AT&T Inc (T) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AT&T first-quarter 2011 earnings release.

For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. If you need any assistance during the call, please press star, then zero. And as a reminder, today's call is being recorded.

With that being said, I'll turn the conference now to Brooks McCorcle. Please go ahead.

Thanks, John. Good morning, everyone. Welcome to our first-quarter conference call. It's really great to have you with us this morning.

As John mentioned, this is Brooks McCorcle, Head of Investor Relations for AT&T, and joining me on the call this morning are Rick Lindner, AT&T's Chief Financial Officer; Ralph de la Vega, AT&T's President and CEO for Mobility and Consumer Markets; and John Stephens, AT&T's Controller and CFO-designate.

We'll cover results, then we'll follow with Qs and As. Let me remind you that our release, investor briefing, supplementary information, and the presentation slides that accompany this call are 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 three, and that says that information set forth in this presentation contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results may differ materially. A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update or revise statements contained in this presentation based on new information or otherwise.

This presentation may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are also available on our website at www.ATT.com/investor.relations.

Before I turn the call over to Rick, I would like to call your attention to slide four, which provides a financial summary. Earnings per share for the quarter was $0.57, which is roughly in line with adjusted EPS from first quarter a year ago and is clearly up from our reported EPS of $0.41 this time last year.

Our results this quarter also include approximately $0.02 of pressure from Alltel integration costs. As we mentioned to you earlier this year, these merger-related costs will also impact margins, wireless churn, and subscriber numbers, which Ralph will cover in a few minutes. We will also see some impact continuing into the second quarter as we complete customer migrations, but overall the integration process is going well and is in line with our overall expectations.

Consolidated revenues were up 2.3% year over year, thanks to continued strength in mobile broadband, U-verse services, and strategic business offerings. Consolidated operating income margin remained stable even with strong sales of smartphones, and cash flow continues to be strong with cash from operating activities totaling $7.7 billion and free cash flow of $3.6 billion.

With that, I will now turn the call over one last time to AT&T's Chief Financial Officer, Rick Lindner. Rick?

Thank you, Brooks. Good morning, everyone. Let me start with a couple of comments on the quarter overall. The highlights are on slide five.

First off, we had a terrific start to the year. We saw a continuation of the positive revenue trends we've seen the past few quarters. We had a very strong wireless quarter with double-digit revenue growth, stable trends in wireline revenues driven by U-verse expansion, and growth in strategic business services.

Going into the quarter, we knew that with another carrier offering the iPhone for the first time, there was the possibility of some natural volatility and our mobile broadband strategy would be tested as never before. I'm very pleased to tell you that the results show our strategy is working. Our wireless business is performing at a high level, and customers, both new and existing ones, continue to choose AT&T.

Smartphone sales continue to be strong. Postpaid ARPU continues to grow at a good clip. Churn remains relatively stable both year over year and sequentially. Plus, we continue to expand in the new wireless growth areas of connected devices and tablets. Ralph will provide you more details in a moment, but mobile broadband is driving unprecedented growth in our industry, and we're pleased with the results we're seeing.

We also continue to be pleased about the transformation of our wireline business. U-verse continues to scale, helping drive consumer revenue per household up more than 6%, and strategic business revenues had its best quarter in more than two years. So on a number of fronts, it was a positive quarter and a good start to the year.

With that as background, let's look at detailed results, starting with consolidated revenues on slide six. First-quarter consolidated revenue totaled $31.2 billion, up $717 million, or 2.3%, versus a year ago. That increase was due to double-digit wireless growth, continued U-verse growth of more than 65% year over year, and stable trends from our business segment.

You see these trends transforming our revenue mix. In the first quarter, 74% of revenues came from wireless, from wireline data, and managed services. That's up from 70% a year ago and 65% two years ago. Revenues from these growth areas were up more than 9% in the first quarter. We are well positioned here and we expect these trends to continue to drive topline growth for the Company as we go forward in this year.

Now I'd like to turn it over to Ralph de la Vega -- Ralph, as you know, runs our wireless and wireline consumer businesses -- for an update on those areas. Ralph?

Thank you, Rick, and good morning, everyone. It's great to be with you today.

As Rick mentioned, we faced a lot of questions with another iPhone competitor entering the market. That made it a little harder to predict what was going to happen in the first quarter, but at the same time, we had confidence in our mobile broadband strategy, our network, and our ability to compete.

Going into the quarter, we told you we had good plans in place. We told you about the stickiness of our customer base and we told you we were prepared. I'm very pleased to say that not only did we deliver another solid quarter, but in many ways we had our strongest first quarter ever.

Take a look at some of our accomplishments on slide seven. Double-digit revenue growth; best-ever first-quarter net adds with gains in every category; best-ever first-quarter smartphone sales, almost equaling our seasonally strong fourth-quarter numbers; best-ever first-quarter connected device net adds, continuing our strong performance in this area; and we continue to add branded computing subscribers, mobile devices such as tablets, air cards, MiFi, and other data devices to our network at a strong pace.

We also posted year-over-year postpaid ARPU growth for the ninth consecutive quarter as more subscribers added data services, a record that none of our competitors can match. And in a quarter that we knew could be volatile, we had postpaid subscriber growth.

Even with these strong sales, wireless service margins were more than 40% when you exclude the Alltel and Centennial merger costs. All in all, an outstanding quarter, especially when you consider the impact of the mergers. Without a doubt, it was a quarter that validated our strategy and our ability to compete.

This quarter's performance helps you understand why we're so excited about mobile broadband opportunities. We're just at the beginning of something really incredible. Mobile broadband has become the critical technology driving growth and innovation. When you think about the additional capabilities to reach that the T-Mobile acquisition provides, you understand why we're so excited about this opportunity.

With that, let me cover wireless revenue on slide eight. Our focus in mobile broadband continues to drive strong growth. Total wireless revenues were up $1.4 billion, or up 10.2%, and wireless service revenues increased 8.6%, up more than $1 billion, versus the first quarter a year ago. This includes growth in both data and voice revenues.

Postpaid ARPU grew 2.4%, which includes pressure from the impact of the Alltel merger. Without this pressure, the increase in ARPU would be pushing 3% for the quarter.

There is no better place to see the success of our wireless strategy this quarter than our net adds and churn, and this is covered on slide nine. Even in a quarter which we knew would be challenging, we added nearly 2 million subscribers. This includes growth in every product category. Connected devices led the way. We added 1.3 million during the quarter.

We also had positive postpaid net adds for the quarter, adding more than 60,000. Excluding the negative impact of the merger integrations, postpaid net adds were around 165,000 in the first quarter. Prepaid net adds for the order were 85,000, and we had another solid reseller quarter with more than 560,000 new subscribers.

Even though iPhone exclusivity ended in the first quarter, the churn impact was minimal. Total churn was relatively stable with last year's level, and excluding merger impacts, postpaid churn was stable sequentially and up only seven basis points from the first quarter last year. If you dive a little deeper, iPhone churn by itself was the same year over year. And iPhone sales increased, which means we continued to grow our iPhone base this quarter. Keeping churn levels low is critical to wireless growth and profitability, and that is why we have a strong upgrade program.

We've also built a sizable part of our postpaid base on family and business plans, about 80% overall, and these customers are more loyal with lower churn rates. These results speak volumes about our wireless business. New customers are choosing AT&T and existing ones continue to stay with AT&T in record numbers.

Another part of the strategy that paid dividends was our focus on smartphones. The details are on slide 10. Smartphone sales helped drive wireless data revenue growth of 24%, up nearly $1 billion year over year. We had our largest first-quarter smartphone sales ever, signing up 5.5 billion customers, both upgrades and new subscribers. The number of smartphones on our network increased by about 2.4 million in the quarter, up 9 million in the last 12 months. These results reflect another strong quarter for iPhone activations, with more than 3.6 million activated during the quarter. That's almost 1 million more than last year, with 23% of these subscribers new to AT&T.

We also had a strong quarter with other smartphones, selling more than 2 million other smartphones this quarter. That's twice as many as we added in the first quarter of 2010. This was driven by BlackBerrys, Windows Phone 7 devices, and significant growth in new Android models. In fact, during the last six months, our monthly sales of Android devices have more than doubled.

We still see a lot of upside here. About 46% of our postpaid base uses smartphones today, but our smartphone sales rate is approximately 65%.

This quarter, we also began breaking out the number of branded computing subscribers added to our network. These are devices such as tablets, air cards, and netbooks. We added more than 420,000 this quarter to reach 3.4 million. That's about twice as many as we had 12 months ago.

Most of these were tablets, with more than 320,000 added. These customers continue to choose AT&T for a reason. Network capabilities matter to them, a faster nationwide mobile broadband network, using voice and data simultaneously on their devices, and international roaming to 224 countries thanks to our GSM network. All of these capabilities make a difference to our customers, and they are a big reason we had such a strong wireless quarter.

As you might expect, strong smartphone sales and high upgrade levels had an impact on margins, and the details are on slide 11. Smartphones tend to have higher subsidies than quick messaging devices and feature phones, but they also have a very attractive customer profile as well with lower churn, higher ARPUs which are about 1.8 times our other devices, and strong data growth.

That's why we implemented an aggressive smartphone promotion strategy in the first quarter, slightly increasing our advertising and marketing spend. You can see the results in our smartphones sales. In the first quarter, we had about 2 million more smartphones sales than we did in the first quarter of 2010. About 9% of our postpaid base upgraded their device in the quarter, signing a new two-year contract with the Company. Without the merger upgrades, about 8% of our base upgraded during the quarter. Again, that speaks volumes about the customers' confidence in AT&T, especially this quarter.

These sales did impact wireless margins. In the first quarter, our wireless EBITDA service margin was 39%, down from the year-earlier quarter but up sequentially. Factoring in customer migration costs from the Alltel and Centennial mergers, service margin would have been 40.5%. Wireless operating income was up more than 13% sequentially to almost $4 billion.

Now let me take a moment to discuss our wireline consumer results on slide 12. We had another strong quarter with our U-verse services. We've done an outstanding job scaling this business within the last few years with solid net adds, strong revenue growth, growing penetration, strong voice and broadband attach rates, with growing Triple Play ARPU, and improving profitability. This helped drive our third consecutive quarter of year-over-year revenue growth in consumer wireline.

We added 218,000 U-verse TV subscribers in the quarter, bringing our total to 3.2 million, up about 900,000 over the past year. Broadband and U-verse voiceover IP rates remain very high. More than three-quarters of U-verse subscribers have a Triple or Quad-Play bundle with us, and ARPU for these customers continues to grow significantly, up 15% year over year to reach almost $170. U-verse now is on an annualized revenue stream of approximately $6 billion.

We also continued our recent trend of total wireline broadband net adds, up 175,000. Together, IP products now represent a $10 billion annualized revenue stream and nearly half of total consumer wireline revenues, growing at over 26% year over year.

That covers wireless and consumer. I'd now like to turn it over to John Stephens to discuss wireline business and consolidated results. John?

Thank you, Ralph, and good morning, everyone.

Let's first take a look at business customer trends, which are on slide 13. What we are seeing so far in 2011 is consistent with the fundamental trends we saw last year. Revenue trends, while still down, have been stable the last three quarters, particularly when you adjust for the third-quarter 2010 sale of our local Japan assets.

But there are some encouraging signs. Strategic business services' revenues from products such as ethernet, VPNs, and application services were up almost 19%, our strongest quarter in more than two years. This drove business IP revenues up more than 8%, once again led by the growth in VPNs.

These results continue trends we have seen throughout this downturn -- consistent investment in strategic business solutions and IP data, services that help drive productivity and efficiency. This has transformed our business wireline revenue mix. Data and other growth areas, such as managed services, now comprise 61% of our revenues, up 200 basis points in the past year. We expect this shift to continue as more and more businesses move to the cloud and IP-based solutions, areas where we are well positioned.

We also continue to execute well. Operating expenses are improving, helping drive margin expansion. So there are some encouraging signs. Any economic improvement would be beneficial, as we have not built an economic turnaround into our expectations this year.

Now let's look at margins and cash flow. Consolidated margin comparisons are on slide 14. For the first quarter, margins were up sequentially, but down from a year ago, at 18.6%. On the wireless side, this reflects a couple of things, merger integration and related costs that Ralph mentioned and significantly higher smartphones sales. Our wireline operating income margin was 11.5% in the first quarter, down slightly from the first quarter last year.

We remain focused on cost initiatives throughout the Company, as evidenced by the total force reductions of almost 6,000 this quarter. This helped offset margin pressure from declines in voice revenues and storm-related expenses that occurred in the West in the first quarter.

Our commitment to operate as one AT&T continues to deliver financial benefits as we consolidate and integrate wireless and wireline operations. And as we target operational efficiencies and simplify product offerings, we have continuing opportunities for cost savings. These initiatives are going well and help us sustain solid margins while also serving customers with a (technical difficulty) operations.

Along with solid margins, we also continue to deliver strong free cash flow. Our cash flow summary is on slide 15. In the first quarter, cash from operations totaled $7.7 billion. Capital expenditures totaled $4.2 billion, with a more than 50% year-over-year increase in our wireless capital to reach $1.9 billion.

Free cash flow before dividends was $3.6 billion, and we made a dividend payment this quarter for $2.5 billion. In terms of other uses of our cash, we reduced debt by more than $1 billion in the first quarter, and debt is down almost $4.5 billion over the past 12 months. Our net debt to EBITDA ratio is now at 1.53.

Our strong balance sheet and cash flow continued to give us the flexibility to invest in the business through both capital improvements and strategic acquisitions, while also returning substantial value to shareholders. With that, I will now turn it back to Rick for closing comments.

Thank you, John. Let me recap the quarter on slide 16.

First, we're off to a good start for the year, with solid revenue growth in both wireless and consumer wireline and stability in our business markets. Second, we had another very strong wireless quarter, a performance that was particularly satisfying when you consider the challenges we faced.

We told you last quarter that we expected positive contract subscriber growth for the year, even with the introduction of another carrier for the iPhone. And we delivered on that outlook in the very first quarter. When you add in record first-quarter net adds, strong sales of branded computing subscribers, and higher postpaid ARPU, you can understand our confidence in the broadband strategy and mobile broadband opportunity.

We're also very pleased with the continued transformation of our wireline business. In fact, fast-growing data and video services now exceed voice revenues in wireline, thanks to U-verse and continued strong growth in strategic business services. And our financial strength and cash flow remains strong, allowing us to return value to shareowners as we continue to invest in our business. So we're off to a good start to the year with solid first-quarter operating results and a positive long-term outlook for the business.

Brooks, that concludes our prepared remarks. I think we're ready to take some questions.

Okay, John, why don't we open up for some questions?

(Operator Instructions). Simon Flannery, Morgan Stanley.

First, Rick, wishing you all the best on your retirement. You'll be missed. Thanks for your help.

Thank you, Simon.

Ralph, could you update us on the LTE rollout? What are the key steps you're going through right now where you stand, and what's the updated timing and POP coverage on that? And any updates you have on sort of network performance in some of the major markets currently. That would be great. Thank you.

Sure, Simon. Our LTE rollout is on track and continues to move at the same pace prior to the announcement of the T-Mobile transaction. We're planning to commercially launch service mid-year and we plan to cover 70 million to 75 million POPs by the end of the year.

Our network team is working around the clock, doing the necessary modifications and building the network. We've got handsets and devices ready to go, so we're really excited. What I'm really excited about is we had a very good first quarter, and we have not yet turned up our LTE capability. So, I expect that future quarters when we have that capability in hand will even give us better momentum.

And on the network performance today?

The network performance today, Simon, is getting better. We've got the nation's fastest network, and it keeps getting faster.

We saw an increase in national broadband speeds over the last six months. We've had solid improvement in voice metrics thus far this year. We've improved both voice retainability and voice accessibility. The only concern we have with network is long-term capacity constraints that we face with spectrum, and as you know, that's one of the things that will hopefully be relieved with the T-Mobile transaction.

John Hodulik, UBS.

Rick, again, we enjoyed working with you, and good luck to you in the future.

Thank you, John.

Just a couple of questions on wireless. Actually, Rick, in the past you guys have said you thought the churn levels would be elevated in the first half and start to head down in the second half, given the expiration of the exclusivity. Is this the kind of increase in churn -- churn was -- the increase was certainly much less than we thought. Is this the kind of level that you think we should expect to see going forward here maybe in the second quarter, or do you think that the expiration of some of the contracts that you guys signed two years ago accelerates that a bit?

And then, secondly on wireless, the prepaid numbers, the net adds of 85,000, a little bit less than we thought. Verizon is testing some paid plans. Is that an area where you think you might need to get more aggressive?

John, let me -- I'll give you a perspective on churn and the impacts there and the contract customers, and then I'll let Ralph address the prepaid wireless question.

In terms of churn, frankly, we expected a slight uptick in churn when another carrier launched the iPhone. Our expectations, I think, were generally less -- more modest in terms of churn increase than external expectations. We believed in our broadband strategy, our wireless strategy. We felt we were prepared for changes in exclusivity, and actually, the results came in better than we expected.

And as you heard from Ralph, there was very, very modest change in overall churn and in postpaid churn levels, and I think one of the most surprising areas, perhaps, is the fact that iPhone churn basically stayed flat. It did not increase. And I think as you think about what drove that and what caused those results, frankly I think it had less to do with customers being under contract. Of course, we always work hard with our upgrade policy to keep customers under contract and we do believe that it helps overall churn levels.

But the fact is that it was well known for months and quarters in advance that another carrier would launch the iPhone. And yet, we continued to see customers upgrade their devices, enter into new contracts in the third and fourth quarters last year in record numbers, and that continued into the first quarter of this year when the phone was available on another carrier.

And the reality is, even if customers were under contract, they had the ability to break that contract, pay a termination charge, and most likely take that device that they had and sell it and recover most, if not all, of that contract termination. So I don't think having customers under contract had that large of an impact.

What do I do believe has an impact is what Ralph touched on earlier, and that is that the device -- and you have to remember the iPhone is a device that carries a lot of data usage and a lot of traffic. For heavy data users, being on our network, having a faster data experience, having simultaneous voice and data, having the ability for high-end users who do any amount of international travel to be able to use that device not just in the U.S. but around the world, all of those things were important to the iPhone customer base.

And so, I think that speaks as much as anything to what we saw in the first quarter into churn levels. And as we go forward, based on what we've seen certainly to date, we are not expecting significant changes in those churn rates or in the iPhone churn rates as we go forward in the balance of this year. Ralph, do you want to touch on prepaid?

Yes, let me add a couple of thoughts, John, on that same subject, and then I'll talk a little bit about our prepaid, but one of the interesting things in the quarter, to add to what Rick has said, is that our momentum for sales actually increased throughout the quarter.

What we saw happen early in January when the iPhone was announced to go to another carrier is customers took notice, waited to see what was going to happen, and then once they compared and they understood that on our network the iPhone works faster, that it has simultaneous voice and data, and it works in over 220 countries, I think they made their choice, and we saw that increase in the February and March timeframe, so we're very pleased with the momentum. I think the customers understand the trade-offs and they're making their choices. And I'm very, very pleased that our marketing message got through, and that we maintained and actually grew momentum throughout the quarter.

In terms of prepaid, we continue to look at a number of things in prepaid. You probably saw that we just announced a new, and our first, smartphone prepaid with LG. It's a low-end smartphone on the prepaid market. We think that there is the same level of interest in that market for data in a prepaid product, so we've launched it and we think -- we have high hopes that that will stimulate prepaid demand. But we continue to look at all other kinds of aspects of the prepaid business to grow it, but to grow it profitably.

Michael Rollins, Citi Investment Research.

Rick, good luck in your retirement.

I wanted to just follow up on two things. First, on the business revenue side, could you talk a little bit about how we should look at the stabilization in enterprise and small business revenue, maybe what drove that in the quarter, and is this the turning point where maybe in the next few quarters we could start to see some sequential growth take shape? And on the other side of the global business segment, wholesale looked like it took a step down in the quarter. If you could talk a little bit more about what happened on that part of the local business revenue. Thanks.

Thanks, Mike. This is John. A couple of things with regard to the enterprise space revenues.

After taking into account the sale of our Japanese local asset business, we did see a stabilization of the trend. I think for us, it's the movement toward the IP and the strategic services, which is helping us trend that. We are -- we have not planned for an economic turnaround, but as that occurs, we will see those trends improve throughout this year and into next year, and I guess our viewpoint would be that we would hope for positive revenue in that area in 2012.

On a longer-term basis, we believe it to be a GDP or GDP-plus type business.

On the small business side, the opportunities there are really in the data side and our IP-DSLAM strategy where we've got about 50% of our central office covered with the IP-DSLAM capabilities, which is allowing us to provide some really competitive products in the data area. When you combine that with our unique position to provide mobile services, we believe we are seeing some traction in the small business area.

But that has been tempered by the fact that business formations in that space are just really challenged right now. That's an economic matter that I think any participant in the market is dealing with.

Lastly, on the wholesale side, we just continue to see challenges in all aspects of that business as our customers continued to trim their networks and look for efficiency. And that's an area that we'll continue to focus on as we go forward.

Mike, this is Rick. I think on just a couple of points, I'd add on the wholesale side and the wholesale numbers you're looking at, I think as we kind of disclosed the breakdown of our business segments, we include -- we group wholesale along with federal and government, education, medical segments of the business. And so, if you just look at our pure wholesale portion of the business, we've seen some improvement there, and in fact, we've seen some nice results driven to a large degree by providing ethernet transport to cell sites for other carriers.

But, we are seeing some weakness in the government areas of the business. On the federal side, federal revenues are still growing year over year. But the growth rate in this quarter declined, and I think at least to some degree, that has had to do with budget issues in Washington that are causing different agencies to tighten their belts a little bit. And then, of course, in the state area, the budget pressures there are having an impact. But wholesale by itself is moving along pretty well.

When you put it all together, our expectation as we go forward in this year will be to see improvement in the revenue trends on a year-over-year basis. We expect to see that as we move into the second, third, and fourth quarters. I think the extent of that improvement and certainly the point in time when we get back to positive revenue growth in business is heavily dependent on the strength of the economy as we go forward in the balance of this year.

David Barden, BofA Merrill Lynch.

Thanks for taking the question, and Rick, obviously I'd like to echo all those sentiments. Good luck in the afterlife.

And just questions, number one, if we could return to the wireline margin question. Obviously, you guys highlighted a couple of qualitative issues. Could we talk a little bit more about quantification in the quarter of maybe some of the seasonal step-ups and the storm costs, and how we should think about that margin maybe lifting back up in the coming quarters? I mean, this was the first time in, I think, maybe 10 quarters that we actually saw the total value of expenses go up rather than down.

And then, I guess, the second question, maybe Ralph, just on the ARPU side, could you talk a little bit about, at this stage of the game, what's driving ARPU? Is it getting the feature phone subs into that $15 price tier? Was it really about selling these $50 iPhones and upselling guys who are already in the integrated device tier up to the smartphone level? What's really the mechanics behind where ARPU is going today? Thanks.

This is John Stephens. On the first issue you had with the margins, quantifying the first quarter storm-related costs over time, maintenance repairs, and then some of the payroll tax issues, it's about 100 basis points or about $150 million.

And so, we would expect -- that's included in this first quarter, and we would expect things to improve and grow margins going forward.

A couple of other things that you're seeing that we're dealing with is the growth in our U-verse business, while very positive and a good story and good overall growth, brings with it some lower margins from our legacy products. I think you're familiar with that. But we do expect to see continued improvement in margins throughout the year. I'll hand the other -- was the other question over to Ralph?

Yes, I'll take that one. David, the thing that is driving ARPU is our fundamental strategy to continue to move customers into smartphones with higher revenue data plans.

So what we did this quarter which worked extremely well was to offer customers lower price options to get into a smartphone, not just from the point of view of the price plans, but also the device pricing. The iPhone 3Gs at $49, selling very well. We also have the HTC Inspire and the Motorola Atrix, two brand-new Android devices that are selling very, very well. So what you see are people that are stepping up from quick messaging devices and feature phones and stepping up to the higher data plans, and that's what's driving ARPU.

And if I could just quick follow up, Ralph, just -- I noticed that you guys shared smartphone penetration of the base this quarter. Could you share the integrated device penetration this quarter, which I think is something you guys have been sharing for the last couple of years? Thanks.

Yes, I think the integrated device penetration stayed approximately about the same level as we did last quarter. So we increased -- smartphones to integrated devices stayed at approximately the same level as they did last quarter, and we grew the overall smartphone base at the same time, so that's very positive for us.

Craig Moffett, Sanford Bernstein.

Good morning, and Rick, let me add to the list of congratulations.

Could you drill down a bit on the wireless consumer versus enterprise trends? It's not something you break out, but is it fair to assume that enterprise wireless has started to show some acceleration, and if so, what does that say about consumer on a net basis? And then, similarly, if you could just share a little bit about the porting ratios that you had outside of the iPhone, what were you seeing with respect to other carriers beyond just the Verizon iPhone impact?

Craig, in terms of consumer versus enterprise, we've had very good success on the enterprise side, both in CR use and IR use.

Our customers in the enterprise side, of course, are just following this wave of growth that we're seeing with smartphones and, specifically, tablets. So we are very pleased with the results, and they complement the growth that we have seen in the consumer markets. So, all the metrics that we've talked about overall are doing as well or maybe a little bit better on the enterprise side. So we are very, very happy with the enterprise results.

In terms of the porting ratios, porting ratios since the beginning of the year and through the iPhone release through another competitor have actually gone up after our customers made their choices and started re-upping the contracts and signing up in what turns out to be a record quarter for smartphone sales, so we're very pleased with the performance with our enterprise business and we're also very pleased with the uptick in the porting ratios that we have seen subsequent to the launch.

Can you share any quantification of either of those impacts?

No. We do not provide that data publicly, Craig.

Mike McCormack, Nomura Securities.

Rick, I'll test your math knowledge one more time before you step down, but just thinking about wireless margins, and we strip out the impact of Alltel and Centennial, it looks like cash costs were up about $1 billion year over year, and obviously you had 2 million additional smartphones, including iPhones. But could you just help us understand maybe the differences in [SAC] between an iPhone and a regular smartphone, and then maybe secondarily, the impact of Verizon getting the iPhone on, whether it's marketing or advertising, is that sort of a one-time expense that we can expect to go away? And congrats again, Rick. Thanks.

I'm sorry, Mike, I didn't -- what was the last part of your question?

Just when we think about that billion-dollar cost increase year over year, how much of that is just incremental SAC related to smartphones and iPhones versus spending in advertising and marketing because of the Verizon iPhone coming online?

Mike, I think the majority of the cost increase, and certainly the majority of the margin impact that you see year over year in our results, is related to the smartphone sales and the increase in those smartphone sales year over year.

What we're seeing in the businesses is two factors that are impacting margins. One is higher upgrade levels. So those overall volumes and upgrades are higher, and then we are seeing a significant mix shift out of lower-end devices, some lower-end feature phones, and even, versus what we've seen in the last couple of years, a lower mix in lower-end quick messaging devices toward smartphones.

Now obviously, there is some upfront cost to that. We believe there's significant advantages to it, advantages in terms of customer satisfaction in churn, significant advantages in ARPU. Even when you go from a quick messaging device to a smartphone, there is a significant ARPU benefit there. But the actual cost by device depend upon the individual smartphones that you are selling because those devices as well vary by device in terms of subsidy.

But let me just leave it with that the majority of that cost increase had to do with additional subsidies related to smartphones, along with, obviously, we are putting a lot of investment into the network to handle the volumes and the traffic that we are seeing, and when you put that additional investment in, it increases our costs associated with cell sites and cell site leases, equipment maintenance. There's a lot of trailing expenses. All the backhaul associated with it.

And so, those are the two areas where we're seeing some cost increases. And the cost increases in the network side associated -- is really associated with volumes and revenues, and it's not having as significant an impact on the overall margin percentage. But the smartphone penetration, the upgrade volumes and so forth, is having more of an impact there. And that's something Ralph and his team are working very hard on in terms of, as we go forward, managing those levels and managing costs to drive margin improvement as we go forward in this year.

Rick, if you don't mind, just maybe give us a little bit of detail in the step-down in D&A. Is that the change in useful lives or is it something else we should be thinking about?

No. It's -- if you look at depreciation itself, year-over-year depreciation itself was up slightly, as you would expect.

Amortization was down, and that was simply merger-related amortization, primarily in wireless, but actually both in wireless and wireline. It's just falling off. Within the depreciation categories, I think we did have a small decline in depreciation in the wireline business, but it was more than offset by increases in wireless, and on a net basis consolidated, there was a small increase in depreciation.

Thanks, and best luck, again.

Thank you.

Jason Armstrong, Goldman Sachs.

Rick, I'd echo the congratulations. We'll definitely miss you.

In terms of wireless trends through the quarter, Ralph, you had some interesting comments on the trend rate, saying momentum improved through the quarter. I'm trying to get specifics here. Was this an iPhone-specific comment and, I guess, to what extent was this tied into the $49 pricing on the 3GS product you have, or was this more of a comment on broad momentum in wireless, i.e. you've weathered competitive LTE launches with Thunderbolt, etc., and really see holistically momentum improving through the quarter?

And then, I guess, second question just on ARPU. The rate of postpaid ARPU growth, I think, was positive relative to expectations this quarter. Are you comfortable that the rate of growth continues to improve from here? I guess you get some benefits from lapping Alltel in 3Q, so it's some momentum there, but are we comfortable that it continues? Thanks.

Yes, Jason, this is Ralph. And yes, what happened with momentum, it was -- holistically, it wasn't just to one specific device. What we really liked is that we had good momentum from the iPhone portfolio, but we also had some terrific momentum from the new Android portfolio.

The sales of Android devices with the Motorola Atrix and the HTC Inspire, our brand-new Android devices, are off to a very good start. So we saw a great impact on momentum from our iPhone portfolio, but also the Android portfolio was very strong, as were other devices. So holistically, it was a very strong quarter. Once customers got over the lull of what to expect, they saw what the competitor had and they made their choices. So I feel very, very strong about that.

When it comes to ARPU, I feel even better because we have just begun to roll out the 4G Android devices. And we know we have LTE coming in the middle of the year and in the second half of the year, Jason.

So, my expectation is once customers get to see the mobile broadband strategy that AT&T has, where you're going to get a great LTE experience with these new devices, but then you're going to fall back to our HSPA-plus capabilities, so that the transition from high speed of LTE to high speed of HSPA-plus is almost seamless is something they're going to love. That to us means higher ARPU, more data usage, and we feel very strongly that we are on the right path, promoting the right products, and with the network capabilities we're going to have by the end of the year, I feel it puts us in an even better position than we are in this quarter.

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

Jonathan Chaplin, Credit Suisse.

Thanks. Just following on from the wireless margin question. Rick, for you, since this will be the last time we have you, and congratulations again, is -- should we see margins in wireless expand during the course of the year as some of the pressures that you sort of built up for in the first quarter from a cost perspective actually don't increase? And then, over time, can we still get to mid-40s EBITDA margins in wireless given that the extra cost that smartphones bring with them? Thanks.

Jonathan, are you hoping that since this is my last call, I'll give all the information that I wouldn't give in the past?

Yes, the gloves are off, Rick. There's no cost. You can give it all to us. I was just thinking in terms of the wireless margin guidance. This was comments that you had made in the past. And I'm wondering if (multiple speakers)

I've got it, Jonathan. I was just teasing you. In terms of wireless margins and what we expect going forward, we do expect wireless margins to improve going forward in the year.

One of the pressures, as we talked about we had this quarter, was with the migration, primarily the Alltel and to some degree the Centennial customer bases, onto our network and our systems, and in order to make that migration because they're coming largely from another technology, we have to replace handsets, and there is a cost and a subsidy associated with that. First, this quarter was, from a margin standpoint, the peak of that impact. We will see some impact going into the second quarter, but it will be less than what we saw this first quarter.

And that migration, for all practical purposes, will be complete by the end of the second quarter. And so, we'll see a natural increase in margins as we go forward due to that change.

In addition to that, as I mentioned earlier, there is a number of initiatives we are working to drive margin expansion and better margins in the wireless business. You saw us across the Company reduce force pretty significantly this quarter, nearly 6,000, and some of that benefit will flow into the wireless business and certainly it will benefit overall margins. But going forward, the individual quarter results can be impacted by specific product launches in those quarters, and obviously, the volume of smartphones sales and the volume of upgrades will impact individual quarters.

But to your point, we do expect wireless margins to improve, and in our expectations and our planning still move wireless margins into the mid-40s that we talked with you about on a longer-term basis.

With that, folks, if I can, let me offer just a couple of closing comments. First off, we entered this quarter and this year with some questions and some uncertainty primarily related to the change in the iPhone exclusivity and the impacts that would have on our business. And as Ralph said in his remarks, hopefully we've answered those questions. Was there an impact from another carrier launching the iPhone? Well, the answer to that is yes. There was. We saw a very small increase in postpaid churn and we saw a slight decline in overall flow share.

But the impacts were significantly less than many in the financial community and the media expected, and frankly, the impacts were less than we expected. And we continued to grow our postpaid base. We continued to grow our iPhone base. We continued to grow postpaid ARPU and had significant growth in wireless data revenues.

And I think that speaks to several things. I think it speaks, first of all, to the strength of our postpaid customer base and those specific customer relationships. I think it speaks to the ability of Ralph de la Vega's team to execute a plan and to compete in the marketplace. And I think it also speaks to the strength of our wireless data network and our franchise overall.

This quarter's results give us a base to build from and momentum for growth as we move into the second quarter and into the balance of this year. And beyond 2011, we look forward to closing our acquisition of T-Mobile and to delivering all of the benefits and all of the promise of a strong nationwide wireless broadband network to our customers, to the nation, and to our shareowners.

One last thing before we end the call. As all of you kindly mentioned in your questions, I have announced my retirement, and this is my last earnings call with you. I would be remiss if I didn't tell you what a pleasure it's been working with all of the talented analysts and owners who have followed our Company over the years. It's been an honor to have this position, and I know I'm leaving it in the very best of hands with John Stephens and the rest of the AT&T team.

And on behalf of that team, we want to tell you once again how much we appreciate your participation on these calls. And as always, we want to thank you for your interest in AT&T. And with that, I'll hand it back to our conference operator John to close out the call today.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for using AT&T's executive teleconference service. You may now disconnect.