respect to 2009.

And those are primarily three things.

Number one, as you would expect, we still need to complete the remaining outstanding bargaining agreements -- two that have yet to be done and one in the southwest that is a tentative agreement, but has yet to be ratified.

And then secondly, we've got to see where we end up this year in terms of return on assets in the funds.

And obviously, this has been a much better year from a market perspective.

So that can provide some help to us as we go into 2010.

On the other side of it, my expectation is, at least where the markets are today, the discount rates will be less and will be lower.

And a lower discount rate provides some pressure on pension and post-retirement medical costs.

So between now and, hopefully, the end of this year, all three of those issues will be sorted out so that when we have our call in January, we'll be able to give you definitive guidance on pension and post-retiree medical costs.

But I certainly, at this point, wouldn't expect any kind of significant increase to those costs like you've seen in 2009.

But again, we'll have to see where all three of those sort out.

Timothy Horan Oppenheimer.

Morning.

Congratulations on the quarter; a couple of quarters -- questions.

Ralph, are you seeing anything that comes close to the iPhone either now or in the future, the next couple of years that you could also promote?

And secondly, Ralph, on the -- can you give us a little bit more detail on the prepaid and wholesale trends?

They seem to be very strong this quarter.

Do you think prepaid can get that -- kind of some customers stability there?

And then, Rick, maybe you can touch on the overall outlook for the strategic view on the industry.

And two questions specifically.

Do you think it makes some sense to see a global wireless consolidation, given what's going on with the handsets and maturity of the industry?

And maybe the same thing on possibly [TBS] merging with a communications carrier, do you see any benefit to that longer-term?

Thanks.

Tim, this is Ralph.

Let me just address some of the iPhone questions and prepaid questions you raised.

In terms of the iPhone and what we see out in the future, we spend an awful lot of time looking for the next great device, the next great technologies so that we can bring that to our customers.

And we think that the iPhone has set the bar and that all the manufacturers are racing to figure out how to get close to it.

But I think it's still the best device in the world at this point.

And others will continue to press the iPhone but never underestimate the capability that Apple has to continue to innovate and continue to deliver great products.

It's a question in my mind, given the functionality of all these devices, that in the end, it's all about making it simple for customers to use the services.

In that regard, Apple is probably the best anywhere in the world.

So they're going to get continued pressure from others who are going to try to emulate them; but so far, I think the device is by far the best out there, especially when it comes to ease of use.

In terms of prepaid, we've had a concerted effort for a awhile now to focus on the upper end of the prepaid market to improve our performance in churn, to improve our performance in cost structure, and to improve our performance in self-service.

We've had a very concerted effort to do that.

And what you saw this quarter is the result of that work in significantly reduced churn, improved profitability, and much better operational performance in terms of delivering the products or services to our customers with a whole lot less cost.

So we're very pleased with how we now have repositioned our prepaid offerings; we're very pleased with the initial take on the $60 all-you-can-eat Talk and Text.

And so far, like I mentioned earlier, we have not seen any migration from postpaid customers to prepaid plans.

So we're very bullish on the approach that we're taking.

We think it's the right way to go at the prepaid market.

And we hope that we'll continue to report good results in the coming quarters.

Rick?

Tim, two things, I guess, with respect to industry view.

One is stepping back for a minute, consolidation for a minute.

I think, certainly, we feel better about the trajectory of the business and the view going forward than we would have shared with you a year ago at this time.

I think when you look across our business lines, we're very encouraged by what we see in wireless and the continuing growth opportunities in wireless data; the continuing -- or the emerging opportunities with some of the new and emerging devices that Ralph talked about.

And we feel that can drive not just topline growth, but continued margin improvement for us going forward.

But even in our wireline lines of business, as we talked about some of the improving trends we see in consumer are encouraging.

Feels like we're turning the corner there.

And in business, which is probably the most challenged right now, again, we feel very good about how we're positioned and we know it's going to improve as the economy improves; it's just difficult to predict the timing and the shape of the curve when the economy does start to lift.

As far as additional consolidation and structural changes within the industry, I think that when you talk about wireless and consolidation across different geographies and more global consolidation in wireless, it's probably a different type of consolidation than we've seen in the past.

It -- whereas, when you're combining two companies that compete in many of the same geographies, there's just a significant amount of natural cost synergies.

When you're combining companies in different geographies, it's a different kind of merger and you have to look at how well a strategic fit it is for you.

And you have to generate synergies from it in other ways.

There's probably some advantages in terms of scale and procurement, and so forth, but it's still less than what you have in the mergers we've had in the past.

Having said that, I think our view in terms of looking at opportunities and consolidation has never changed.

We always look at three things -- first and foremost, does it fit with us well strategically?

And two, can we -- is there a deal that can be structured that we feel we can generate a good financial return to our shareowners and an adequate return on investment?

And then three, you always have to be mindful of the regulatory environment and regulatory considerations in terms of the ability to complete a transaction.

So all three of those are things that we would look at and continue to look at going forward.

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

Mike McCormack, JPMorgan.

Obviously, a very strong quarter in iPhone.

Just wondering, Ralph, if you can -- and I know you sort of touched upon this, but -- a substantial part of gross, that was coming from non-iPhone's but a very small portion of the net number.

Just wondering if there's anything underlying there that we should be thinking about, whether there are promotions you can start to attack there to get better sort of non-iPhone net adds?

And secondly, on the business trends, I think in the slide deck, you guys are indicating that you think 4Q may stabilize to improve on the growth rate.

Just trying to get a sense for whether that's just an easier comp year-over-year or whether you're anticipating 4Q to have better underlying trends.

Thanks.

Mike, this is Ralph.

We feel really good about our non-iPhone net adds and gross adds.

When people do the math, sometimes they just take the activations times the 40% and assume that those are net adds; but those are really kind of gross adds.

You have to subtract from that the churn.

But the bottom line is that we feel really strong about the portfolio of products we have, for example, in quick messaging devices, our Blackberry portfolio and all the smartphones that we have.

One of the things that I really like that I think is actually going to set us apart as these phones, whether they're quick messaging devices or smartphones, is the capability that we have in our network that is hard for some competitors to duplicate.

And that is the capability to do simultaneous voice and data.

These devices that are coming out are properly labeled smartphones and they need a smart network that allows you to be able to use voice applications and data applications at the same time.

Right now, some of the competitors in the market can't do that.

They can use voice or data, but they can't use both at the same time.

So the most prevalent application that people use, which is voice, can't be done at the same time as with data.

And what we have in our portfolio is just a smashing set of products that are going to come out to exploit that capability and differentiate us when it comes to that functionality.

And also with speed.

Keep in mind that even if we lose the iPhone exclusivity, we're going to probably be the only ones that have a speed of 7.2 that these phones can work on.

So they'll work in our network faster than on anybody else's network.

But I can tell you, Mike, that I feel as strongly as I ever have about the capability we have with the devices that are in our lineup.

And like Rick mentioned, I'm super excited about the deals that we've been able to do with eReaders, with personal navigation devices, that again highlight the power of the network that we have, that have a global reach.

And what all of these device manufacturers have realized is that benefit of HSPA and GSM technology that when they make a device, it can be a device that can sell anywhere in the world.

And that's a unique advantage to our network.

So, I feel good about our network capability and reach, and technology capabilities, as well as some great devices that are going to be running on that network.

Ralph, when you think about the upcoming Android launch, is there anything, maybe some of these capabilities that might be out, sort of coinciding with that?

Or is there not anticipated to be a reaction on your side?

No, no, I've mentioned before that we have kicked the tires on Android; we have evaluated it; we're through with that.

Now we're working with handset manufacturers to bring products to market.

And again, because of all the capabilities that I mentioned, I think those devices will actually work best on our network when you can do both simultaneous voice and data.

They're going to be terrific devices.

And I think much better devices than on anybody else's network.

Thanks, Ralph.

And thanks to you again, Ralph, for taking time to be with us this morning.

And thanks to everyone for taking part in the call today.

Let me close by just underscoring one key point that we made early on.

And that is, that we continue to deliver on the strategy we outlined for you at the beginning of this year.

First, we said we'd be aggressive driving growth in areas that were key to our future, and we've done that.

Our wireless customer base, our wireless growth metrics have never been better.

We're leading the way in integrated devices, in emerging devices and in wireless data capabilities.

U-Verse continues to have good traction and it's reached a point where it's beginning to reshape our consumer revenue profile.

Advanced business services continue to be resilient, delivering mid-teens growth.

The second thing we outlined for you at the beginning of this year was our commitment to eliminate costs, maintain margins, and drive cash flow.

And as you look at third quarter results, I think it's clear we've delivered on that front as well.

Wireless margins expanded both year-over-year and sequentially; wireline operating expenses were down; and wireline margins were stable sequentially.

Consolidated margins are running ahead of the full-year outlook we gave you in January and cash flow is strong, up nearly $6 billion year-to-date.

We continue to return substantial value to shareowners through dividends as we reduce debt and invest in the business.

So the bottom line is good progress on all of these fronts despite a very tough environment.

We are getting a lot done in areas that are key to our future growth, and our focus now is on sustaining this kind of execution into the fourth quarter and into 2010.

I want to thank you again for being with us this morning.

And as always, thanks for your interest in AT&T.

Thank you, John.

Thanks, everyone.

Have a great day.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T executive teleconference.

You may now disconnect.