AT&T Inc (T) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the AT&T second-quarter earnings release 2010 conference call.

(Operator Instructions).

And also as a reminder, today's conference is being recorded.

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

Please go ahead.

Thank you Perky.

Good morning everyone, and welcome to our second quarter conference call.

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

As Perky mentioned, this is Brooks McCorcle, Head of Investor Relations for AT&T.

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

Rick will provide an update with perspective on the quarter in a minute, and then we'll take your questions.

First, 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, and as a reminder that's www.ATT.com/investor.relations.

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

Reported EPS for the quarter was $0.68, up about 26% versus the same quarter a year ago.

This includes a $0.07 gain from the exchange of Telmex International stock.

When excluding that one-time gain, EPS was $0.61, which was up 13% over the second quarter a year ago.

This is our second consecutive quarter of double-digit EPS growth excluding one-time items.

Second-quarter consolidated revenues of $30.8 billion were up both year-over-year and sequentially, and that was led by continued double-digit service revenue growth in wireless, further improvement in consumer wireline trends, and continued mid teens growth in strategic business products.

In addition, our consolidated margins improved by 180 basis points year-over-year, with significant margin expansion in wireless and also improved wireline operating margins due to solid execution on costs initiatives.

Cash flow also continues to be strong, with cash from operations for the quarter totaling $8.6 billion, which was up 9% year-over-year, and free cash flow of $3.7 billion.

As a reminder, we have moved Sterling Commerce to discontinued operations, and we've restated eight quarters of history.

Comparisons we'll be showing you today are based on results from continuing operations.

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

Rick?

Thanks Brooks, and good morning to everyone joining us on the call.

Before we get into detailed results, let me start with a few quick comments on the quarter overall.

And the second quarter highlights are on slide four.

The main point I would like to make starting out is that we again delivered a very strong set of financial results, as Brooks mentioned.

We had our second consecutive quarter of double-digit EPS growth excluding some one-time items.

Consolidated revenues were up both year-over-year and sequentially.

Margins expanded, and they expanded in wireless, in wireline, and in total.

And cash flow was strong.

So we are pleased across the board.

The team is executing at a high level, and the financial results are solid.

We continue to have a positive long-term outlook for the business, and the results we put up in the first half clearly add to our visibility and confidence for the second half of this year, with an improved full-year outlook.

That comes from a number of things.

First, we've got terrific momentum in wireless.

Wireless service revenues grew double-digits.

Postpaid ARPU grew again for the sixth consecutive quarter.

We also had our best second quarter ever for organic net adds at 1.6 million.

Our churn rates continued to improve, and we hit best-ever levels again.

And both integrated devices and connected devices continue to be strengths for us.

Even with strong iPhone activations in the quarter, we delivered substantial year-over-year wireless margin expansion.

Second, improving trends point to a return to revenue growth in our consumer wireline business.

U-verse continues to scale, and it's driving growth in consumer IP revenues.

And we posted our second consecutive quarter of sequential growth in consumer wireline.

Third, we continue to see good traction in our business markets, and revenue trends are steadily moving in the right direction.

Finally, we continue to execute well on the cost side, which has helped us deliver strong margins and strong free cash flow.

So there's a lot to be positive about in terms of our current results, as well as in the look ahead.

With that as background, let's take a look at consolidated revenues on slide five.

Our revenues totaled $30.8 billion for the quarter.

That's up about $200 million versus the second quarter of a year ago.

As you can see on this chart, our overall revenue mix continues to undergo a substantial and positive transformation, increasingly weighted to wireless, to wireline data, and managed services.

In the second quarter, 71% of revenues came from these categories, and that's up from 66% a year ago and 61% two years ago.

Combined revenues from these sources grew nearly 8% in the second quarter.

The drivers behind this transformation are clear.

First is the explosive growth the industry is seeing a mobile broadband.

That's an area where AT&T has set the pace and where we are well-positioned going forward.

We are also seeing a transformation in wireline data with the emergence of U-verse and with strong mid teens growth in strategic business services, even during the economic downturn.

When you put this together and look at data services, both wireless and wired combined, they are the primary growth drivers.

Total data revenue grew 15% year-over-year.

And we expect this mix shift in revenues to continue, and the company is well-positioned for it.

Now let's take a look at wireless, starting on slide six.

As the wireless business evolves, our focus has been on data and ARPU growth, and our results this quarter show the strength of that approach.

Wireless service revenues grew over 10% and are up more than $1 billion versus second quarter a year ago.

The standout metric for us was postpaid ARPU.

Driven by mobile broadband and continued strong data adoption postpaid ARPU grew 3.4%, and that's despite adding 1.6 million subscribers from an acquisition late in the quarter.

Churn also continues to perform at record levels.

We had 1.6 million organic net adds, our best ever second quarter, to get us to a total of over 90 million subscribers.

Postpaid net adds were 500,000 with continued migration of the base to integrated devices.

And prepaid increased by 300,000 due to the introduction of the iPad 3G.

Customer response to the iPad 3G has been very positive since its launch at the end of April.

We also added nearly 900,000 new connected devices -- e-readers, alarm monitoring systems, and a host of other emerging products.

These connected devices have lower ARPUs but higher margins, and it's a terrific opportunity for us.

Our continued growth in postpaid ARPU and improvements in churn validates our strategy of focusing on high-value, postpaid subscribers.

For AT&T we believe this strategy will continue to drive improvements in our overall wireless results.

Slide seven highlights our growth in wireless data.

In the second quarter we grew wireless data revenues over 27% to $4.4 billion.

Our postpaid data ARPU was up over 18%, and customers on postpaid data plans grew nicely, up about 1.5 million in the quarter and almost 7.6 million over the past year.

We added 2.9 million 3G postpaid integrated devices in the quarter, and that was up nearly 15 million in the past 12 months.

The ARPU for integrated devices continues to be 1.7 times our other devices.

Approximately 70% of integrated devices are on family plans, and over 40% are on business-related plans, with churn levels well below our average.

When you combine them, these two groups of subscribers are above 80% of the base.

And there is still a great deal of upside.

A little more than half of our postpaid subscribers have integrated devices today, and our percentage of sales continues to run above 75%.

iPhone activations for the quarter were a record 3.2 million, and sales continue to be strong.

During the second quarter we introduced, as you all know, new pricing for wireless data.

These plans are another way to expand our opportunity in mobile broadband.

They make it more affordable for people to enjoy the benefits of the mobile Internet at a lower price and allow customers to migrate up as their data needs grow.

While it's still early, we are pleased with the initial results on the new data plans, and they are in line with our expectations.

I also want to give you an update on our wireless network progress.

The details are on slide eight.

First, we continue to execute aggressively on our nationwide initiatives.

Earlier this year we deployed HSPA 7.2 nationwide, which increased our network speeds.

In areas where we've completed the backhaul in support of 7.2, internal data is showing speed improvements in the 32% to 47% range.

We recently announced plans to deploy HSPA+ by the end of this year.

This has the capacity to double the theoretical peak speeds offered by HSPA 7.2.

We are continuing to add cell towers.

We are upgrading high-capacity antenna systems, and we are building out fiber backhaul throughout our footprint.

In support of this growth, year-to-date capital spending for wireless is up 49% from the first half of 2009.

But what's great is that all of this work delivers immediate customer benefits, plus it's part of a seamless path to next-generation LTE.

We plan to begin our trials for LTE within the next few months and expect to begin deploying LTE in 2011.

In the meantime, the nation's fastest mobile broadband network gets even faster while on a seamless path toward 4G.

I'm pleased to report that we are seeing and our customers are experiencing the impact of these investments.

Companywide, our 3G average data download speeds are up 15% versus a year ago, based on internal data.

In New York our data is showing download speeds that are up 31% over the past six months.

3G dropped calls improved 13% across the metro area and 23% in Manhattan.

3G blocked calls are also down 21% in New York, in the New York metro as a whole, and 39% in Manhattan.

And looking ahead, we are moving as quickly and as aggressively as possible.

As our Chief Technology Officer said in remarks a few days ago, we are moving heaven and earth to execute our network plan.

We're adding additional third and fourth carriers, adding fiber backhaul and Ethernet to cell sites.

We're deploying in-building and venue solutions where appropriate, and we are doing more with WiFi, including piloting WiFi hot zones like the one we've turned up and have running in Times Square.

In San Francisco we are implementing the same actions, and we are seeing similar progress.

But we are about 90 days behind the schedule in New York City.

You can expect improvement in San Francisco to follow similar trends to those in New York.

In summary, we have a perfect technology path forward, and it's a huge advantage for us.

We're executing against it aggressively.

We're making progress, and there's more to come.

The other great news for wireless has been the strength in the growth of our margins.

The details are on slide nine.

When people look at things such as the iPhone and the whole explosion in mobile broadband, there's a natural tendency to focus on unit growth and revenue gains.

But equally if not more important is the profitability of those customers and services.

In the second quarter, even with record iPhone activations of more than 3.2 million, our wireless service margin was over 43%.

It was up 300 basis points from the year-earlier quarter.

And for a little perspective on that, our wireless margins right now are up over 700 basis points above where they were just three years ago.

And longer-term with continued growth in service revenues and ongoing cost initiatives, there's further opportunity to expand wireless margins.

You see the same trends when you look at wireless operating income.

In the second quarter wireless operating income grew by $800 million to reach $4.1 billion.

That's up 25% versus the year-earlier quarter.

Looking back, our wireless operating income has more than doubled in less than three years.

Let me turn now and cover our wireline results, starting with consumer trends on slide 10.

One of the big drivers in the continued improvement in consumer revenues has been our U-verse platform.

The product continues to scale nicely.

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

More than 3/4 of U-verse subscribers have either a triple or quad play bundle with us.

As a result, U-verse ARPUs are attractive and growing.

AARP for U-verse triple play customers was nearly $160 in the second quarter, and that was up 13.8% year-over-year and 6.8% from the first quarter of 2010.

In the second quarter, wireline IP revenues, that's U-verse services plus non-U-verse broadband, grew 32%, and these products now represent more than 40% of total consumer wireline revenues, up almost 1,000 basis points in just the past year.

This was our first billion-dollar revenue quarter for U-verse, and it was our second straight quarter of sequential growth in total wireline consumer revenues.

We now have a clear line of sight to a return to consumer wireline revenue growth in the quarters ahead.

Going forward, we expect U-verse revenue to continue to grow and margins to improve, and this will drive further improvements in our overall consumer financials.

Last week we announced the start of pair bonding deployment for U-verse.

This will help us further expand U-verse services to even more customers, as we stay on track to reach 30 million by next year.

Now let's take a look at wireline business, which is on slide 11.

We are seeing continued improvement as we and the industry work our way back from the economic downturn.

While we are certainly not all the way back, we are seeing further signs of stabilization.

Recent contract wins are encouraging, and the trends continue to move in the right direction.

Revenues from strategic business products -- Ethernet, virtual private networks, application services -- were up nearly 16%.

Business IP revenues were up more than 9%, the best growth in this category in several quarters.

We posted our first growth in five quarters in total business data revenues.

That reflects some stabilization in data transport for business, which is also encouraging.

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

We are seeing a fundamental shift with more enterprises asking us to help deploy full mobile solutions that bring together mobile broadband, cloud computing, seamless access to applications, and even social media.

We are uniquely positioned to deliver these kinds of solutions.

We've had some major successes already, and we recently created a new business sales group to accelerate this opportunity.

This new unit will develop applications that help enterprises mobilize their business.

And we'll use these applications to build industry and company specific solutions.

So there's more to come here, but we are excited about this opportunity.

We're also excited about the momentum we're seeing with several customer wins that play to our global network and mobility strengths.

We recently announced agreements with Hilton Worldwide to provide a fully managed suite of WiFi and Internet services, and with German distribution company Henkel to manage their worldwide global network infrastructure in more than 100 countries.

Now let's move ahead and take a look at margins and cash flow.

The margin comparisons are on slide 12.

We said at the beginning of the year we expected to deliver stable to improved consolidated margins when compared to 2009.

And so far we've beaten that.

In the second quarter, consolidated operating income margin was 19.8%.

That's a 180 basis point improvement over the second quarter of 2009.

This reflects solid performance across the company, both in wireless and wireline.

Our wireline operating income margin was 12.2% in the second quarter.

That's up 50 basis points versus second quarter last year.

This reflects improving revenue trends and solid execution on cost initiatives.

Across the business, total force was down more than 10,000 since the end of 2009.

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

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

These initiatives strengthen our ability to sustain solid margins, and they put us in a unique position among our competitors to serve customers seamlessly with a best in class operation.

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

Our cash summary is on slide 13.

In the first half of the year, cash from operations totaled $15.8 billion.

Capital expenditures were $8.2 billion, with a 49% year-over-year increase in wireless capital.

And 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 $7.6 billion, and dividend payments totaled $5 billion.

Over the last six quarters, we have generated over $10 billion of free cash flow after dividends.

And in terms of using that cash, our debt is down almost $7 billion over the past 12 months.

That gives us a debt to capital ratio of 40.3% and a net debt to EBITDA ratio of 1.5.

This gives us the flexibility to retire additional debt as it comes due and to continue to invest in the business and return substantial value to our shareowners.

I would like to close by recapping just a few items that are on slide 14.

Our revenue trends are moving in a good direction.

Wireless service revenues grew double digits.

We had strong mid teens growth in strategic business service revenues.

Business IP and data transport trends have improved, and we have clear line of sight to a return to growth in consumer wireline, as U-verse scales.

In addition to topline improvements, we continue to have strong margins, with expansion in wireless, in wireline, and consolidated.

For the second straight quarter, we delivered strong double-digit earnings growth, excluding one-time items, and cash flow was strong, with more cost improvement opportunities going forward.

These results clearly add to our visibility and the confidence we have for the second half of this year, and it's fair to say that versus the outlook we provided you in January, we have improved expectations.

For the full year we now expect improved margins versus 2009 levels.

We also expect strong earnings per share growth, and consistent with stronger earnings, we expect full-year free cash flow that's above our original outlook.

Our job is to continue to execute and to deliver financial results for you.

We did that in the second quarter, and that's where we are focused going forward.

Well Brooks, that concludes what I had prepared.

I think we are ready for Q&A.

Okay, Perky, why don't we go ahead and open the line for Q&A.

(Operator Instructions).

Simon Flannery, Morgan Stanley.

Rick, one of your last comments there was about raising the free cash flow guidance.

You've got your leverage down to 1.5 times.

In terms of returning cash to shareholders, can you just help us think about your view on buybacks at this point?

Obviously a very attractive yield in the equity markets versus the bond markets, and how dividends play into that?

Then just to understand on the guidance, I thinking of for Q3 in particular, you've put out the early upgrade offer, six months.

Obviously the iPhone came in a little bit later this quarter.

So is there anything we need to be aware in -- of timing of margins Q3, Q4 this year versus Q3, Q4 next year?

Or is it going to be -- the impact going to be fairly modest?

First of all on cash flow, one of the things we are very, very pleased with is the cash flow performance over the last 18 to 24 months.

We've had a lot of focus and had just terrific results on cash flow during a period that, as you all know, has been very, very difficult economically.

That cash flow has given us the ability to continue to invest in the business through capital expenditures.

We made also some significant purchases of wireless spectrum.

We closed two very nice wireless acquisitions.

And so all of those things have helped us position the business going forward.

In addition to that, we have paid down debt, and we've brought our credit metrics back into the top end of the range that represents our target range.

So going forward, that does give us some flexibility to use excess free cash flow, after payment of dividends, for things other than debt reduction, and we are certainly going to consider those options, and one of those obviously is share repurchase.

In terms of the guidance going forward, as you noted, we will probably see some degree of acceleration potentially in upgrades of iPhones from fourth quarter to third, as the iPhone 4 availability continues to improve from a supply standpoint.

But I don't think that will have a -- it certainly will have no impact on the total year results and our total guidance for the year.

It may have a bit of an impact in 3Q, but I think it will tend to be more modest.

John Hodulik, UBS.

Just two quick ones.

First on the wireline margins, it looks like you saw some real outperformance there, up 80% -- 80 bps annually, after a decline in the first quarter.

Is that what we can expect?

Or that -- at least an annual increase in the second half of the year?

And then sort of related, the broadband numbers, at least on a net basis were somewhat weak.

Could you talk about what you're seeing from a competitive standpoint from the cable companies?

And then maybe if any sort of increased spending to counter that might affect the margins going forward?

Sure John.

First of all, we are pleased with the margin performance.

The team has been working very hard on cost.

And it is all tied into this series of initiatives that we put under the umbrella of one AT&T.

And the exciting part about that is it positions the company to provide services to customers and to interface with customers in the way they want to work with us, which is to be able to, through single points of contact, be able to purchase both wireless and wired products.

So it's a better customer experience.

And at the same time it gives us real opportunities to consolidate organizations, to eliminate systems, to consolidate processes -- all of which allow us to continually take costs out of the business.

It's what has helped us reduce costs and reduce force, as we talked about in the presentation, throughout the first half of this year.

In addition to that, we have -- we are seeing now some benefits of work that we've done in our benefit plans, particularly through bargaining and particularly through our medical plans last year.

We're starting to see some of the benefits from that, and we'll continue to see that as we go through the next couple of years.

So all of those things are helping on the cost side.

And we've also had some other factors that have helped.

We've been working very hard, and we've got a consolidated, dedicated group that is working to reduce access costs -- the amounts we pay to carry traffic and to use other carriers' networks.

And we've had good results there.

Reductions in access costs and reductions and improvements in the trends there.

And we're seeing good results now, frankly, despite the economy, in bad debt expense.

So all of those things obviously have helped on the margin side.

As we go forward, we are going to -- we will continue all of those efforts, and I think that has -- that will continue to help us maintain margins in our wireline business, and our outlook would be to continue to perform with EBITDA margins in the lower 30 range, similar to what you've seen in the first half of the year and in the second quarter.

With respect to broadband, we did have a weaker broadband number in the second quarter.

And I think that was due to two things primarily.

One is just normal second quarter kind of seasonality.

But also we have seen competitors become more aggressive with promotions targeted specifically at our non-U-verse areas.

And we will respond and are responding to those.

We'll respond in a targeted fashion in terms of offers and promotions.

But more importantly, we're also building infrastructure this year and building out IP DSLAMs in some of our non-U-verse areas that give us the ability to offer more robust data speeds and have a stronger broadband offering in those areas.

And I think that will help as well.

So our outlook as we go forward into the third quarter and the second half of the year is that we should see some improvement in those overall broadband numbers.

At the same time, we continue to be very pleased with U-verse performance and the performance in the U-verse areas.

I think we'll also see a bit stronger results going forward in U-verse.

One, it was affected a little bit just in second quarter from a seasonality perspective.

But in addition going forward, the ability to utilize pair bonding will expand our reach, so it brings more homes that we can now reach with the U-verse product set and gives us more homes to market into.

One last comment I would make with respect to really broadband but also just total revenue connections in the consumer area is, as you know, we've been reporting for many years now the revenue connections number, and that's an important indicator of consumer revenues.

But it's also important to note that not all revenue connections are created equally, and so as you see in our second quarter results, we had some weakness in some of the connection numbers.

Some of that, to a large degree, is a seasonal in nature.

But at the same time, we continued to see strong and improving revenue trends.

And so when you look underneath that, what you see is that where we tend to lose some connections are in some lower ARPU voice and lower speed, lower ARPU broadband products.

Where we are gaining connections -- and U-verse is a perfect example of this -- if you look at in the U-verse areas, we're gaining connections with customers who are buying multiple products, triple and quad play kinds of bundles.

They're buying higher speed data products, and they are buying high-end video packages.

So as a result, when you look at our broadband numbers, even though the broadband -- total broadband declined a bit in the quarter, our overall consumer broadband ARPU is up year over year over 5%.

And our consumer revenue per household is up about 7.5%.

And so that's what you see driving those revenue results and as well contributing to margin results, because when you sell a bundled set of products and when you sell higher ARPU products into households, gives you the opportunity to maintain and strengthen margins.

[Mark] McCormack, J.P.

Morgan.

I actually like the name Mark, but didn't get it.

(laughter)

On the wireline margin side, just a -- maybe a little clarification on John's question.

Can you give us a sense for whether it was -- it was probably more headcount related.

Was that more front-end loaded in this quarter or backend loaded in Q1?

And can we expect sort of a similar trend throughout the year?

Or was this sort of a first-half phenomenon?

And then secondly, I was a little surprised by positive commentary regarding sales improvement on the business side, and I guess there was a comment about economic metrics improving as well.

Can you just sort of clarify what you're seeing there?

Sure.

Well, first of all on wireless margins, I think some (multiple speakers) some of the plans from a force standpoint are probably a bit more front-end loaded for us this year, but we will see.

It really will be determined by how volumes and what kind of demand growth we see as we go through the second part of the year.

And again, the big drivers of the margin improvement are the things that we talked about.

So our biggest expenses first of all are force, wages and benefits, and then access expenses.

So those are the areas that we have focused on, and we'll continue obviously from the improvements we've made in our benefit plans, from the reductions we've made in force, we'll continue to see those benefits as we go forward in the second half of the year.

Wireline, as you know, is also going through a significant transformation in products, from voice to video and data.

And what we're working very hard to do is to manage the margins and the profitability of that mix of services as we make the transition.

And to do that we have to continually monitor and migrate costs out of services and areas that are declining, and we need to continue to improve margins in the data services that -- and the video services that are growing.

And so it's really working both ends of that equation.

And our -- we've done a good job up to this point, and my expectation is we'll continue as we go in the second half of the year to be able to manage that and maintain those margins in the kinds of ranges you saw the first half of the year.

The other question had to do with business sales -- and just let me be clear.

We are seeing -- when you look at the trends over the last three or four quarters, we are seeing some improvement in three or four of the economic metrics that we believe are important relative to our business revenue trends.

And -- but that improvement is -- I would characterize as being modest and slow.

And the economic trends are, first of all, in unemployment, where unemployment continues to be stubbornly high.

It's improved a bit but not seeing frankly much movement there.

We are seeing some improving trends in industrial production -- again, slow and modest.

We are seeing some improvement in business formations at the low end of business, and so those are also helpful.

But overall what I would characterize in business is, we expect going forward in the remainder of this year and as we get into 2011, steady improvement, but it will be slower improvement, and we are not anticipating any kind of V-shaped recovery, if you will.

One other thing I would add in business -- and this is also important; we've talked about this in the past -- is the business group as well as our operations folks had done a terrific job in managing the costs in the margin side of supporting business customers.

So as we've gone through the last 18, 24 months, our fully allocated margins in business have stayed very stable, and in fact, in the last couple of quarters, we have seen a bit of an increase in margins on the business side, and that's been encouraging to us.

One of the things we've talked to you-all about is our belief that the things we have done on the cost side will allow us to leverage that cost structure and get some margin improvement as we started to see some continued improvement in revenues, and I think we are seeing a bit of that now.

Jason Armstrong, Goldman Sachs.

A couple of questions.

First, you put up nearly 4% growth again on postpaid ARPU, if you adjust for the Alltel acquisition.

As we think looking forward, layering in Alltel fully and then some of the tiered data plan impacts, how does that shape the outlook for postpaid ARPU growth from here?

And then second question, there were some comments over the weekend, I think from Randall in an FT article, talking about acquisition opportunities, in particular mentioning international wireless.

Can you flesh that out for us a little bit?

I'm just wondering maybe specifically parameters around what constitutes sort of an attractive market opportunity for you?

And then maybe as we think through investing, how relevant is control versus minority stakes?

Thanks.

Sure Jason.

First of all, on postpaid ARPU growth, we continue to be very pleased with the performance, and obviously it's driven by data revenues by growth in penetration of integrated devices, as we talked about in the presentation.

We continue to see good results there, and we continue to have upside potential.

I believe that integrated devices at some point will get up into the 70%, 80% range of the base -- maybe higher.

It's just the direction that the market is going.

It's very early on the tiered wireless data plans to really give you much in terms of the results and how that will impact the trends.

I will tell you, on kind of a macro basis I think what it will do is it will put a little bit of pressure on ARPU and data growth in the near term as some customers migrate down to some lower price points.

But obviously it puts wireless data in a much better position and provides some growth opportunity going forward.

I don't think it will dramatically change the trajectory of ARPUs or revenue growth, but it may reduce the growth rates a bit in -- as we go forward over the next year or so.

The early results on the tiered data plans though have been I think pretty encouraging, and on balance, pretty much what we expected.

We have seen some migrations of customers from $30 unlimited plans down into the lower tiered plans, but the migrations at this point have tended to be at kind of the lower end of our range of expectations.

And originally, to be honest, we had expected virtually all of those customers to migrate down to the lower price point, and in fact, we've had a portion of those customers -- more than we had expected -- migrating, but just migrating to the $25 plan.

So from an ARPU perspective, all of that is a bit better than we had expected.

And we are seeing -- on the other side we are seeing nice growth in terms of customers that are now upgrading to integrated devices and moving into that, the lower tiered plan, and so I think we are seeing the benefits of lowering the point of entry so that customers can move into the integrated device, begin to try the data services.

And we believe over time, based on how much data they use, they will then begin to migrate up to higher tiered plans.

So all in all, I think it's been within our expectations.

With respect to acquisitions, I'm -- I would tell you that while we have looked at international opportunities, particularly with respect to some emerging markets, when we look at those kinds of opportunities, we look at a number of factors, including the cost -- can we produce value to share owners based on that investment?

-- what the market structure is like, and what partnership opportunities are available.

And finding the right opportunity there is very difficult.

So I think in -- I believe the Chairman's comments in the article you were talking about really pointed to the fact that we just -- we haven't found opportunities there that we feel are the right fit for us.

Generally, if we were to make an investment, in most cases we would want the ability to have substantial control over operations, although the one area that has been very successful for us and that we are very pleased with has been our relationship and our stake in America Movil, which has been I think a good way for us to bring some emerging market exposure into our mix.

David Barden, Bank of America.

Two, if I could.

Just on related topics, Rick, obviously we saw the agreement to sell Sterling Commerce.

Also you guys agreed to sell a unit in Japan.

It sounds like you guys are zeroing in on a strategy more focused on upgrading that portion of the rural wireline market that you can to push back on some of the cable inroads.

I was wondering, are there any more plans inside AT&T to focus on divesting those parts of the business that may include some of the rural wireline markets that are -- increasingly look non-core to the AT&T game plan?

And then the second part of that I guess is to follow up on Jason's question, the second part of what Randall was saying seemed to be this continuing theme about the industrial logic of a satellite acquisition.

But I think that as time has passed and as your facilities-based video has rolled out, it seems like there is less and less of an industrial logic.

I was wondering if you could kind of speak to where that issue stands internally now.

Thanks.

Sure David.

And you know, as you noted, we've done a couple of divestitures, and as you would expect from us, as I think every company does, we are continually looking at our portfolio of assets and products and services, and looking at areas that are not as strong a fit for us or not as closely tied to our strategies going forward.

And when there are opportunities at the right prices or the right terms to make some divestitures there, we will.

But that's just part of the ongoing process of looking at the portfolio of assets that we have.

The rural properties are interesting in terms of looking at those, because a couple of things that they do for us is -- our business is scale-related.

So when we look at those properties, they tend to produce pretty good cash flows, and the direct costs are relatively low, related to many of those properties, or they are shared across our total infrastructure.

And so we continue to look at opportunities there to strengthen the position, to increase and improve our broadband capability, to utilize our relationships and commercial agreements with satellite to bring a full bundle of products into those territories.

And we'll continue to look at what makes the most sense for those going forward, but there is nothing imminent with respect to those.

And in terms of -- the discussion about satellite in our businesses have -- has gone on for many years, and there are always, again, are advantages of scale and the ability to leverage the size of customer bases to reduce content costs.

But in all acquisitions and opportunities, you look at what are the financial characteristics and opportunities?

And can you create value?

And obviously, we -- as we've gone up to this point, we've felt very good about the path we're on, and as you heard today and as you see again in our results, you continue to see the growth in the U-verse platform, and the strength of that, frankly, is in its ability to provide voice, data and video, a full bundle of products, all over a common infrastructure.

And so we'll continue to push down that path, and you see the results.

You see the improvement it's making in our consumer business and our consumer revenue trends, and so I think we are looking at all the right things, and I think we're following the right path with respect to that consumer business.

[Rick] Cusick, Macquarie.

Wow, we are getting all the names right today.

Hi Phil.

So let's talk about iPad a little bit.

I would assume that that's the majority and maybe more of the prepaid adds that you did this quarter.

I know it's early in the experience here, but can you talk about how these customers act.

What do they do in terms of usage versus iPhone?

How long do they stick around?

Are they trying it for a month and then they are dropping off?

Or are they sticking around for a little while?

And recognizing it's only been out there for two months.

But I wonder if you can go through that with us a little bit.

Sure Phil.

Well, you are right.

They've only been out there at the longest a couple of months, and so not a lot of history at this point.

What we do see is that, first of all, in the quarter we did 400,000 to 500,000 iPad 3G's, over that two-month period, that were activated on the network.

The majority of those, probably in the 75% to 80% range, come on at the higher data package, so -- and originally some signed up at the $30 package, and then as we introduced our tiered pricing, they're coming on at the $25 two-gig level.

And overall ARPUs so far -- again, it's very early on -- are in the same range as our prepaid base, kind of upper 20s to $30 customers.

And usage patterns are about what we've expected so far, which is above our typical iPhone customer but less than our typical LaptopConnect customer.

So in all respects I think the iPad numbers, metrics, ARPUs, volumes have been in the ranges that we expected.

One thing that's been encouraging and a bit surprising so far is the level of interest from business customers.

And when we first introduced the iPhone, the businesses -- and in particular CIOs at the -- of our business customers were reluctant, and they kind of pushed back on bringing the iPhone into their infrastructure.

And over time that's -- as you know, has changed dramatically, and now we have businesses that are developing applications and putting their own applications and content down on the iPhone base within their companies.

And so that's involved.

Well, right from the beginning with the iPad, we've had a number of our business customers express interest.

A number of them have trials going on.

They see a lot of opportunity to use the iPad within their business.

In fact, right before the call, Brooks and I were just talking, and she has downloaded -- as you go through earnings we produce a lot of paper, obviously, with presentations and backup materials.

She's got all of that downloaded now on her iPad.

So I think we'll be doing much more of that going forward.

And that's just an example where people see the opportunity.

Businesses see the opportunity in many cases to use the iPad potentially in place of laptops for many of their people that travel.

So it will be interesting to see how the product evolves, but so far it's been very good.

Perky, we have time for one more question.

Tim Horan, Oppenheimer.

Thanks for all the detail.

Maybe just a little bit more clarity, Rick, if you give us some color on CapEx for the year and for next year.

And maybe just to narrow down the earnings guidance a little bit.

You are up kind of 13% this quarter year-over-year, and it seems like the trends are very strong.

But I know you have Alltel impacting you on the second half of the year.

Should we be thinking about kind of low double-digit earnings growth for this year and maybe kind of the same range next year in this economic environment as the type of guidance you are trying to convey at this point?

Thanks.

Sure Tim.

First of all, on CapEx, CapEx -- we are right on target in plan through the first half of the year to be in the $18 billion to $19 billion range that we guided to.

As you know, we said at the beginning of the year we expected wireless CapEx to be up a $2 billion this year.

If you look at first-half results, I think wireless CapEx is up about $1 billion in the first half, and so again we are right on target with that.

We are seeing in some areas maybe a bit more demand than we had in the original plan, but not enough to change our guidance or total CapEx for the year.

So I think everything this year is right on target.

We are in the very early planning stages to update our plans for next year.

But on a macro basis, what I would expect at this point, as we look forward over the next few years, is that overall we'll continue to be in a similar range, kind of lower teens as a percent of revenues, but you will see some continued shift in our CapEx between wireline and wireless.

Obviously as we get to end of next year, we will be ramping up our initial $30 million home build on U-verse, so that will further bring wireline CapEx down a little bit.

On the wireless side we will be rolling out LTE.

So you will continue to see a bit of a mix shift there, but overall CapEx, I would tell you, as a percent of revenues, in range it's pretty consistent with what you are currently seeing.

In terms of earnings guidance, as you said, we've got -- we've had two very strong quarters to start the year, with double-digit earnings growth.

It's a -- as you know, it's a volatile environment out there, and we can't commit to you double-digit earnings growth every quarter.

But the first half of the year has given us confidence and visibility into what we can do, both in terms of revenues and margins in the second half.

And I think we will continue to post -- have the opportunity to post strong earnings growth in the second half of the year.

We've got a couple of things that will be different from the first half.

We will incur some costs as a part of the acquisition of the Alltel properties, and as you know, the majority of customers there, we acquired 1.6 million customers.

The majority of those are postpaid, about 1.4 million, and the majority of those customers overall are CDMA customers, and so we want to as quickly as possible build out the GSM networks in those footprints and convert that base to GSM.

And there's a cost associated with doing that.

So you will see some impact from that in the second half of the year.

And as we talked about on one of the earlier questions, as we go into third quarter we'll have a bit of an acceleration of some upgrades to the iPhone 4.

But overall, as I mentioned in the presentation, versus where we were at the beginning of this year, better visibility into earnings growth and more confidence in earnings growth as we go through the second half of the year.

Thank you very much.

Folks, if I can, I would just like to offer a couple of closing comments.

And first of all, I want to thank all of you for taking part in the call today.

And I would just like to emphasize first that, again, we delivered another strong quarter of financial results, with consolidated revenues up year-over-year and sequentially.

Our margins were strong and growing, with expansion across the business in wireless and wireline and consolidated, and this drove double-digit earnings growth for the second consecutive quarter.

Secondly, we continued our momentum in wireless, with double-digit service revenue growth and our sixth consecutive quarter of postpaid ARPU growth.

Also delivered substantial year-over-year wireless margin expansion, even with a record quarter in terms of iPhone and integrated device activations.

And third, we continue to execute well on the cost side, while efficiently managing the business.

And this helped us deliver solid margins and strong free cash flow.

It puts us in a great position to continue delivering good results in the remainder of this year.

And we have a fundamentally positive outlook for the business, long-term, and near-term feel good about the second half of the year.

Our job now, as I've mentioned before, is to continue to execute and deliver those financial results for you.

That's where our focus is.

I want to thank you again for being on the call, and as always, thank you for your interest in AT&T.

Thanks everybody.

Have a great day.

Thank you Perky.

Thank you.

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

Thank you very much for your participation and for using the AT&T Executive Teleconference.

You may now disconnect.