AT&T Inc (T) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the AT&T first quarterly earnings release 2010 conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Senior Vice President of Investor Relations for AT&T, Brooks McCorcle.

Please go ahead.

Thank you, Rich.

Good morning everyone.

Welcome to the AT&T's first-quarter conference call.

As Rich said, this is Brooks McCorcle, head of Investor Relations for AT&T.

And on behalf of everyone at our Company we appreciate your interest, and it is really great to have you with us this morning.

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

Rick will provide an update with a perspective on the quarter and then we will take your questions.

Let me remind you that our release, investor briefing, supplementary information and the presentation slides that accompany this call are all available on the Investor Relations page of the AT&T website.

That is ww.att.com/investor.relations.

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

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 three, which provides a consolidated financial summary.

Before a previously disclosed non-cash charge relating to the taxability of retiree healthcare subsidies, first-quarter EPS was $0.59, which was up 11.3%.

First-quarter consolidated revenues grew year-over-year to $30.6 billion.

That was supported by a double-digit increase in wireless service revenues, continued mid-teens growth in strategic business products, and further AT&T U-verse gains.

Consolidated margins improved both sequentially and year-over-year.

We had substantial margin expansion in wireless, and wireline operating income margins were stable sequentially, reflecting solid execution in terms of our cost initiatives.

Finally, although down slightly from the first quarter a year ago, cash flow continues to be strong, with cash from operating activities totaling $7.3 billion, and free cash flow at $3.9 billion for the quarter.

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

Thanks, Brooks, and good morning everyone.

It is good to have you with us this morning.

Before we cover detailed results, as we typically do, I would like to start with a few comments on the quarter overall.

The highlights are on slide four.

First of all, I am pleased to be able to say that we had a terrific start to the year.

Earnings per share before the non-cash charge was up double digits.

Consolidated revenues were up.

Margins expanded; cash flow was strong, And I think all of these reflect good execution on the plans that we outlined for you in January.

Our wireless business continues to perform at a high level.

We had 1.9 million net adds, with continued strength in smartphones and connected devices.

Wireless service revenues were up double digits.

Churn improved to best-ever levels.

Postpaid ARPU grew again for the fifth consecutive quarter.

And most important, even with continued strong iPhone activations, we delivered substantial service wireless margin expansion to 44.5%.

The other area where we gained traction is in wireline consumer.

In fact, we achieved our first sequential improvement in consumer revenues in several years.

Our U-verse platform continues to scale.

We had a nice rebound in broadband net adds.

As a result, consumer IP revenues, that is U-verse and broadband combined, were up better than 32%.

In our business markets we have begun to see some early signs of improvement in the economy.

Revenue and volume trends have begun to stabilize, and sales of our most advanced services continue to be strong.

Across the operations we also continued to execute well on the cost side, and that has helped us deliver strong margins and cash flow.

So on a number of fronts a positive quarter and a good start to the year.

Regarding the broader economic environment, in January we said that as we looked at 2010 we modeled a continuing, but generally slow recovery.

And While the economy has begun to show some encouraging signs, we continue to operate that -- with that as a general framework.

So that means we are running the business in a way that allows us to deliver solid results that are not dependent on a quick economic upturn.

And because we focused on cost improvement in margins, we believe we are well positioned with good leverage when we do start to see meaningful improvement in the macro economy.

So with that as background, let's get into the detailed results starting with consolidated revenues on slide five.

Consolidated revenue trends have stabilized over the past few quarters.

And as Brooks has mentioned, in the first quarter they totaled $30.6 billion, up $78 million versus first quarter a year ago.

The key drivers are, first, wireless results that continue to be very strong.

Second, AT&T U-verse growth has driven steady improvement in our consumer trends.

And third, business revenue comparisons are improving and we are seeing signs that economic impacts may be moderating.

Our overall revenue mix continues to undergo a substantial transformation, increasingly weighted to wireless, to wireline data, and managed services.

In the first quarter 69% of revenues came from these categories, and that was up 900 basis points over the past two years.

Taken together in the first quarter these revenues grew 7%.

This shift in mix reflects broader industry and technology changes, but also the fact that we have moved aggressively to position our business out front in key areas, like mobile broadband, as well as advanced business products and IP-based services.

So let's move to wireless.

Our wireless results start on slide six.

I am pleased to say that our mobility business delivered another strong quarter.

Wireless service revenues were up 10.3% to $12.8 billion.

That was driven by continued strong subscriber gains with 1.9 million net adds, our best ever first-quarter total.

It was led by an increase in connected device subscribers of more than 1 million, which we have broken out for you starting this quarter -- things like eReaders, alarm monitoring and a host of other emerging products.

As you know, some time ago we created an organization devoted to growth in the emerging device space, and as you see in our results, those efforts are starting to pay off.

While ARPUs in connected devices are typically low, the churn and margin characteristics are quite attractive.

And it is an important growth area.

We believe the range of devices that will be connected wirelessly in the future will be both broad and deep.

Postpaid net adds for the quarter totaled 512,000, and with continued migration of the base to integrated devices.

Our churn levels also continued their steady trend of improvement.

Total churn was down 26 basis points year-over-year to 1.3%, and postpaid churn improved to 1.07%.

Both of those are at best-ever levels for us.

Customers are choosing AT&T, and equally, if not more important, more customers are choosing to stay with AT&T than ever before.

Beyond subscriber gains the other major driver of wireless revenue growth is ARPU expansion.

We lead the industry in postpaid ARPU, which was up again this quarter by 3.9%.

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

The growth in postpaid ARPU has been powered by mobile data.

The details are on slide seven.

In the first quarter postpaid data ARPU increased nearly 22%.

Wireless data revenues were up $947 million over the last year to now more than $4 billion for the quarter.

Mobile data is a $16 billion plus annualized revenue stream for us, a run rate that has doubled in just over two years.

To drive this kind of growth you need three things.

First, a great data network.

We carry about half of all the wireless data traffic in the United States today.

And as we will discuss in a minute, data throughputs have stepped up significantly with our HSPA platform.

Second, you need a broad data capable device lineup.

We have that today, and you should expect to see us continue rolling out terrific devices as we go through this year.

We have twice the number of smart phones on our network as any of our competitors.

Third, you need rich access to applications, again, an area where we lead.

In the first quarter data adoption was strong.

We added 3.3 million 3G postpaid integrated devices to our network to reach 26.8 million in service.

This included 2.7 million iPhone activations, more than one-third of them new to AT&T.

Customers with data plans grew nicely as well, up nearly 2 million in the quarter, and 8 million over the past year.

And in both of these areas we still have a lot of running room.

Only half of our postpaid subscribers have integrated devices, and our in-flow continues to expand, running above 70%.

Our integrated device customers are high-quality customers.

ARPU for integrated devices is 1.7 times versus other devices.

Roughly 60% of our integrated devices are on family plans, and another one-third are on business related plans.

So they are very sticky, with churn levels well below our averages.

Data usage trends also continued to expand.

In the first quarter text messages were up 52% to more than 140 billion, and multimedia messages more than doubled over the past year.

Mobile broadband continues to be the industry's number one growth driver, and it is an area where we are very well positioned.

Now let me give you a quick progress report on our major wireless network initiatives; the details are on slide eight.

In our last earnings call in January John Stankey, our President and CEO for Operations, shared with you our network plan and provided a look at key performance metrics over the previous 90 days.

We have continued to make good progress through the first quarter, the first steps in an aggressive program for the year -- adding an additional radio network carrier, adding cell towers, building and upgrading high-capacity antenna systems, and building our fiber backhaul.

All in, capital spending to support wireless was up over 30% year-over-year.

As we have explained, implementing these network enhancements does cause some variations in performance at particular locations day to day.

So the lines on some of the cards are not smooth, but the trends are clear.

First, with HSPA 7.2 software turned up nationwide in January, and with our backhaul deployment taking shape, we are seeing a significant step up in data speeds.

Companywide our 3G average data download speeds are up 25% versus a year ago based on internal data, and up 14% in just the past 90 days.

In areas where we have completed the backhaul in support of HSPA 7.2 internal data is setting speed improvements in the 32% to 47% range.

And that is very encouraging.

On the voice side we continue to have very high levels of call retainability nationwide based on independent tests.

We are seeing improvement in voice metrics in New York, where we have both very high data volumes and a high concentration of data users.

Over the past 90 days the internal data shows that 3G dropped call performance has improved in Manhattan and in the larger metro area.

We have added third carriers from midtown and downtown, supporting increased capacity in these high traffic areas.

Our 3G Voice Composite Quality Index, an internal metric which measures both connectivity and retainability, moved up 10% during the quarter in the New York metro area overall, and in Manhattan that index moved up 47% quarter over quarter.

In terms of download speeds, in Manhattan we are seeing average speeds that are close to our nationwide average.

Looking ahead we continue to execute our network plan, adding additional third carriers, adding fiber backhaul and Ethernet to cell sites in support of HSPA 7.2, as well as our migration to LTE, deploying in-building and venue solutions where appropriate.

Plus we are doing more with Wi-Fi.

In fact, our Wi-Fi customer connections were up more than five times year-over-year.

With our GSM technology foundation a seamless path through HSPA to LTE, we've got a terrific technology path going forward for customers, and we believe the best path forward to capture the next wave of wireless growth.

Now in addition to subscriber and topline growth and the progress we are seeing on our network initiatives, wireless margins also expanded this quarter.

Slide nine provides an overview.

Our first-quarter wireless service EBITDA margin was 44.5%.

That is up 380 basis points sequentially and up 200 basis points from the year-earlier quarter.

This reflects the strong revenue growth, the high quality of our subscriber base, reduced churn, as well as cost improvements that we made in the network and support functions for wireless.

As we announced a couple of weeks ago, starting with this quarter we've changed how we account for certain intercompany transactions as part of our effort to manage the business from an external customer perspective.

This did have an impact on segment margins, increasing wireless EBITDA margins by 160 to 190 basis points in most periods.

But it did not change the margin trends.

And the comparisons on this slide, as well as the comparisons we provided to you as part of our earlier disclosure, are all restated for this change.

Longer-term with continued growth in service revenues and ongoing cost initiatives, there is additional opportunity to continue to expand wireless margins.

Now I would like to turn and cover our wireline results, starting with consumer trends, which are on slide 10.

Again, this quarter we are seeing clear evidence that U-verse is driving a steady transformation of our consumer business.

And it is helping us deliver our first sequential growth in wireline consumer revenues in quite some time.

Our U-verse customer base continues to scale with 231,000 U-verse TV adds in the quarter to 2.3 million, and roughly 1 million over the past year.

Broadband and U-verse Voice over IP attach rates remain very high.

More than three-quarters of U-verse subscribers have a triple- or quad-play bundle with us.

And U-verse revenues continue to grow with more than a $3 billion annualized run rate.

And based on current trends we should exit the year with annualized U-verse revenues exceeding $4 billion.

Today we offer a 120 HD channels, more than our cable competitors in all markets where we compete.

And we continue to innovate, innovate with enhancements like our recently announced 24 megabit downstream Internet service in every U-verse market.

And U-verse mobile remote access, which lets customers use their wireless handset to navigate the program guide and manage DVR recordings.

In the first quarter wireline IP revenues, that is U-verse services plus non-U-verse broadband, grew better than 32%.

These products now represent 37% of total consumer wireline revenues, up 960 basis points over the past year.

As a result, we delivered our ninth consecutive quarter of year-over-year growth in revenues per household, and our fourth consecutive quarter of improved year-over-year consumer revenue comparisons.

We are now more than three-quarters of the way through our U-verse build, and we are on track with our plan to reach 30 million living units.

As U-verse scales we are starting to see meaningful, directional changes in our overall consumer business.

Next let me provide a quick update on wireline business trends, which are on slide 11.

In the first quarter we saw continued improvement in business revenue trends.

And that reflects good sales performance and some early signs of stabilization in business markets overall.

Key economic metrics, like industrial production and net business formations, have begun to improve.

We also see early signs of improvement in our own metrics.

We had our first sequential growth in enterprise LD revenues in six quarters.

We are seeing lower Company-managed wireless disconnects and better business access line trends.

We posted our best-ever year-over-year business revenue comparisons in four quarters.

And enterprise service revenues, taking out equipment, were nearly flat sequentially.

All of these trends are encouraging.

That said, I would caution that it is still early in terms of talking about a recovery in business revenues, and too soon to gauge the timing and the shape of the improvement to come.

We continue, however, to drive solid growth in our most advanced business products.

Revenues from strategic business products, like Ethernet, virtual private networks, application services, were up nearly 15%.

Plus we continued to do well selling wireless in the business space.

Looking ahead it is clear that the ability to build unified solutions for business customers that include wireless, mobile broadband in particular, will increasingly be a key differentiator for customers across all business categories.

I think that is a big positive for AT&T.

Our priorities in the business space have not changed.

We continue to invest to expand our network reach and to strengthen our product portfolio.

We have been disciplined on cost to maintain stable business margins, and both of these things will provide leverage as the economy recovers.

Now I would like to take a look at margins and cash flow for the quarter.

And the margin comparisons are on slide 12.

We told you in January that we expected to deliver stable to improved consolidated margins this year, with further wireless margin expansion and a disciplined focus on cost initiatives across the business.

In the first quarter I think it is fair to say we delivered what we said we would.

Our consolidated operating income margin was 19.6%.

That is up 80 basis points versus first quarter last year, and a 390 basis point improvement sequentially.

This reflects solid performance across the Company.

Wireline operating expenses were down 2.8%, with major cost initiatives on track, including continuing consolidation of operations as we make changes to improve processes.

In wireless we have made good progress in areas such as billing, customer care, and network operations.

Across the business bad debt expense continues to trend favorably, and total force was down by more than 6,000 in the quarter.

Companywide we have a commitment to operate as One AT&T, which first means delivering a single, seamless experience to customers for all of our wireless and wireline products.

And as we consolidate and integrate operations to do that, we also have continuing opportunities for cost efficiencies.

Along with solid margins, we also have continued to deliver strong free cash flow.

Our cash summary is on slide 13.

In the first quarter cash from operations totaled $7.3 billion.

Capital expenditures were $3.3 billion, including a 34% year-over-year increase in wireless capital.

As we outlined for you in January, we continue to expect full-year capital investment in the $18 billion to $19 billion range.

Free cash flow before dividends was $3.9 billion, and dividend payments totaled $2.5 billion.

In terms of other uses of cash our debt is down almost $5 billion over the past 12 months.

And we have the flexibility to retire additional debt as it comes due, while continuing to invest in the business and returning substantial value to shareholders through dividends.

I would like to close with a quick recap on slide 14.

When you look at our business and when you look at the opportunities ahead, we believe there are a number of things that set AT&T apart in this industry.

First, we have a strong wireless business that is setting the pace in terms of ARPU growth, revenue growth and margin expansion.

Wireless service revenues were up double digits.

Churn reached best-ever levels.

And we delivered a substantial step up in margins with further margin expansion opportunity ahead.

Most important, we are well positioned to capture the next wave of wireless growth.

We lead in integrated devices.

We have established ourselves as the leader in connected devices, a significant growth area for us.

We have a terrific opportunity as we continue rolling out the backhaul to deliver significant speed increases for our wireless customers.

We are seeing excellent throughputs already.

And we are aggressively investing for the next generation of growth in mobile broadband.

Our U-verse platform is gaining scale and is positively impacting our consumer trends.

We expect continued solid U-verse growth throughout this year.

We have the industry's premier business capabilities.

And we are hopeful that we are seeing the early signs of stabilization in business markets.

We have substantial opportunities ahead on the cost side of our business with continuing cost improvement opportunities that will both support margins and drive strong cash flow.

And we have a proud history of returning substantial value and cash to our shareowners.

So we are off to a great start this year, with excellent first-quarter financial results.

And we continue to have a positive long-term outlook for the business.

With that, Brooks, that concludes our prepared remarks.

I think we are ready for some Q&A.

Great.

Rich, I think we can open up the queue.

(Operator Instructions).

John Hodulik, UBS.

Just a quick question on the wireless margins.

Obviously it is a really strong quarter, and given the guidance was in the low 40s, and you touched on it a little bit today saying, maybe it seemed to be more in the medium term there could be some upside to this.

But I guess the question is, is this the high watermark for the year as it relates to wireless margins, or how do you expect the rest of the year to trend, especially with a potential iPhone refresh hitting in midyear as it has the last few years?

We had not changed our overall guidance for wireless margins, although the accounting change that we talked about will drive an increase in those margins as we report the wireless segment by somewhere around 160 to 180 basis points or so.

So our outlook for the business hasn't changed, that 160 to 180 basis points will ride on top of that.

But as we look at it, our expectation is for this year still to be in the lower -- I would characterize it as lower 40% range.

In other words, it will be higher with the accounting change, but probably still in the same general vicinity that we guided toward.

And the same thing going forward.

We see improvement beyond 2010 certainly up into the mid-40s.

And again, we will be more towards the upper end of that range, with the accounting change we talked about.

Going forward, first quarter the last couple of years, at least, has been a little higher in wireless margins.

Just because you tend to have -- following the holiday season you tend to have a little bit lower level of gross adds and upgrades in the postpaid space.

As we go forward in the rest of this year we will have some new product launches that we are very excited about.

We'll have some product refreshes that we are excited about.

And those will most likely drive some higher upgrades, and hopefully drive some higher gross add activity as well.

So that may impact margins a bit.

But we are still, in margins both in wireless and wireline, we are still executing as we talked about a lot of plans as we integrate our operations under the One AT&T initiatives.

And so we will see benefits from that in both of our segments as we go forward in the year.

You saw some of that in the first quarter, as we mentioned, for us both announced reductions that we had made, as well as just normal attrition came down about 6,000.

Great.

Thanks for the call.

Jason Armstrong, Goldman Sachs.

A couple of questions.

Maybe first just on the balance sheet.

Rick, you are closing in on the 1.5 times leverage targets.

What are your thoughts from here around a buyback, timing and potential level?

Then second question just related to the wireless business.

As we think about postpaid versus prepaid, I think as we look at the net industry forecasts for this quarter, year results included, there is a certain expectation that we are going to show a significant shift towards prepaid in terms of where the growth is coming from.

I am wondering, along those lines are you comfortable with your positioning right now in prepaid, or should we expect you to engage to a greater extent in this segment?

Thanks.

Good questions.

I think, first of all on the balance sheet side our view hasn't changed at all.

We are making good progress in bringing leverage back down into our target levels, and we are getting close.

However, we are also helpful that we are getting close to approval for the acquisition of the former Alltel properties from Verizon that has been pending for some time regulatory approval.

So that will push the metrics back up a little bit.

But all that being said, the plan is still the same.

We want to drive the credit metrics back within our target ranges, And then we will take a look at where we are and the opportunities and determine what we want to do from a buyback perspective.

So nothing really changed there.

In terms of wireless, what you're seeing, I think, in this quarter, and it is consistent with -- to a degree I think what people were expecting as we go into this year, is some shifting in the wireless business in terms of where revenue growth is coming from.

Certainly our expectations for this year is that postpaid customer growth, postpaid net adds, will come down from prior levels.

But we are seeing a continued shift in revenue growth being driven by wireless data revenues, by penetration of integrated devices.

And we are seeing just the tip of the iceberg, I think, with the opportunity on connected devices.

So as result what you see in this quarter is, even with postpaid net adds being down, we are delivering a wireless service revenue growth that is above 10% for all the reasons that I mentioned.

On top of it in the prepaid part of the business we have over the last year been making some changes and tweaks to our prepaid offerings.

We have also made some changes and tweaks to offerings within our reseller category that are primarily prepaid in nature.

As a result, what you saw this quarter is continued growth in the reseller category, but also small, but positive growth in prepaid.

And when you look at the prepaid trend over the past several quarters churn has come down dramatically, and the net add tend there has improved.

So we will continue to tweak those offers in the marketplace, and continue to work to drive some growth in those categories.

A couple of things that we won't do, is we won't chase growth that we feel is not profitable.

We won't do things that could bring a significant impact or a negative impact to our postpay business.

And that is still to a large degree where our focus is.

There is still a lot of opportunity there.

You know, we have reached a point we are 50% penetrated with integrated devices in the postpaid base.

But when you look back -- step back and you look at the sales for the quarter -- and by sales I mean looking at what customers are buying, both in gross adds and in upgrades -- we are at or above 75% in terms of the sales activity there in integrated devices.

So still a lot of opportunity there.

Great, thanks.

Simon Flannery, Morgan Stanley.

If we could turn over to the fixed side for a minute.

You posted some good numbers on the DSL side, relative to expectations a turnaround from some of the recent trends we have seen.

Can you just talk a little bit about was there anything specific that you were doing there?

And then talk more about the economics.

What is going on with broadband ARPUs generally, and profitability on the U-verse side as this reaches scale?

Thanks.

First of all, in broadband in total we had a nice rebound this quarter.

And that is -- that reflects certainly continued growth in the U-verse platform.

But it also -- and it reflects some first-quarter seasonality that if you look at the last several years that you see.

But what it also reflects is the fact that across our broadband product set churn rates are down.

And we did have better performance in DSL.

And I think to a large agree that reflects the fact that we are offering a very good set of options for customers these days across our footprint.

So customers, no matter where they are, they have the option with broadband to bundle a video product, either U-verse or DirecTV.

They've got the option to bundle a voice product.

And on top of that give them the ability to bundle with broadband either wired or wireless voice, or both.

We are seeing good traction in voice over IP in our U-verse footprint.

We are also increasing speeds in broadband.

So this quarter, for example, we implemented across our U-verse footprint 24 megabit download speed in our broadband product.

Outside of the U-verse footprint in many areas we are offering DSL speeds that are at the 6 and 10 megabit levels.

So when you put all of those together, I think we have just got a good overall product set that appeals to a broad range of consumer customers out there.

Beyond that, I would say there weren't anything -- there wasn't anything specific in terms of what we did in broadband this quarter.

And on the ARPU and profitability?

Oh, on ARPU and profitability, we are seeing increases in broadband ARPU, in consumer, particularly.

And that simply reflects the fact that customers are continuing to migrate up in speed.

So we are currently at about 59%, I believe, of our consumer base that are buying 3 megabit speeds and above from us.

And we expect that to continue.

We expect as applications and customer demand and needs continues to increase that we will see customers migrating up in speeds.

So there is ARPU opportunity there.

And as you would expect, particularly in that kind of product, as you drive higher speed, higher ARPU you are also improving profitability.

On the U-verse side of things, one of the things I have started looking at in the last quarter or two is when you look at our U-verse customers in total and the products that they are buying, and when you step back and you look at the recurring margins in those customers, the recurring revenues and expenses, we are driving profitability levels at an EBITDA basis that really is equal to or better than our overall wireline margin levels.

And obviously what creates in U-verse some dilution to margin and earnings then is the acquisition and installation costs associated with those customers.

But the plan going forward is we are not going to slow down with U-verse.

We are going to continue to try to drive good growth in U-verse -- in the U-verse platform in video, but also in broadband and voice over IP.

We will continue to do that throughout this year.

But over time as those installation costs just naturally become a smaller piece of the overall U-verse revenue stream, we will start to see then the lift and improvement in profitability there.

But I have been encouraged by the fact that when I look at those recurring revenues and margins that they are at a reasonable level today.

And when you look at the trend that they have been growing pretty nicely over the last few quarters.

That's helpful.

Thanks.

Chris Larsen, Piper Jaffray.

Actually two follow-on questions.

First, to follow up to Jason's question on the balance sheet, how do you think about dividend increases versus share purchases, given the tax change that sounds very likely this year?

Then on the cost side you gave great detail on the U-verse.

Should we expect continued wireline margin improvement from this point, both as revenue trends begin to improve and you start to hit that inflection point on the U-verse?

Than a last question of my own, I guess.

Can you talk a little bit about your thoughts on the 3G footprint, what sort of percent of POPs do you feel like you want to cover with full 3G versus EDGE?

Chris, good question.

Let me address the dividend question first.

As you know, we contemplate dividend increases as we get towards the end of the year.

And so as part of that we certainly look at projections for the business in terms of cash flows supporting that dividend, and we consider changes in the environment like tax law changes.

But, frankly, we will wait until we get closer to that timeframe, and see how everything in the environment shakes out before we make any determinations there.

Putting the -- any tax issues aside though, what I would tell you is that we do believe that a strong and a growing dividend is a key element of how we provide returns to shareowners.

So in terms of the use of cash that has traditionally been a much higher priority for us.

And share repurchase has been a tool and a vehicle we have used in cases where we have gone through periods where we have excess cash and we are at comfortable levels in terms of our balance sheet leverage.

So it was a way to adjust and modify our capital structure.

But having said that, as we get through the rest of this year, and as we see how the environment changes and how it might impact our shareowner base, we will consider all of those options.

Wireline margins is a balancing act right now, in all honesty.

Because we have products that are legacy products, like wireline voice, that are declining.

But they are very mature products with not a lot of burden from installation or acquisition costs, so they have high margins.

The products that are the future of the business, our growth products, generally in the area of IP-based service and managed services, there are more acquisition costs certainly associated with some of them, like U-verse.

But over time as those products scale they will grow in margin.

So we are going through this transition, and to balance it through this transition, that is why we have been very proactive and very aggressive on the cost side of our business, and very proactive in trying to consolidate our operations that underlie and support both wireless and wireline, this set of One AT&T that we talk about.

And we have been very proactive in taking costs out of the business there, and very proactive in taking costs out of the business in areas where we are supporting services that are declining.

And we will continue to do that.

I do believe we've got an opportunity to keep margins by a combination of all of those things -- keep margins in wireline at a fairly stable levels as we go forward in the following quarters in the wireline business.

And longer-term -- and I do think of this as longer-term -- I think if we got some lift in revenues and lift from the economy there is some upside to that.

I am sorry.

I forgot the last question.

3G footprint.

Oh, the 3G footprint is -- we are continuing to expand that footprint, and we will have 3G coverage in virtually all areas that we serve.

At the same time as we are moving into expanding the 3G capability through HSPA 7.2 and then beginning to trial and plan and move towards LTE.

It will follow the normal and network progression we have had with upgrades to the data network.

I don't have a specific POP number for you at this point.

Phil Cusick, Macquarie.

Thanks for coming back to me.

They have clearly put too much power in my hands with this new Cisco IP phone.

If you figure out how to use it, let me know and you can give me some help.

Honest to God, I can't figure it out.

I will get a trainer for you.

So the (technical difficulty).

I kind of dropped.

I'm sorry.

You pressed the wrong button.

We will come back to Mr.

Cusick if he requeues.

We will go to the line of David Barden, Bank of America.

That was awesome.

Don't touch any buttons, David, whatever you do.

I have a Cisco IP phone too.

I'm not even going anywhere near it.

Two questions, if I could, guys.

Thanks for taking the question.

First, Rick, on CapEx, last quarter you predicated the guidance for an increase in spending on a regulatory and investment climate that was supportive of investment.

It looks like CapEx this year in the first quarter was flat to slightly down.

Could you talk a little bit about your perspectives now on whether the climate is supportive of making those investments and when you think they will come?

The second question was just on the wireline business generally.

Sequentially revenues were down about $180 million.

At the EBITDA level it was also down about $180 million.

So we saw almost all the revenue decline hit the margin line.

And I was wondering if you could talk a little bit about more how we should think about that cost dynamic versus revenue, as we start to see the economy come back, as you seem to be suggesting?

Thanks.

Sure, David.

First of all, on the CapEx front, overall capital expenditures, as you said, were about flat with first quarter last year.

We were up in wireless, down a bit in wireline, and the reductions there had more to do with demand level for services -- services like high-capacity circuits and so forth.

So we also had in the first quarter, I would tell you, a couple of areas where we had some supply chain and vendor issues that impacted some network components.

Not huge numbers, but impacted the total numbers a little bit.

First quarter is always a little lower for us because of certainly a portion of -- a large portion of our cap spend are portfolio capital projects.

New portfolio capital projects, which get approved and get into the pipeline late in the prior year always take a bit of time to ramp up.

So you've got all of those factors.

At this point our outlook for the year in terms of CapEx is the same as we gave you in January, kind of $18 billion to $19 billion range.

A little rebalance in the portfolio with a couple of billion dollars more spend supporting the wireless business, offset by some reductions in spending wireline.

No change there.

On the regulatory front I think we continue to have good, I think, positive, productive dialogue with regulators.

They obviously have laid out some objectives and plans that they will move forward on, and it will create a number of different notices and proposed rulemakings and activities on the regulatory front.

We will continue to work on -- with them on all of those.

I do believe at the end of the day -- I do believe they understand and agree that in order to achieve their objectives it is going to require an environment that supports capital investment and the ability for carriers to earn a return on that investment.

So I think in that respect we are hopeful.

On the wireline margin front I wouldn't get too concerned overall, I guess, with a quarter-to-quarter changes in wireline margins, even in the range of magnitude you spoke of, because there is always some quarter-to-quarter seasonality.

And frankly as large as that business is, there are just some issues and adjustments that occur from quarter to quarter that impact those comparisons.

But as I said earlier, I think overall in the levels that we operated in around the first quarter, I think we will be able to maintain wireline margins throughout the year in a fairly stable way in those ranges.

Then longer-term, again, we will continue to work to increase profitability in the growth services, which will then further solidify, and hopefully give us some upside, with some revenue growth on margins and wireline.

Thanks, Rick.

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

Jonathan Chaplin, Credit Suisse.

So just one follow-up on wireless margins to kick it off.

It sounds like -- you know, the discussion, Rick, earlier was a little bit unclear.

It sounds like our expectations for margins should be 160 to 180 basis points higher than they were before.

So does that mean if you were guiding to sort of low 40s before, somewhere around 42%, for arguments sake, we should now looking at 44?

And if we were focused on 45% before for where it should be longer-term, we are now focused on 47%.

Are those the right kind of ranges to think about?

Then as we start thinking about earnings trends now that we are a quarter into the year, your guidance was sort of a very wide range of flat to an improvement in earnings.

Can you give us a little bit of more context around what your -- what earnings trends could be now that you have seen a little bit of an improvement in the economy and an upswing in enterprise?

Then finally, Randall made a comment a few weeks ago about the industry moving towards tiered data pricing.

Can you tell us what you're doing internally to make the move towards tiered data pricing?

What has to happen for that to occur?

Sure, Jonathan.

Yes, first of all on wireless margins, I hope I didn't confuse everybody with comments made earlier.

But it is -- very simply our outlook hasn't changed.

So whatever you have modeled for wireless margins with this accounting change it is going to be 160, 170, 180 basis points higher than that.

And it is just a mechanical change.

So what I was trying to say is that moves the margin levels up, probably still at least in the ranges that I would define as towards the lower 40s in 2010 and the mid-40s beyond that, although 160 to 180 basis points higher than what you had before.

On earnings per share I think our guidance has been stable to improving earnings per share in 2010.

Not changing that guidance, clearly the first quarter and being up -- excluding the tax charge, being up 11% gives us confidence that we are going to be able to provide some growth in earnings per share.

At the end of the day that is -- put the guidance aside -- that is our objective.

We want to grow the business.

We want to grow topline revenues again.

We had some topline revenue growth this quarter.

That is something that we shouldn't just put aside.

We want to continue that trend.

And to do that we need strong wireless growth.

We need continuing improvement in both our consumer and business wireline categories.

Then we want to grow obviously earnings per share with that.

And with some margin expansion can hopefully grow it at faster rates than revenues.

So that is what we are setting out to do, and we are off to a good start in this year.

On tiered data pricing, or pricing of any product, I won't get into thoughts and strategies about making potential changes in the future on pricing for any products.

But I think your question is a good one.

And it is one not just for AT&T, but it is one for the industry overall.

Because we are dealing with a few factors that you have to step back and just think about.

One, in wireless you're dealing with some real limitations, both from a technology standpoint, and more importantly from a spectrum standpoint on capacity.

Secondly, you're dealing with an overall trend of devices and applications and services moving to a wireless environment.

So that is creating a tremendous amount of demand, particularly in wireless data.

The third factor in the environment is you're dealing with a situation where when you look at your customer base, even customers that are using similar devices, there is huge disparity in the amount of data that they use and the amount of capacity they consume.

So when you look at all of those things as an industry, I think it will influence how in the future the pricing models develop.

As an industry, what the industry has to do is develop models that are understandable by customers, that customers can understand and live with, and at the same time is fair to customers in terms of the amount of a somewhat limited resource that they are consuming.

So that is the whole thing on data pricing.

And it will, I suspect, evolve as we go forward in the industry, and it will evolve as applications and devices continue to evolve and data traffic continues to grow.

Before we close, folks, I would like to add just a couple of quick closing comments.

In January we outlined a plan for you.

I believe what you have seen in our results today is that we delivered what we said we would.

And hopefully what you see is that we delivered a little more than we said we would in this first quarter.

We had a terrific start to the year.

Wireless growth was excellent, best-ever turn, best-ever postpaid ARPU, best-ever first-quarter net adds, strong data growth.

And I think even more importantly, we have a terrific technology path going forward to continue to deliver wireless growth.

We are already seeing solid improvements in data download speeds and we've got a lot more to come there.

At the same time, U-verse and our U-verse platform continues to scale.

It has improved, and it is changing the revenue trajectory of our wireline consumer business.

We have what we believe are the industry's premier business capabilities, which we also continued to expand.

And we are seeing early encouraging signs in the business markets.

In total, as I said, something not to be overlooked, our consolidated revenues were up.

Our cost initiatives are on track, and as a result, margins expanded and cash flow continues to be strong.

So it was a strong start to the year.

And our fundamental outlook on the business is positive.

Now our job, very simply, is to continue to execute with the same kind of intensity and focus in the quarters ahead.

Before I sign off this morning, I want to take just a minute to recognize someone.

Jerrell Ross is a person who has been on our Investor Relations team now for many years.

And for investors and analysts out there you may not have met Jerrell, but I guarantee you have seen his work, because he is one that has written all of our press releases, our earnings releases.

He has written our earnings release presentations, our investor briefings and our presentations of a financial nature in all of our analyst meetings.

He is a real pro.

He has done a great job for us.

And the good news is he is moving into -- he is moving up.

He is moving to a new position supporting our Chairman.

And I just wanted to take a moment to thank Jerrell for all of his efforts and his contributions over the years, and wish him well.

Also, I want to thank all of you for being on the call with us this morning.

We appreciate you being with us.

And, as always, I want to thank you for your interest in AT&T.

Thank you, everyone.

Thanks, Rich.

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

Thank you for your participation and for using AT&T Executive Teleconference Service.

You may now disconnect.