AT&T Inc (T) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AT&T fourth quarter 2009 earnings release.

For the conference, 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.

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, and welcome to our fourth 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 today are Rick Lindner, AT&T's Chief Financial Officer, and John Stankey, AT&T's President and CEO for AT&T Operations.

Rick and John will update our results in a minute; then we'll take your questions.

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 on the Investor Relations page of the AT&T website, which is 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 quickly call your attention to slide four, which provides a consolidated financial summary.

Fourth quarter earnings per share was $0.51.

That includes $0.04 of pressure due to severance charges, offset by $0.04 of tax-related benefits.

Fourth quarter consolidated revenues were stable at $30.9 billion, up slightly on a sequential basis for the third straight quarter, with strength in wireless, AT&T U-verse, and strategic business services.

While consolidated margins obviously reflect the charges we took in the quarter, our wireless margin was slightly up sequentially and our already strong wireline margin was stable.

Cash flow continues to be strong, with 2009 cash from operations and free cash flow up substantially over 2008, reflecting solid cost management, lower capital expenditures, and the timing of cash tax payments.

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

Rick?

Thanks, Brooks.

Good morning, everyone.

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

Before I get into the detailed results, I'd like to start with a quick overview and a couple of comments on our positioning as we head into 2010.

Fourth quarter highlights are on slide five.

When you look at the year overall, I believe that in a challenging economy, we executed with a great deal of focus and we executed well.

2009 was a terrific year for wireless growth; our best net add year ever.

We built momentum in key growth areas -- wireless data, U-verse, and advanced business solutions.

Margins were generally stable throughout the year and cash flow was up substantially.

Across the board, we strengthened what we believe is the industry's best growth profile, with continued leadership in mobile broadband; further expansion of premier business capabilities; powerful IP-based platforms for both our consumer and business services; and continued financial strength, with cash flow coming from a strong wireless business and a wireline business that continues to have very solid margins.

Most important, we closed the year well.

In the fourth quarter, wireless unit growth, wireless data growth, wireless ARPU were all strong.

We continue to have solid traction in terms of U-verse gains.

Wireline consumer trends continue to be encouraging.

Combined U-verse and broadband revenue growth was up better than 30% for the second consecutive quarter.

Those revenues make up a growing percentage of our consumer revenue mix, which helped drive our third consecutive quarter of improved year-over-year revenue comparisons in consumer.

We maintained mid-teens growth in our most advanced business products.

Our cost initiatives are yielding benefits, supporting both margins and cash flow.

We ended 2009 with cash from operations and free cash flow, both up substantially over 2008.

And as you know, we increased our dividend for the 26th consecutive year while we have reduced debt.

So, from a number of perspectives, it was a very solid year and a good fourth quarter.

And looking to 2010, like most everyone, we model a continuing slow economy in the recovery and employment.

But that said, with our operational strengths, we believe we're well-positioned to deliver stable to improved earnings in 2010, with additional opportunity as the economy turns.

Our long-term view of the business continues to be quite positive.

With that perspective, let's take a look at detailed results, starting with consolidated revenues, which are covered on slide six.

Now, as Brooks mentioned, we've seen consolidated revenue trends stabilize over the past three quarters.

Revenues totaled $30.9 billion in the fourth quarter, down less than 1% year-over-year, and slightly up sequentially.

This was our third consecutive quarter of modest sequential revenue improvement.

These trends reflect a number of things.

The first is good wireless growth; second, we continue to deliver strong growth in U-verse, which continues to gain scale, driving improved consumer revenue comparisons; and third, our business revenue comparisons were somewhat more favorable this quarter.

The fundamental thing for us is that our revenue mix is undergoing a substantial transformation, increasingly weighted to wireless, data, and managed services.

In the fourth quarter, 70% of revenues came from these categories, and that was up 1,000 basis points over the past two years.

And taken together, these revenues grew 6.5% in the fourth quarter.

This shift in mix reflects broader industry changes and the fact that we've been aggressive, taking a leadership position in areas like mobile broadband and IP-based products.

There's every reason to expect this mix shift will continue, as our wireless data initiatives and our U-verse platform continue to scale.

The number one revenue driver for us continues to be wireless, and the details start on slide seven.

Wireless service revenues were up 9.2% in the fourth quarter and up more than $1 billion versus fourth quarter a year ago.

The major driver of this growth is strong subscriber growth.

We had 2.7 million total net adds in the fourth quarter and 7.3 million for the full year.

Annual postpaid net adds were 4.3 million, with 910,000 in the fourth quarter.

That followed a very strong postpaid third quarter, following the iPhone 3GS launch.

We continue to lead the industry in postpaid ARPU and it was up again this quarter by 2.6%.

This was our eighth consecutive quarter with year-over-year growth in postpaid ARPU.

Churn also was our best-ever for the fourth quarter, with total and postpaid churn both down year-over-year for the sixth consecutive quarter.

Our fourth quarter subscriber gains also reflect strong growth in wireless connectivity for emerging devices or what we call connected devices.

This includes eReaders, navigation devices and so forth.

As you see in the table on this slide, total emerging devices on our network increased by well more than 1 million in the fourth quarter, predominantly reflected in our reseller subscriber totals.

We've put a concentrated effort into the emerging device space over the past year.

We believe the range of devices that will be connected wirelessly is going to be quite broad.

We created an organization with a specific mission to build relationships and grow in what we believe is a high potential area.

And based on fourth quarter totals, that's proving to be a good strategy and we're executing well right out of the gate.

Now while ARPUs in emerging devices are typically low, the churn and the margin characteristics are quite attractive, and we're encouraged by the growth we're seeing in this category.

I would add the new Apple iPad announced yesterday will be included in our prepaid totals.

We believe the iPad is a terrific new device and we're very pleased it's going to operate on our network.

And the financial characteristics are attractive.

We are not subsidizing the device and customers will buy access to our network without a contract.

Usage will be paid for in advance via credit card, with rates starting at $15 for a block of usage and $30 for a month of access.

In addition to subscriber gains, the other major driver of wireless growth is data adoption, where we continue to set the pace.

The details are on slide eight.

Over the past few years, we've put a lot of effort into capturing the wireless data opportunity and it's gratifying to see those efforts pay off.

We have twice the number of smartphones in our network than any of our competitors.

We offer a terrific range of data-capable devices and applications, and all of these things are reflected in our wireless data results.

Fourth quarter wireless data revenues were up more than $800 million or over 26%.

And looking at full year totals, we increased wireless data revenues by $3.5 billion.

In the fourth quarter, text messages were up 70%; multimedia messages more than doubled; the number of 3G integrated devices on our network was up more than $4 million, in line with our third quarter increase; and we activated 3.1 million iPhones in the quarter.

There's still a great deal of upside in front of us in terms of integrated devices.

We're still below 50% penetration of our postpaid base, and integrated devices as a percent of gross adds continues to run well above that -- about 70% in the fourth quarter.

Average ARPU for integrated devices continues to run 1.8 times our other devices, and postpaid data ARPU increased better than 17% versus fourth quarter a year ago.

But even with continued strong smartphone device sales, we sustain solid margins in the fourth quarter.

Our wireless margin summary is on slide nine.

Fourth quarter wireless service EBITDA margin was nearly 39%, up 300 basis points from the year-earlier quarter, and our margin was up a bit sequentially, which is encouraging, given the usual fourth quarter seasonality that we see in the wireless business due to holiday sales, advertising and promotions.

These results reflect good operational execution and the increasingly high quality of the subscriber base, as we have won customers at the high end.

It also reinforces our confidence in the longer-term wireless margin outlook for mid-40% margins.

And we expect to be in the low 40% range in 2010.

Well, that's a quick look at wireless volume and financial trends.

And at this point, I'd like to stop and turn it over to John Stankey, President and Chief Operating Officer for AT&T Operations, for an update on our wireless network initiatives.

John?

Thanks, Rick.

Good morning, everyone.

It's good to be here with you.

What I want to do is take just a couple of minutes to give you an update on our wireless network initiatives, and provide a quick look ahead at some of the things we expect to accomplish this year.

Slide 10 provides a quick ground center on our wireless network capabilities today.

We have a broad nationwide network.

It covers 97% of the US population.

We also have broad 3G coverage -- 75% of the population and growing rapidly.

We have the nation's fastest 3G network today, based on third-party tests.

Supplementing that is the nation's largest WiFi network by a wide margin, with some 20,000 hotspots, something none of our competitors match.

Plus we have the many benefits of having a GSM-based network technology.

It's the predominant wireless technology globally, which means that it gets broad R&D, a wide range of devices, and very attractive cost curves.

GSM technology offers another advantage.

Like CDMA, it allows for simultaneous voice and data sessions.

It lets you talk and access data at the same time.

And looking to the transitions that will take place over the next few years, UMTS is the natural precursor to LTE, so it has advantages in terms of forward compatibility with LTE, with respect to handset design and the ability of devices to inner-operate on a global basis between 3G and 4G networks.

UMTS and LTE paired together will be the predominant technology platform for years to come.

That's a quick profile in terms of our wireless network capabilities.

Now, in terms of usage.

The industry has seen unprecedented growth in wireless broadband volumes.

At AT&T, we're seeing more of those volumes because we support twice as many smartphones as any of our competitors.

So, as we show in the bar chart on this slide, over the past three years, our total mobile broadband usage is up some 5000%; and in 2009, just the past year, usage is up 200%.

I believe one term for this phenomenon is that it's a high-class problem.

We're absolutely thrilled to have customers who use our advance devices and applications.

Customers with smartphones with advanced data capabilities are more engaged more times per day, evidenced by their usage profiles.

Their expectations are higher because value and utility are higher.

And all of these things are positive for the industry and great for our business over the long haul.

To get ahead of these changes in volumes and expectations, we've executed a number of major initiatives, which are summarized on slide 11.

We've made significant investments in 2009.

We added some 1,900 new cell sites; added more than 100,000 new circuits for backhaul -- four times our 2008 total; we've doubled the number of fiber-served cell sites we have.

We've made great progress on 3G overall, expanding to more than 360 cities.

And most important, we completed an extensive spectrum conversion using our 850 megahertz spectrum for 3G.

850 is the original cellular spectrum -- it's very high-quality with terrific propagation characteristics.

It's very effective penetrating buildings, for example.

We exit 2009 as the only US service provider that has the vast majority of its customers covered with a 3G voice and data offering in this spectrum.

As customers make the shift to more data-intensive devices, we think this is important for the perceived quality of their overall experience.

The result of this work is that we're moving aggressively in the right direction.

When you look at our network performance nationwide over the past year, our composite quality index for voice is up 22%; data throughput increased more than 19% during the past year; 3G block calls are down 25%; 3G dropped calls are down 22%.

And we have very high levels of call retainability nationwide -- that's the inverse of the dropped call rate -- within two-tenths of one percentage point of the only higher score in the industry, based on independent tests.

That's the nationwide view.

Now I want to take a few moments and talk in detail about our progress in two very high volume markets -- New York City and San Francisco.

Given our high smartphone numbers, double our closest peer, in both markets, we have large population centers, very sophisticated users with high expectations, and very high volumes.

For example, in the dense areas of New York City, there are periods during the week when nearly 70% of the devices active on the network are data-intensive handsets.

So, raising performance levels in these two markets is the organization's top priority.

We put all the resources available against the issue and we're closing the gap.

Slide 12 has the details.

Let me cover what we've accomplished in the past 90 days.

First, we've added cell site controller capacity.

In New York in particular, the gating factor was equipment capacity.

We had to work with our vendor to get upgrades put in place.

Those are now mostly behind us, which allows us to add radio capacity.

The process of changing out radio equipment may cause variations in performance in particular locations on specific days -- that's just the reality of the work.

That said, our 3G voice composite quality index has improved in each market over the past 90 days, with three consecutive months of improvement in New York and a significant step up in Manhattan as we close the year.

Again, these numbers tell us we are closing the gap against our immediate target, which is the performance level we achieve today in our top performing markets.

That's what we've accomplished over the past three months.

Now, what do we expect to accomplish over the next 90 days?

We're adding third and fourth radio network carriers to maximize capacity on available spectrum.

In Manhattan specifically, now that we have scalable cell site controllers in place throughout most of the island, we're intensely focused on putting more radio capacity on the street.

We'll increase the amount of 3G spectrum and radio capacity by one-third in high volume areas of the island by the end of the first quarter.

While we are through the majority of our zoning challenges in the Bay area, we'll continue to work the remaining issues we have in parts of the Financial District and a handful of other locations to final resolution.

We're adding cell towers; and over the coming months, we're building and upgrading high-capacity antenna systems to boost performance in high-traffic areas like stadiums, convention centers, and public transportation routes.

In short, we've got an aggressive plan.

We're working closely with equipment companies.

Together, we're creating solutions that will benefit everyone, as usage continues to grow across the industry.

We expect significant improvement in both markets in the coming months.

Beyond these market-specific efforts, the major network initiative we have underway is our nationwide HSPA 7.2 deployment, which is outlined on slide 13.

HSPA 7.2 is a very big deal for the industry and for our customers.

It's today's real opportunity to increase speed and there is an echo system to support this change now.

With software and backhaul upgrades, HSPA 7.2 has the ability to double the theoretical peak speed of the 3G network to 7.2 megabytes.

It will deliver those speeds to customers well ahead of the time when an LTE ecosystem with handsets is available.

And as we continue to move to LTE, it will provide a much more robust network experience when customers move outside of 4G locations, especially around the globe where LTE will take time to achieve ubiquity.

7.2 is a major advantage.

Carriers around the world are implementing it.

The technology is available now.

We already offer 10 devices that are 7.2 capable, so customers will be able to experience its benefits in the near-term.

We're very pleased to say that one of the 7.2-enabled devices that will have connectivity on our network is Apple's new iPad, which was unveiled yesterday.

As Rick said earlier, we're really excited about the device, and we work closely with Apple in planning for its connectivity on our network.

AT&T is a natural fit for the iPad, given the combination of the ever-improving speed of our 3G network and our robust WiFi capabilities.

We have a thorough technical understanding, with a good read on the iPad's usage requirements and characteristics, and all that is included in our network plans for 2010 in the plans I'm sharing with you this morning.

Here's where we are with our 7.2 deployment.

We've already turned up 7.2 software in our 3G cell sites nationwide.

That alone improves consistency in accessing data session and increases network efficiency.

The next step is to build out backhaul, focusing first on our highest trafficked cell sites.

This is the same build we would do for LTE, so it's a seamless, efficient and forward LTE-compatible deployment.

We anticipate that the majority of our mobile data traffic will be carried over the expanded fiber-based backhaul by the end of this year.

The bottom-line is that the nation's fastest 3G network will continue to get even faster throughout 2010 and 2011 in a process that is a natural progression to LTE.

7.2 will be a major differentiator for AT&T in the marketplace.

It's an upgrade that's not available to non-GSM carriers.

Our technology allies are excited about the deployment and we are as well.

Early field results from the 7.2 software turn-up are encouraging when supported with fiber-based ethernet.

Our first metro clusters show average throughput increasing nearly 50% during peak conditions -- a meaningful and noticeable improvement to a customer's experience.

To that end, wireless is our number one investment priority.

You see that commitment in our 2010 capital plan, which is summarized on slide 14.

We're budgeting total capital investment this year in the $18 billion to $19 billion range -- that's up 5% to 10% overall versus 2009, with investments in wireless up substantially.

We're getting more for every dollar of wireless investment.

Today, $1.00 of wireless investment yields twice the capacity as it did a year ago.

Even so, we'll see a substantial increase in wireless and backhaul Capex, which will be about $2 billion.

The amount of capacity we'll add to our wireless network in 2010 will be 2X what we did last year.

We plan to deploy 2,000 new cell sites.

Radio network controller and additional carrier installations will be 2X what we did in 2009.

Deployment of ethernet backhaul connections to cell sites will be 10X.

We'll continue to be aggressive with fiber-to-the-cell-site deployments -- 3X what we did in 2009.

Plus we're expecting regulatory approval to acquire properties from Verizon related to its Alltel divestiture.

With completion of that deal and integration of the networks, our 3G coverage would increase by more than 400,000 square miles.

And we'll continue with LTE trials in two markets.

Beyond wireless, our 2010 investment plan calls for continued expansion of our U-verse deployment -- on track with our plan to reach 30 million living units by the end of next year.

Our investment in enterprise capabilities will continue to be robust.

This includes an aggressive move to enhance our in-territory business broadband speeds in over 2,200 wire centers in 2010.

This will be a very nice complement to the advanced speeds and performance already afforded business customers inside of our U-verse footprint.

We'll devote increased capital to projects that we will give the umbrella name, One AT&T.

This includes work on unified support systems; converged customer experience; common care portals -- a whole host of projects designed to improve operations, eliminate unnecessary duplication, elevate the customer experience, and eliminate costs.

Continual process improvement and cost improvement is a major area of opportunity for us.

We approach those opportunities with great discipline and persistence.

In summary, a strong capital investment program, a level frame by the expectation of regulatory and legislation decisions relating to the telecom sector will continue to be sensitive to investment.

I hope this overview has been helpful.

Rick, I'll turn it back to you.

Thanks, John.

And let me turn now and I'd like to cover with you wireline results, starting with consumer trends, which are on slide 15.

There are a number of forces at play, as you know, in the consumer space, but the dominant change for us has been the growth of our U-verse platform.

As our U-verse customer base continues to scale, we're seeing steady and significant changes in our consumer revenue profile and steady improvement in trends.

This was our third straight quarter with an improved year-over-year growth rate for consumer.

U-Verse revenues nearly tripled over the past year, and on an annualized basis, now approach $3 billion.

Our total consumer wireline IP revenues -- that's U-verse services plus non-U-verse broadband, which represent an annualized revenue base of more than $7 billion -- grew better than 30% again this quarter.

In the fourth quarter, these products represented 35% of total consumer wireline revenues, and that's up nearly 1,000 basis points over just the past year.

Our U-verse TV subs were up more than 1 million in 2009.

We've had very steady results throughout the course of this year, including 248,000 net adds in the fourth quarter.

Attach rates continue to be high.

Our U-verse broadband attach rate continues to run well above 90%; our U-verse voice attach rate is in the 70% range; and more than three-quarters of our U-verse customers were either triple or quadplay, combining TV, broadband, voice, and wireless.

Across all eligible living units, U-verse TV penetration now approaches 13%.

In areas marketed to for 24 months or more, overall penetration is better than 20%.

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

We posted our eighth consecutive quarter of year-over-year growth in revenues per household.

Looking at declines in consumer connections, we had a 30% overall improvement versus the fourth quarter a year ago.

Again, as U-verse scales, we're starting to see meaningful directional changes in our overall consumer business.

Next, let me also provide a quick update on wireline business trends, which are on slide 16.

The fundamental trends underlying our business are consistent with what we've seen in the first half of the year.

We have seen some encouraging signs, but no real turn in economic conditions.

Competitively, we continue to do well in the market and we continue to seek good growth in our most advanced business products.

Revenues from strategic business products -- ethernet, virtual private networks, applications, services and such, were up 17%.

Business IP data revenues were up better than 7%.

Our total business revenues declined 5.5% versus the year-earlier quarter, and 4.9% for service revenues, which exclude equipment sales.

They were down just four-tenths of a percent sequentially.

This was our best sequential comparison in business revenues in five quarters.

Looking ahead to the next few quarters, prior-year comparisons are more favorable.

During the past year, while we've dealt with economic pressures in the business space, we have continued to invest to expand our network reach and to strengthen our product portfolio.

We've been very aggressive on cost initiatives, which has allowed us to maintain stable business margins.

These things should give us good leverage as growth returns.

Looking ahead, we're watchful regarding the economy.

The key -- one of the keys will certainly be employment growth.

And longer term, we have tremendous global networks and solution sets, and so our outlook for business continues to be positive.

Now let me close with a look at margins and cash flow.

Our consolidated margin comparisons are on slide 17.

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

And even with the charges that we've booked in the past couple of quarters, that's what we delivered -- with continued strong wireline margins and improved wireless margins.

This reflects a sharp, disciplined approach to cost management across our operations.

We made good progress this year on cost improvement initiatives in areas such as billing, customer care and network operations.

We reached agreement on good union contracts with our major unions.

For the year, our total force was down approximately 20,000.

Wireline operating expenses declined 1.5% for the year and 2.7% in the fourth quarter, even with increased pension and retiree benefit costs, compared with 2008.

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

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

Slide 18 provides a cash summary.

For the full year, cash from operations totaled over $34 billion, and capital expenditures totaled $17.3 billion, in line with our guidance.

Free cash flow before dividends was a record $17.1 billion and dividend payments totaled $9.7 billion.

In terms of uses of cash, we have reduced debt.

Net debt is down more than $10 billion over the last six quarters.

In December, we increased the dividend for the 26th consecutive year.

Our balance sheet is sound.

Our debt metrics are solid and improving.

We have the flexibility to retire additional debt, as it comes due, to continue to invest in the business, while at the same time, returning substantial value to share owners.

Now I'd like to close with a quick recap, which is on slide 19.

And when you look at our business and you look at our results for 2009, there clearly are a number of things that I believe set AT&T apart.

We have a terrific wireless opportunity as we roll out HSPA 7.2 and upgrade backhaul.

We're aggressively investing for the next generation of growth in wireless broadband.

Our U-verse platform is performing very well and it's gaining scale to the point it's beginning to meaningfully change our consumer revenue profile.

We expect continued solid U-verse growth.

We have the industry's premier business capabilities.

Despite the economy, growth in IP data and advanced business products continues to be solid, and business margins are stable.

We have substantial opportunities on the cost side of our business and a solid track record of delivering cost savings, to maintain and support margins and to drive strong cash flow.

Plus, we have a proud history of returning substantial value and cash to our share-owners.

I might add to this list two more things.

First, we have a clear vision and a positive long-term outlook for the business.

It's hard not to get excited when you look at what's ahead for our wireless business, and when you look at how U-verse is scaling, and when you consider the strength of our business franchise.

And second, looking more closely at the year ahead, I believe we have an achievable positive outlook for 2010.

Given the economy, we're appropriately conservative in our approach -- I think that's what you would expect of us.

With that said in 2010, we expect to deliver stable consolidated revenues, with stable-to-improving margins and EPS.

That includes the additional cost of approximately $0.05 to $0.06 associated with the acquisition of Alltel properties that we expect to close early this year.

We do not expect additional pension retiree benefit cost pressure in 2010.

We expect wireless service margins in the low 40% range this year and in the mid-40% range longer term.

And as John outlined a few minutes ago, we're targeting Capex in the $18 billion to $19 billion range.

We're expecting free cash flow that's generally in line with 2008 levels.

Results this year were helped by the timing of some tax payments, by lower capital expenditures, and by improvements we made in working capital.

But we're essentially saying that our cash trends are going to remain strong and steady.

That allows us to maintain a strong financial position, while at the same time, continuing to return value to our owners.

Brooks, that concludes our prepared remarks.

I think we're ready for Q&A.

Okay, great, John.

Now let's open up the lines for questions.

(Operator Instructions).

Simon Flannery, Morgan Stanley.

First, Rick, just a couple of clarifications on the 2010 outlook.

If you'd just talk to us about the pension and OPEB impact, what you're assuming in that guidance for the Alltel closing and anything else that we should know, sort of depreciation or amortization year-to-year.

And then for John, I think you talked quite a bit about the LTE.

Perhaps you could give us more color on timing on that.

And also, is there any consideration being given again to HSPA Plus?

Or is going to be straight from 7.2 to LTE?

Thanks.

Thanks, Simon.

Let me address your questions regarding some of these individual factors, and then what I might do is step back and give you a little bit of additional color on our outlook for 2010.

First of all, in terms of pension and OPEB costs, as I said, we don't expect any additional pressure in 2010.

In fact, I think pension and OPEB costs will be slightly less in 2010 than in 2009.

That's a factor of strong returns in our benefit funds that we had in 2009, less -- we're moving at the end of the year for 2010 to a lower discount rate, which increases expense.

And then it also reflects the progress we made in bargaining with respect to both pension and post-retiree medical costs.

That benefit there will be offset by some dilution that we'll have from our wireless acquisitions, and primarily, that dilution will come from the Alltel transaction.

It reflects the fact that the bulk of those customers and the networks we're acquiring are CDMA.

And so we'll be spending both capital and expense dollars to build out the GSM networks and GSM footprint in those territories.

And as well, we're going to move as quickly as possible to transition that customer base to GSM.

In order to do that, we'll have to subsidize devices and we'll have to touch a lot of customers and incur the costs to do that.

But we will move through that as quickly as possible after closing the acquisition.

In terms of depreciation and amortization, there's a little bit of reduction and amortization in the year.

It's going to be offset by increases in depreciation.

To some degree, the increase in depreciation reflects the fact that over time, the mix of our capital expenditures has shifted somewhat.

In today's networks, you're spending more capital associated with software.

And obviously, with our U-verse deployment, we spend capital associated with the CPE and the devoices in the home, like the set-top boxes.

All of those are depreciated over shorter periods.

So, net, probably a slight increase in expense when you look at depreciation and amortization combined.

Now, as I said, let me take a minute and step back and put some color around the outlook.

First of all, we, as you would expect, continue to expect solid wireless revenue growth as we move into 2010.

And that will be driven by continuing to penetrate the base with integrated devices and grow data revenues, as well as the growth opportunity we see in emerging devices.

On the wireline side of the business, we'll continue to see in 2010 some pressure from reductions in voice revenues.

However, as you've seen the last three quarters, we are seeing improving trends in consumer.

And in this last quarter, we've seen some improvement in business trends.

So, when you put all of that together, I think we're confident that revenues will be very stable in 2010.

Now, as you move to margins, again, we expect increasing margins in wireless, and we expect, though, some continuing pressures on margins in the wireline business.

That wireline margin pressure really comes from, over time, the changing mix of the business.

As voice revenues are reducing those legacy voice revenues, tend to carry higher margins.

Some of the new products that are in their growth phases, both data products as well as video, are lower in margin.

And that creates the pressure.

In 2009, I think we did an excellent job of mitigating that pressure as we went through the transition.

A lot of that has to do with John Stankey and his team, who's here with us today.

As we go forward into 2010, we're going to have to continue to work through that transition.

We're going to have to continue to focus hard on costs; and at the same time, focus on growing margins in these new services as they scale.

If we're successful in doing that in 2010, as we were in 2009, we have opportunities to grow, on a consolidated basis, operating margins in 2010.

And that would drive growth in EPS as well.

So I hope that helps with respect to some color around the outlook.

I would tell you, as I did in the formal remarks, we are cautious in guidance at this point in time.

We believe the economy will continue to improve, but the improvement will be slow.

And frankly, it's -- I think the economy is still very fragile at this point in time.

But to put it in perspective, we finished the year for 2009 with $2.12 in earnings per share.

That's probably $0.10 to $0.12 higher than I would have thought last year at this time -- again, being cautious with respect to the environment.

So as we go forward into 2010, I think we have a similar kind of opportunity; it's going to require some very good execution on the cost side of our business as we work through some of these transitions.

So I'll stop there and John will let you address the questions on LTE.

Simon, I don't see any differences in what we'd previously said in terms of our LTE timing.

We are past the assessment phase, and know where we're going on the technology and how we're going to deploy it.

As you heard, we're going to be deploying in two markets to test and validate it in more of a production environment during the course of 2010.

My assessment of the stability of the technology and the full complement of capabilities that are necessary to go to a commercial release that would support our application for LTE is that I don't expect that to be mature enough until 2011.

That's consistent with what we have been forecasting for some period of time.

So you should expect to see us be in a position where we can probably begin to introduce that into the customer base in small parts of our territory in the 2011 timeframe without having a more meaningful footprint and scaling until 2012.

And that's probably pretty consistent with when we also see devices that are the right kind of devices that people are likely to use, start to emerge.

Now, I'd like to hope that it's sooner.

It'd nice if it was.

I think the good news is that if it matures faster than what my more cautious outlook would suggest right now, we're probably in a position to do that.

We're doing all the hard work stuff now.

The hard work is getting the backhaul in place and getting ourselves in a position where we have the infrastructure right, including the antennas.

And if the electronics and the software comes along and the ecosystem develops quickly, then we can probably move to go a little bit faster.

But I'm not optimistic that that's going to happen at a faster pace than what I just articulated.

Our view on 7.2 Plus is probably going to be driven by that pace and what we expect.

We haven't made any clear declaration as to whether we will do 7.2 Plus, but it's an option that's available to us.

And it really ties into one of the big enablers is getting the antenna work done for LTE, just like getting backhaul in place is a precursor step; getting the antennas in place for LTE opens up the 7.2 Plus option for us.

If we see that the time frames are kind of extending out or are going to be problematic, we probably are more inclined to do more 7.2.

On the other hand, if we don't have to pull that lever because we get quicker moved to LTE, we may opt not to do that.

The nice thing is we have the choice.

And there really isn't a lot of incremental work to choose to do 7.2 if we decide we want to deploy.

Great.

Thank you.

John Hodulik, UBS.

Two quick ones.

First, on the iPad.

Could you just talk about the economics of that?

I think some people are concerned, given the $30 price tag for the unlimited service.

I think you've said in the past the iPhone was similar to a high-end postpaid customer.

Is it -- maybe talk a little bit about some of the cost offsets you have, as far as the subsidies and that kind of thing.

And then digging down a little bit into the free cash flow guidance, it looks like about a $4 billion decline on a year-over-year basis.

And I see the Capex seems to be a $1 billion to $1.5 billion of that; but where's the other $2.5 billion in free cash flow decline coming from?

If you could walk through the components of that, that'd be great.

Sure, John.

First of all, on the iPad economics -- it is a substantially different model from our typical postpaid customer economics, in that we're not subsidizing the device.

Customers will buy the device.

They'll activate it on an online basis, so -- and they will pay for it via a credit card, paid in advance.

So we don't have the normal acquisition costs, the setup costs, billing costs, so on and so forth.

And so then it really comes down to forecasts and estimates for usage on the device.

And there, our expectation is that that device is going to be somewhere between our highest usage integrated devices, say an iPhone, and a laptop kind of environment.

We believe, though, the device, based on where we believe it will be used -- in homes, in offices, coffee shops, bookstores, airports, so on and so forth -- will be used a substantial amount of time in a WiFi environment.

And so we'll just -- we'll have to monitor this usage as the device gets out there.

And if it's substantially different, we'll adapt to it.

But right now, I think the economics will be very positive because it will be a very low-cost device for us -- no cost, really, in terms of acquisition.

On -- in terms of the free cash flow guidance, let me try to describe that a little bit.

We had a terrific free cash flow year in 2009.

It was helped and assisted by the fact that there were some incentives from a tax standpoint in place in terms of accelerated depreciation on capital investments.

Plus our overall Capex levels were a little lower than what we're planning for 2010.

And third, we put a very strong emphasis in 2009 on improvements in working capital and we achieved some substantial success there.

Even in the economic environment that we're in, we were actually collecting receivables faster.

John Stankey's team in Operations did a great job in managing things logistically with respect to our inventories and our construction work in process.

And so, all of that helped 2009.

As we move to 2010, clearly, the tax incentives with respect to capital investment are bit unknown at this point.

You heard the President in the State of the Union mention it last night as something he's supporting.

And hopefully, it will be supported and extended for 2010; but we're uncertain of that at this point.

We will continue to focus on working capital and I think we still have opportunities for improvement, but probably not to the degree that we saw in 2009.

So it's really those three items -- the taxes, the working capital, and then the Capex levels -- that make up any difference that you see between 2009 and '10 levels.

Great.

Thanks.

Jason Armstrong, Goldman Sachs.

One just data point follow-up on the iPad announcement.

Is there a revenue share built-in for the $15 and $30 plans there with Apple?

And then, two, I guess, bigger picture question -- first, on wireless margins and the outlook into 2010.

This quarter, we saw big uptick in integrated devices.

And I'm just wondering, the low 40s margin guidance in the next year -- does that accommodate this level of integrated device subsidies that we saw this past quarter?

And then second question, just on U-verse video, another good quarter of net adds.

You opened up a lot of markets during the quarter.

How should we think through your trajectory relative to penetration of existing markets versus getting a bump from new market launches?

Thank you.

Thanks, Jason.

Good morning.

There are no agreements with respect to revenue share on the iPad for either the $15 or $30 plans.

In terms of wireless margins, yes, our expectation for 2010 includes continued focus on sales of integrated devices.

And as you know, we're going to be launching, in the first half of the year, some additional devices, including a number of devices based on the Android operating system.

And so we'll continue to focus there.

It's still a terrific opportunity for us.

We're at about 46% penetration of our postpaid base.

We're selling at a rate that's 70% and has been climbing, in integrated devices.

And I think, ultimately, integrated devices as a percent of postpaid can move into the 70% to 80% range.

So we're going to continue the focus there.

One thing to keep in mind on margins, again, the margins were up slightly sequentially.

We had a similar number in the fourth quarter as we did in third quarter of integrated device and iPhone sales.

But in the fourth quarter, you always have higher levels of advertising and promotions associated with year-end and the holidays.

And that was no exception in this fourth quarter.

Compared to third quarter, that higher level of advertising and promotions impacted margins about 100 basis points.

So as we go forward, obviously, you'll see that kind of seasonality in the fourth quarter, but not necessarily throughout the rest of the year.

And then, finally, on U-verse trajectory, as John said, we'll continue to open new markets.

John's team is continuing to build toward the 30-million home target that we have.

That build will be steady.

We'll be opening up new markets this year.

Many of those will be in the Southeast.

Our expectation for U-verse is to continue -- market permitting -- continue to grow at the kind of rates that you've seen us grow over the last four or five quarters.

And Rick, is there any way you can add some granularity around what the existing markets are doing?

Just some sort of penetration stats so we can map that?

Well, I think the best one, Jason, is what we mentioned in the presentation, I believe -- that in those markets that we've had open for 24 months, we're in the 20's in terms of penetration and still climbing.

And so I certainly think this product can grow into the -- I think our next target would be in those markets, growing it into the 30's in terms of penetration levels.

And you know, it's -- in just about all of the markets, I mean, it tends to grow at a percent or so a month, in terms of penetration.

That's great.

Thanks a lot.

David Barden, Bank of America Merrill Lynch.

Just two, if I could.

First, Rick, you talked about the 70% of gross adds being integrated devices, which are 80% higher in ARPU than the installed base.

The math implies that all the installed base is actually in a kind of negative revenue trajectory.

And we've heard in the past that it was economic-related or roaming related, right-sizing.

Could you kind of talk about your expectations in this year about how that non-integrated smartphone base could evolve, especially given some of the evolution in the pricing dynamic we've seen in the last few weeks?

And the second question would be maybe for John, if you could.

We've been talking a lot about MPV for some of these devices, and the big missing piece is that they have big capacity requirements.

Is there any way to put a dollar number around a certain amount of capacity requirement, like $5 of Capex for a gigabyte or $1 for 100 megabytes a month?

Is there some way that we could put that element in the analysis?

Thanks a lot.

David, on ARPUs, we have seen this year some pressure in ARPUs primarily on voice.

Some of it I think is certainly economic-related; people managing their plans and their voice spend; less travel, less international roaming and long-distance, for example.

I think that will improve as the economy improves.

What you see happening in the base is -- the reason we're penetrating the base further in integrated devices is that, number one, it's a high percentage of our sales to new customers, but also, we've got existing customers migrating to those devices.

And that's really where that revenue opportunity is and ARPU opportunity is, as they migrate to a high-end device, an iPhone or a blackberry, they're adding $30-plus in data usage.

And with the pricing we rolled out at the beginning of January, it's also important to think about the next tier of devices -- devices we call quick-messaging devices, consumer touch devices.

These are devices that certainly are designed to be very effective in terms of messaging; also have capabilities in terms of browsing and email.

Those devices represent about 25% to 30% of our sales, generally.

And with the new pricing that's put in place, we'll be moving those customers and devices to include $20 worth of recurring data services.

We're giving customers a lot of flexibility in terms of being able to design it based on their needs, so they can put on a $20 unlimited messaging package, or they can put on a combination of a messaging package and Internet access and email usage.

But as that pricing change moves through that part of the base, as more customers upgrade to those devices, as we continue to sell them, there's some additional ARPU opportunity there.

So, our expectation is, with all of these moving changes, to still drive ARPU growth in the postpaid base.

Dave, I'm not comfortable in providing you with my cost per bit.

You can bet we have it and we manage it aggressively and look at it aggressively.

I did try to give you a little bit of a flavor in my comments, that if you kind of look at where we sit today versus a year ago, it's costing me half as much to move that bit today than it was a year ago.

And I would tell you, we're actively working that.

We know that scaling and getting better yields is part of managing the dynamic in the IP space.

We've been doing that on the wireline side for a number of years.

And if you look at the levers we're pulling right now to make that happen, and that we'll continue to pull, is -- one is what I would call engineering and technology.

We're getting some lift from better capabilities on the equipment and features that are being enhanced that allow us to better manage capacity and load in the infrastructure, and how we engineer it to get more erlangs onto the system.

And we're learning a lot about that in the data world, and getting better month-over-month and year-over-year.

Two, integration.

So once you get out of the aggregation layer and you start getting to a point where we can consolidate our transport, we have a great opportunity to scale the assets that we put in place on the wireline side, and we're doing that.

We're not building incrementally to haul data traffic.

We're trying to bring as much of that traffic onto the core and aggregation layer of the network as we can.

And then, three, good old-fashioned commercial aspects of how we're buying and paying for equipment.

And once again, because we're on that global supply chain -- and we're on a technology right now that's not only giving us increased speeds, but is getting a little bit longer in its maturity cycle -- we're getting the benefit of pricing benefits that kind of roll in, in the latter part of the lifecycle.

And you add all those things up and we are getting better yields; but that's as far as I'm willing to go.

We'll get the cost per bit next quarter.

Thanks, John.

Somebody else is going to give it to you.

Phil Cusick, Macquarie Research.

Hey, thanks for taking my questions.

So, sort of in the same vein.

First, can you talk about the timing of wireless Capex?

It sounds like you're going out and spending really as fast as you can.

Is this really going to be a front-loaded number for this year and does it slow down in the second half?

Or is it more steady?

And then, second, as you talk about that cost per bit coming down in a real way, is the pricing we see on this iPad sort of indicative of longer-term reductions in the pricing for downloads and PC cards and things like that, as you try and drive that into the mass market?

Or is this really just a total separate economic decision?

Thanks.

So on the second question, I would say I think it's more indicative of the evolution you're seeing.

I don't think it's unique to this particular device.

And manufacturers are doing an awful lot of work in -- there will be decisions that folks have to make as you go to a new era of interface transition.

Do people want to take the cost of putting two era interfaces in LTE and UMTS?

Or do they want to take the price curve on UMTS?

And I think you'll see, depending on the device and the application, a stratification that will occur.

There will be some devices that don't require higher speeds and want to go with the better cost curve on the attachment rate.

And as a result of that, they choose to use a different dongle or a modem interface.

That's one of the beauties of having both era interfaces in your network, as you can capture both aspects of that technology.

In terms of the spending profile, we've been working really hard to build -- I'll call it muscle and capacity -- in the infrastructure and our ability to deploy it and spend it.

I think we've gotten a lot better in that regard.

You heard Rick talk about the improvements in working capital.

Part of that is because we're just becoming a lot better and more precise around how we do our project integration and how we build networks.

I think you're seeing improved effectiveness and efficiency, and that's improved capacity as well.

And frankly, what you're probably going to see this year is a very -- a much flatter spend than you've historically seen in wireless Capex.

It's still not going to be perfect.

My goal is four straight quarters of exactly the same amount of money.

That's kind of what I'd like to see from an execution perspective.

We're not quite there but you're going to see a much more even continuum across the year than probably what you've seen in years past.

And no, you shouldn't expect it to tail off and fall into oblivion in the fourth quarter.

Thanks, John.

John, we have time for one more question.

Michael Rollins, Citi Investment Research.

Rick, you mentioned in some of your prepared comments that you are seeing some signs, early signs, of the economy stabilizing or approving.

I was wondering if you can give us some more of those details of what were behind some of the signals that you're watching.

And then the other part of the question is, are you seeing any meaningful differences in signals out of the large global enterprise segment versus what you're seeing out of the small business segment?

Thanks.

Sure, Mike.

I think, as we've talked in the past, particularly with respect to the business segment overall, I think we need to see growth in employment; we need to see growth in business fixed investment.

That's why tax incentives on investment continue to be important.

And we need -- on the small end, small business, we need to see capital available and new business formation begin to increase.

Those are the things from an economic standpoint I think we need to see.

What we'd seen up to this point, if you look at all the economic indicators, is we've seen some of the trends flattening somewhat.

And so they're not necessarily trending down as they were six or nine months ago.

But we haven't seen significant improvement yet.

And that's why I think we're cautious as we go into this year.

A couple of signs that I think are positive as we talk with and work with business customers -- some projects that, particularly our large business customers have had that they've had on the shelf for a period of time, they are beginning to become active again and look at funding those projects, particularly in areas that can help their businesses become more efficient, more cost-effective.

And that's an area that's a sweet spot for us.

We play very well in that space.

So I think that's encouraging.

Although, as you know, particularly on the large business accounts, there's a time cycle before those efforts and those RFPs turn into revenues that we can book and talk about with you.

We've also seen some cases in the government space where we've got some states, for example, that are looking at more outsourcing type arrangements.

We also see that in our enterprise customer base.

And again, that's an area that's positive for us that we participate very well in.

So, when I step back from it, and if we just think about employment, for example, our outlook is that we're not going to see probably significant growth in employment in the early part of this year, but we hope to begin to see some improvement as we get later in the year.

And again, that kind of fits in with the cautious stance we continue to have.

But over time, again, I think the important thing is that with our business customers, we're very well positioned; we have the capabilities and the services and the network reach; we're positioned well in the services with a lot of growth potential.

So, as this economy turns, I think we're going to do very well.

And are you seeing anything different in small business versus the large -- you mentioned some of the data points in large -- anything on the small that would be encouraging?

I think small business is still challenged right now.

And again, it's a case where we're going to need to see some growth in new business formation.

We're going to have to see more capital available to small business.

So I can't tell you that we're seeing, at this point, significant improvement from an economic standpoint.

That's very helpful.

Thanks.

Folks, I'd like to close with just a few comments about the quarter and also about the opportunities ahead.

First, I want to thank everyone for being with us today and taking part in the call.

In 2009, as I said, I think we executed well.

I think we delivered what we outlined we would for you.

We closed the year well.

And we strengthened what we believe is the industry's strongest telecommunications platform.

We had terrific wireless growth.

We extended our leadership in mobile broadband.

AT&T U-verse is scaling well with continued solid net adds.

It's becoming all that we envisioned in the product and more.

Growth in advanced business services continues to be encouraging, and we also made good headway on costs, which helped us to deliver strong margins in both wireline and wireless.

We delivered record cash flow for the year, and we continue to return substantial amounts of that cash to our share owners through a strong dividend.

As we look ahead, we're confident about the business.

Our outlook is positive.

I think there are a number of things that set AT&T apart in the marketplace.

We have the best path forward to capture the next generation of mobile broadband growth.

You heard John talk about it today.

HSPA 7.2 gives us an important edge with a major step-up in speeds and an elegant migration path forward to 4G.

We have premier global business capabilities.

We continue to invest to further our networks and our product sets.

We have powerful IP platforms for both business and consumer products.

U-Verse has excellent momentum, and it's reached a scale where it's now beginning to impact and improve our overall consumer trends.

We have strong and improving wireless margins, with opportunities for further expansion in 2010 and in the years ahead.

We've maintained, at the same time, strong wireline margins.

We're sharply focused on cost improvement initiatives to continue to support those wireline margins.

And all of these things put us in a good position to continue to deliver solid and strong cash flow, with contributions from both our wireless and wireline businesses.

So I think while we're realistic and appropriately cautious about our outlook and about the current environment, we're well-positioned and we're excited about the opportunities going forward.

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

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

Thanks, everybody.

Have a good day.

And ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T's executive teleconference service.

You may now disconnect.