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AT&T Inc. (NYSE:T)

Q3 2007 Earnings Call

October 23, 200710:00 a.m. ET

Executives

Richard Dietz – Senior Vice-President Investor Relations

Richard G. Lindner - Chief Financial Officer and Senior Executive Vice-President

Analysts

John Hodulik - UBS

Michael Rowlands - Citigroup

Mike McCormack - Bear Stearns

Simon Flannery - Morgan Stanley

Jason Armstrong - Goldman Sachs

Jonathan Chaplin – JP Morgan Securities

Tom Seitz - Lehman Brothers

Operator

Good morning, ladies and gentlemen. Welcome to the AT&T third quarter earnings release 2007 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Richard Dietz, Senior Vice-President Investor Relations. Mr. Dietz, you may begin.

Richard Dietz

Great. Thank you, Christine. Good morning, everyone. It’s great to have all of you with us as we cover our third quarter results this morning. Joining me on the call this morning is Rick Lindner, AT&T’s Chief Financial Officer.

Earlier this morning we issued our release, investor briefing, supplementary information, and presentation slides, all of which are on investor relations page of the AT&T website. That’s www.ATT.com/investor.relations.

Before I get started I need to cover our safe harbour statement. 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 these presentations 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 available on our website, ATT.com/investor.relations.

Okay. With that covered, let’s start with EPS comparisons, which is on slide four of our presentation. Adjusted EPS for the third quarter was 71 cents. That’s up 12.7% from a year ago results. That’s our tenth straight quarter of double-digit adjusted EPS growth. Reported EPS for this quarter was 50 cents. We had 21 cents of merger costs and purchase accounting effects and the result is 71 cents adjusted EPS. In our third quarter results we did not adjust for 171 million in items related to legal matters, non-merger severance, and other non-recurring adjustments, which reduced third quarter operating income and margins and lowered EPS by about 2 cents. At the net income level, this one-time expense pressure was off-set by adjustments to federal and state income tax liabilities. These tax items also were not adjusted for in our third quarter results.

With that background I’ll now turn it over to AT&T’s Senior Executive Vice-President and CFO, Rick Lindner. Rick.

Richard G. Lindner

Thanks, Rich. Good morning, everyone. Let me begin on slide six, which provides an overview of our results. We had an excellent third quarter. We’re delivering on the targets we laid out for you. We’re ramping revenue growth. And cash flow continues to be strong. In wireless we had 2 million net adds, our best third quarter ever. In Enterprise we had positive growth in recurring service revenues this quarter. And in both total and recurring Enterprise revenues we posted our second straight quarter of sequential growth. These improvements in wireless and Enterprise allowed us to ramp consolidated revenue growth, and this was our fifth straight quarter of improved total top line growth.

At the same time, we continue to deliver on merger synergies. As a result, margins were solid and free cash flow continues to be strong. We now expect full year free cash flow after dividends of $6 to $7 billion. As you know, that’s above the updated range we provided last quarter.

We continue to return substantial value to share holders. We repurchased $2 billion worth of our shares in the quarter, $8.9 billion year to date, and combined with dividends that’s $15.5 billion returned to shareholders this year.

Before I cover the operational results in more detail, let me comment briefly on some of the strategic steps we took during the quarter. Slide seven lays out some of our recent initiatives. For AT&T, and for the industry, growth is increasingly coming from robust, data centric mobility services, from business markets, and from converged services as customers expect seamless interactivity across wireless broadband, traditional voice, and video service platforms. Our focus is concentrated on these areas as we work to innovate, to build smart alliances, define markets, and build a foundation for sustained growth.

First, as you’ve seen with our Dobson and Aloha announcements, we’ve taken steps to expand our wireless coverage and our Spectrum position. We’ve also been aggressive with exclusive launches of cutting edge wireless devices that raise the bar in terms of data services and entertainment options. The Apple iPhone is certainly part of that and there are a host of others.

We’ve also taken steps to add expertise and products to our Enterprise portfolio. The latest is the addition of InterWise, a global internet web conference provider. And we also expanded our alliance with IBM to make AT&T IBM’s primary network management provider.

We’re making terrific progress with our U-verse Video Service. Install rates and deployment are both ramping as planned. And we’re doing a number of things to drive convergence across wireless broadband and traditional land line voice. For example, we’ve launched a wireless broadband bundle and we’ve had a strong response to the relaunch of our AT&T Unity plan which created the nation’s largest calling community with more than 120 million AT&T wireless and wired phone numbers.

In concert with this focus, we’re doing significant work to reposition the AT&T brand. Brand migration work is largely complete. That’s changing over the Singular and Bell South names to AT&T. And customer awareness levels already rate very high. So now we’re focusing on the next transition. That’s to build into the AT&T brand a new world of capabilities and customer expectations.

With those comments as a backdrop, now let me cover for you the quarter in some more detail. Slide eight shows earnings per share growth and margin expansion. As Rich mentioned, before merger related effects our third quarter EPS was 71 cents. Our adjusted consolidated operating income margin was 23.7 percent. That’s up more than 400 basis points year over year, but down just slightly sequentially. However, it’s important to note that we did not include in our adjustments this quarter $171 million in items related to some legal matters, non-merger severance related to our IBM agreements, and other non-recurring items. These charges increased operating expenses, which negatively impacted the consolidated adjusted operating margin by about 60 basis points, and impacted our wireline adjusted operating margin by 100 basis points. But meanwhile, at the EPS level, these impacts were offset by benefits from tax adjustments. We continue to expect to operate at the top end of the 23 to 24% adjusted operating margin range, and of course we expect to deliver continued double-digit growth in adjusted EPS this year and next.

A key driver to our margin strength is expense savings from merger initiatives. We continue to run ahead of schedule on AT&T core and Bell South/Singular merger synergies. Slide nine provides you an update.

Last year we achieved $1.1 billion in savings from SBC/AT&T integration. That’s a combination of both expense and capital savings. And through the first three quarters of this year we’ve realized $2.8 billion; 70% of that total is expense related and the remainder is capital savings.

We are on or ahead of schedule in key areas such as network and traffic consolidation, labour savings, and rebranding. Brand awareness for AT&T is at targeted levels; 95% of our company owned retail stores have been rebranded and we expect to reach 100% in December, and 100% of our vehicles have been rebranded. Most importantly though, I believe we still have a lot of headroom in terms of cost reduction.

We continue to expect merger synergy run rates to exceed $5 billion next year, growing to more than $6 billion in 2009. But frankly, we think of those numbers as simply the base line. Beyond basic merger synergies we currently have multi-year initiatives under way in areas such as IT, network, and customer care that offer substantial cost benefits, and you’ll hear more about those at our analyst conference in December.

I think the most promising trend line in our results this quarter though is the ramp we’re delivering on top line revenues. Slide 10 shows our revenue growth trajectory. The chart here shows total revenue versus pro forma results for 2006, which combine AT&T, Bell South, and Singular, and take out the accounting effects associated with advertising and publishing from the Bell South transaction.

Revenue growth rates have been steadily improving and this quarter we took a dramatic step up. Year-over-year revenue growth was 3.2% and we had sequential revenue growth of 1.8 percent. The drivers are strong double-digit growth in wireless, improved trends in Enterprise and solid regional results.

We had just an excellent growth quarter in wireless. The details are on slide 11. Gross adds were up significantly, we generated 2 million net subscriber ads during the quarter, and over the past four quarters we’ve grown our wireless subscriber base by 7 million, all organically. We’ve also grown ARPU. Total ARPUs is up 2 percent, our fifth straight quarter of year-over-year ARPU growth, and post-paid ARPU was even stronger, up more than 5% year over year. The result is continued solid double-digit wireless revenue growth with total wireless revenues of $10.9 billion in the quarter and service revenues of $9.9 billion.

Our network coverage is excellent, our sales present is strong, brand awareness has made big moves in the right direction, we’re setting the pace with cutting edge handsets, and these are all contributing to very strong momentum in wireless.

In addition to subscriber growth, the other big driver behind wireless performance is growth in data and the highlights are on slide 12. Year over year, wireless data revenue growth was 64% taking us to $1.8 billion for the quarter, an annualized revenue base of more than $7 billion at this point. This was our fifth quarter of wireless data revenue growth above 60 percent. This growth reflects strong increases in both consumer and business data usage, including E-mail, media bundles, internet access, laptop connectivity, smart phone connectivity, and Enterprise vertical market solutions.

Data now accounts for more than 18% of total wireless service revenues and more than $11 of our post-paid ARPU. And as strong as that growth has been, it’s clear to us we’re still in the early stages of wireless data growth. There is a huge opportunity in front of us. At this point, nearly 40 million of our subscribers are active data users. That’s up more than 30% over the past year. But I think an important point is that only 35% of our post-paid subscribers today are on monthly wireless data plans and growing that number is a significant opportunity in the future.

Adoption of data centric handsets is on the rise. Devises like the iPhone and the AT&T Tilt are ratcheting up customer expectations and redefining the market. And 3G growth is just getting under way. Today we have approximately 7 million customers using 3G devices; that’s nearly triple the total two quarters ago. And most importantly, data ARPU for our 3G customers is almost double that of the average 2G post-paid customer. We’re attacking that data opportunity in a number of ways, including cutting edge handsets and innovative data in entertainment services. We’ve highlighted some of these on slide 13.

Our scale coverage and distribution make a compelling combination, not only for customers, but for strategic partners as well, and we’ve launched a number of high profile handset exclusives. The iPhone is certainly the leading example and it continues to generate strong sales. Currently we have activated more than 1.1 million iPhones with more than 40% of those as new customers to AT&T. And most recently we launched the AT&T Tilt, the first AT&T enabled Windows 6 smart device.

We’re selling a higher percentage of data rich devices. The iPhone and the Tilt certainly fit that category, as does the new Blackberry 8820, which adds Wi-Fi capabilities to the Blackberry experience. AT&T continues to be the world’s largest provider of Blackberry services.

In addition, we’ve introduced the Sierra Wireless Laptop Connect Card, the first device that’s fully compatible with the latest generation of HSPA technologies that we’re deploying throughout our 3G network.

We’re also loading up on richer entertainment options. We just recently announced that starting in November we’ll have Napster’s more than 5 million full track music library available through our service for over-the-air download. That gives AT&T the largest and most complete music solution among national wireless carriers.

With our wireless platform in the lead, we’re delivering services that converge communications and entertainment and converge wireless and wireline. The AT&T Unity plan, for example, gives customers who sign up for both AT&T wireline and wireless services the option of having a free calling community of all AT&T phone numbers, some 120 million. That service took off in the third quarter with our in-service total growing nearly fourfold from the second quarter.

In addition, we’re doing more to converge customers wireline broadband experience with their wireless experience. As I mentioned earlier, we now market a wireless broadband bundle and we’ve launched a service called MediaNet, which gives customers new web-based tools to manage their wireless homepage from their PC or from their handset. We’re being aggressive as we work to expand customers options and to make their experiences on our networks richer.

Now, while we drove very strong wireless gross adds in the third quarter, and those were accompanied by some 4 million handset upgrades, at the same time we expanded margins. The highlights are on slide 14. Versus the year-ago quarter, our third quarter adjusted wireless operating income was up 54 percent; that’s an increase of more than $1 billion. Our adjusted operating margin was up 680 basis points and our adjusted service EBIDTA margin was 39.1% of 350 basis points.

There are a lot of drivers which we’ve covered with you in the past, including strong revenue growth, reduced charm (sic) and merger integration. We continue to improve our network cost structure. In the IT systems migration and the consolidation of IT systems that we outlined as part of our merger integration are now nearly complete. The unwind of our California-Nevada network joint venture is also nearly complete with 98% of our customers in those areas now on our own network. But the shutdown of our TDMA network is still ahead. We moved 560,000 subscribers off that network in the third quarter and we have about 780,000 that remain, with roughly two-thirds of them resale customers.

Our view of margin potential going forward has not changed. For next year we expect margins will expand further to a full year average in the lower 40% range, with clear opportunities for additional expansion beyond 2008.

The other key area of substantial improvement is the ramp that we’re seeing in Enterprise. The details are on slide 15. The chart here is the one that we’ve provided for the past several quarters. It shows year-over-year growth rates for total Enterprise revenues, excluding CPE sales and MNA impacts. As you see, this quarter we moved into positive territory, up 0.3 percent, and momentum is good. This was our second quarter with sequential growth in Enterprise revenues.

There are a number of drivers; demand is solid, data transport volumes are strong, IP services – which included virtual private networks, managed network services, and hosting – grew 21.6% year over year. VPN revenues were up more than 30 percent. Hosting revenues were up 19 percent. We currently have 36 data centers in operation around the globe and by the end of this year we expect to have 38 deployed. And across our Enterprise portfolio, best of all, we’re winning contracts, including our first under the GSA networks contract.

To drive sustained growth you’ve seen us take the initiative to expand our capabilities for Enterprise customers. We announced an expansion of our alliance with IBM to be their primary network management services provider and we expect that will add approximately $1 billion in revenues annually over the next five years with most initially flowing to the wholesale category.

We also announced plans to acquire InterWise, a leading global web internet conferencing provider. So our Enterprise growth trajectory continues to improve and the assets we’ve added and the alliances we’ve built will help us continue to build on that progress.

Now, while we drive toward growth and Enterprise we’ve sustained solid results in regional business. Slide 16 provides a quick update. Regional business revenues grew by 3.4% in the quarter. Revenues from small and midsized firms continue to be solid, up 6 percent, consistent with recent results. Regional business data revenues grew 6.9 percent, the same as last quarter. Data transport revenues in this category posted solid mid-single-digit growth. IP data services were up nearly 10 percent, lead by DSLs hosting and VPN. And voice revenues also continued to grow in regional business. Access lines increased in the quarter as they have over the past several quarters and should (sic) remain stable.

Slide 17 shows regional consumer trends, which despite increase in cable competition continue to deliver stable revenues consistent with results in this category over the past several quarters. Our broadband penetration of consumer lines moved to 37% in the third quarter, and in our west region broadband penetration is above 44 percent. Consumer video penetration moved up to 6.7 percent. That’s a combination of both satellite and U-verse TV.

With games in broadband and video more than offsetting declines in traditional voice access lines, over the past year we’ve had a net gain in regional consumer connections of 895,000. As a result, our consumer ARPU based on primary lines was up 3.7 percent.

As we show on slide 18, we also had a solid broadband quarter with a net gain in total broadband subscribers of 499,000. We now have 13.8 million broadband connections, up 18.6% or 2.2 million over the past year. Forty-four% of our consumer broadband customers now take speed tiers of three megabits or more. And our wireline broadband revenues grew 14% to $1.4 billion in the third quarter, an annualized revenue stream of more than $5 billion.

We believe that there’s a substantial opportunity for broadband still ahead from the millions of dial-up users that remain, from cable subscribers who are choosing our platform, and from a new generation of consumers who are looking for a robust combination of wireless and broadband. To that end, in August we launched a trial broadband-wireless offer that’s a combination of a wireless device for voice along with a DSL line for broadband, and response was good. We’re now moving forward to sell that combination across our footprint.

As I mentioned at the outset, we’re seeing a very strong ramp in U-verse. Slide 19 has the highlights. Six months ago we has 16,000 U-verse video subscribers and at the end of the third quarter we had 126,000. Service is now available in portions of 33 markets. Install rates have climbed throughout the third quarter. And at quarter’s end our install rate already approached our year-end goal of 10,000 per week. That’s up from 5,500 a week three months ago. Our technicians are gaining experience and expertise, and we’re climbing the learning curve of video quickly.

Now let me close with a few comments on cash flow that’s on slide 20. Throughout the first three quarters of the year cash from operations totalled more than $24 billion and free cash flow after dividends totalled $5.5 billion. We now expect free cash flow after dividends for the full year to come in between $6 and $7 billion – that’s up from the outlook we provided last quarter. This cash gives us the flexibility to invest in the future of our business and return substantial value to share holders. Year to date we’ve executed $8.9 billion in share repurchases and we’ve paid $6.6 billion in dividends for a total return of value to shareholders exceeding $15 billion. We currently have 86 million shares remaining in our current repurchase authorization and we expect to continue with repurchases in the fourth quarter.

So in summary, I think virtually by every measure we had a strong third quarter. We accelerated our revenue ramp driven by strong wireless results and advances in Enterprise. Merger synergies continue on plan. Margins continue to run at the high end of our full-year outlook. We delivered a tenth consecutive quarter of double-digit growth in adjusted earnings per share. And free cash flow is strong and growing. Combined, there are a lot of reasons to be optimistic and those include the good momentum that we have in wireless, in Enterprise, in broadband, in video, and in converged services.

With that, Rich, why don’t we stop here and we’ll open up the lines for questions?

Richard Dietz

Great. Thank you, Rick. Christine, we’re now ready for the question and answer session, if you would begin, please.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question and answer session. (Operator Instructions) The first question comes from Jason Armstrong from Goldman Sachs. Please go ahead.

Jason Armstrong – Goldman Sachs

Thanks. Good morning.

Richard Dietz

Good morning, Jason.

Jason Armstrong – Goldman Sachs

A couple questions. First on video. You know, U-verse momentum clearing picking up. Can you talk about sort of the addressable footprint? You know? The percentage of homes you’d expect to ultimately hit with U-verse? It seems like, if you look at recent comments on pair bonding, etcetera, sort of talking about extending the reach, it seems like you’d be able to ultimately really expand the addressable market, you could hit over your own facilities and then, I guess the second part of that question is, there’s obviously been a lot of speculation in the market recently about, you know, a satellite component sort of under your ownership. How would you sort of fit the two together? It seems like the two actually would run counter to each other.

And then second question on the wireless, Rick, you talked about post-paid wireless data ARPU and I think your comments implied something in the $20 range for post-paid data ARPU on the 3G user base specifically. If you think about sort of framing the opportunity, does, you know, sort of this level set the opportunity in terms of pricing and then the volume components sort of driven by 3G handsetted options, that’s sort of how we should think about it?

Richard G. Lindner

Okay, Jason. A lot of question are there. Let me try to pick those off. First of all, in the video and the video footprint, you know our plans right now to build would cover in the neighbourhood of 55% to 60% I think eventually of the households within our footprint. When you look at that base in terms of what’s addressable, I think here are some key facts. First of all, within that footprint 80% or more of the homes are at 3,000 feet or less. Given where we are and where we see the technology heading, where compression technology is heading on HD, our standard offer could be offered to all homes within 3,000 feet without pair bonding. When you go beyond that and you start looking at pair bonding it gives you the opportunity to open up the vast majority of that face to the standard offer and, in fact, to be able to offer to 80 or 90% of that base with pair bonding multiple HD streams, higher broadband speeds. So over time we expect that base to be largely addressable. There’ll always be some outliers that are just by virtue of geography a long way from the fiber at the node. But even in some of those situations, as neighbourhoods grow, you’ve got the option to split nodes and take fiber closer to some of those homes. So you eventually pick up those as well.

As you all know, you mentioned DBS and there’s, it seems like always speculation in the market place, but we just don’t comment on MNA rumours or MNA speculation. Never have and won’t do that.

With respect to our strategy and what we want to do with video and how DBS fits within that strategy, nothing’s changed there. We want to be able to offer a video alternative to customers across our base and our preference, certainly, where we can do that over our own network through a universe solution is to do it by that means. What our commercial agreements with DBS providers allow us to do is fill in the rest of that footprint and offer solutions then across our entire customer base.

Jason Armstrong – Goldman Sachs

Can I just follow up on that? When you talk about your customer base, specifically, you know, as it relates to video, are you talking about the broader customer base including the wireless footprint because it’s obviously national or are you talking about, you know, the most logical extension of the bundle right now, which is sort of wired voice, data, and video?

Richard G. Lindner

We’re talking about, I think, primarily, Jason, that what you consider that logical extension, it’s the footprint within our 22 states. You also ask about wireless 3G and ARPU and I think that’s a tremendous opportunity for us and I think the numbers you had are about right. We’ve got, right now we’re running about $11 of data ARPU in our post-paid base, but those customers that have adopted 3G handsets are running nearly double that. They’re in the $20 to low-$20 range. They’re currently running at about 30% or a little over 30% of data as a percentage of their total ARPU. I think that kind of frames the opportunity out there, at least in the near term. Now, certainly those first 7 million will tend to be more early adopters of data services and that’s why they’re opting to go with the 3G handsets, but I do think that helps define the opportunity.

Jason Armstrong – Goldman Sachs

Okay, great. Thanks.

Operator

The next question comes from John Hodulik from UBS. Please go ahead.

John Hodulik – UBS

Hi, thanks. Good morning, Rick. Good morning, Rich.

Richard Dietz

Good morning, John.

Richard G. Lindner

Good morning, John.

John Hodulik – UBS

Just quick question on free cash flow. I saw the nicer, the better guides there, $6 to $7 billion now, and just looking into ’08. If you start ’07, say, in the sort of mid-point of the range at $6.5 billion, you add the $2 billion in incremental synergies, the accelerating revenue growth, and the operational savings that you guys were talking about, you know, you’re talking about a big increase in free cash flow in a year-over-year basis. How should we think about, you know, getting more of that cash into shareholders hands, whether it’s through buy-backs or dividends, if you could just comment on what your current thinking is with these higher numbers.

And then, Rick, if I could ask you to sort of give us a little preview of the conference. In past you’ve said that operational savings, I think Randall had laid out about $500 million in incremental annual savings the last time we sort of went through this. Are we thinking a similar number this time going forward?

Richard G. Lindner

You’re talking, John, about just non-;merger cost opportunities?

John Hodulik – UBS

You got it.

Richard Dietz

Yeah.

Richard G. Lindner

Let me take that one first. We’ll lay out at the conference, as we typically have in the past, we’ll lay out a view of the business. Where we see opportunities, where our focus is going to be. We’ll have presentations from each of the major business units, as well as share with you a view from the chairman in terms of overall company strategy and share with you some of the things that we see occurring in the business from a network and technology standpoint, and in particular how the technologies are converging between wireless and wireline, for example, and how we can utilize that going forward with the assets we currently own. As part of that, we’ll lay out as well where we see opportunities to take costs out of the business. I’m not going to go into any numbers at this point. I think we’ll wait for the conference to do that. But we’ll lay out for you where we see the opportunities.

But the other thing you should think about in terms of what’s going on right now in the business and what will be going on certainly as we look forward over the next year or two, this business and this industry is going through change and transformation at a rapid pace. We’re seeing changes in technology, we’re seeing the way people communicate changing. And certainly we’re seeing traffic migrating to mobile applications and mobility is increasing in importance. But we’re also seeing customers that continue to want the kind of bandwidth and the service quality that is available through wire technology. That’s where we believe opportunities are for us. But to make those kinds of transitions this business is going through what we have to do is we have to continue to become more efficient and cost out of the business, but at the same time we’re going to be reinvesting in new technologies, we’re going to be incurring acquisition costs to grow top line revenues in areas where we have opportunities like in video. So you’ll see a balance between the two. In other words, I don’t want you to think of it simply as merger synergies and other cost opportunities and that creates all of this excess cash flow that all comes back to share owners. We’re going to generate a lot of cash, we’re going to continue to be very share owner friendly with the use of cash, but at the same time we’re going to be investing in areas of the business that we think prepare this company for the future and give us the opportunity to continue to ramp top-line growth. So as you go forward and beyond 2007, yeah, I think we’ve laid out a pretty clear pattern of how we look at cash and how we utilize cash from a shareholder perspective. And you should continue to expect good growth and consistent annual growth and dividends from us, and at the same time you should expect to see that when we have excess cash beyond that we’re not utilizing back into reinvesting in the business that we’re going to be utilizing that to repurchase shares. So I don’t think you’ll see anything directionally that’s different from what you’re seeing from us this year.

John Hodulik – UBS

Okay. Great. Thanks.

Operator

The next question comes from Jonathan Chaplin from JP Morgan Securities. Please go ahead.

Jonathan Chaplin – JP Morgan Securities

Good morning. Just a quick question on wireless, if I may. It seems like wireless EBIDTA margins are consistently tracking ahead of expectations, or at least they’re consistently tracking ahead of our expectations. I’m wondering how much of the expansion in margin that’s coming from the ARPU growth that you’re getting, I’m wondering if you could give us an idea – particularly on the data side – what the incremental margins are. And then there’s one piece of the wireless business, the only piece of the wireless business where it seems like you’re falling behind to some extent is in selling data cards. It seems like you might be hamstrung to some extent by what seems to be a slower than expected roll out in your HSTPA footprint. It just seems like that is ultimately going to be a very attractive market segment with high output and low churn (sic). I’m just wondering how you’re looking at that strategically, whether it doesn’t make sense to accelerate your HSTPA roll out to get as much of that market as possible. Thanks.

Richard G. Lindner

Good questions, Jonathan. First of all, on the wireless EBIDTA margins, we’re working real hard to stay ahead of you analysts, at least, on one or two metrics. You’re doing a pretty good job these days of keeping up with us. But on wireless EBIDTA margins we are pleased with the growth that we’re seeing and the growth comes from, particularly the last quarter or two, I think from two primary drivers. One is the growth in customers and in ARPU, and that ARPU growth is largely driven by data. But the other piece of it is that, you know, we continue to now refine our cost structure, particularly on the network side. So we’re able to, we’d been in a position because of our acquisition of AT&T Wireless and the integration of those networks, we’ve been in a position this year where we’ve been able to continue to groom our networks. We have, throughout our footprint we have good spectrum positions, we have dense cell site grids, we have equipment available, particularly 2G equipment, edge equipment available, that we’re able to deploy for capacity reasons. So we’ve been able to leverage that and will continue to leverage that as we go into next year to drive margins. A lot of those things are kind of interconnected, so it’s hard for me, I have to make some assumptions and do some math to kind of break it down in terms of where we see the, you know, what component drives the EBIDTA margin growth how many basis points. But we are leveraging at that network position, so we’re able to grow ARPU, grow customers, grow revenues, and keep our network expenses relatively flat. If you step back from the business and you look year over year, you know, we’re up 350 basis points. I would look at it kind of like this, we’ve actually seen in the business probably a 600 basis point improvement operationally. That is a function of merger synergies, network improvements, increases in ARPU and increases in customers. Six-hundred basis point improvement. We have reinvested probably 250 basis points back into the business to make sure that we are competitive in terms of our acquisition costs and our handset offers. That part of the market has gotten more competitive over the last year, but the net result for us is the 350 basis point improvement that you see.

The data cards I think is, and the 3G roll out, is a good question. First of all, what you’ll see as we go forward in the fourth quarter, we have been building 3G footprint and capacity and we’ll be turning up a number of markets as we go through the fourth quarter, as well as expanding our footprint in existing markets. So we are investing in 3G and you’ll see us continue to invest and now, as we’re getting more 3G devices out there, we’ll expand that footprint in 2008. The other thing that’s important is the Sierra Wireless Card that I mentioned is the first card that really takes full advantage of the HSPA upgrade that we’re doing across the network that increases both the uplink and downlink speeds of our UMTS networks significantly. So you’ll see that begin to roll out. You know, we have been versus a couple of competitors a little slower in 3G roll out, but we’ve also had, I think, the luxury overall from a data experience of having a better data experience across our footprint by nature of the fact that we have Edge across our entire footprint. While Edge is a slower data speed, it is certainly a faster speed and a better experience than the 2G alternatives that other carriers have had. So Edge provides a good base across the footprint and then has allowed us to build 3G on top and, of course, 3G is backwards compatible with Edge across all our devices. But you’ll see us accelerate that as we go through the fourth quarter and into 2008.

Jonathan Chaplin – JP Morgan Securities

Thank you very much.

Operator

The next question comes from Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery – Morgan Stanley

Thanks a lot. Good morning. A couple of questions on videos. Some very good metrics in terms of U-verse ads. Can you help us on the side of the economics a little bit? How are you trending in terms of cost to pass, cost to install. ARPU trends, and anything on sort of churn or where the dilution is trending over the next couple of quarters.

And then on the DBS side, are you still intending to have one partnership across your footprint with either DIRECTV or dish and what is the timing for signing new contracts there? Thank you.

Richard G. Lindner

Simon, first of all, good morning. And on video let me give you a feel for some of the other metrics. I think they continue to be very consistent with trends we’ve shared earlier. There’s no real change in the expectation or guidance we’ve had on the cost side in terms of the build. The build cost per home is continuing to run in the kind of low $300 range per home. And, you know, again, there’s no real change there.

In terms of acquisition costs and installation costs, we’re continuing to work to move our installation time, labour time down on new installations. We’d like to get that down eventually to about a four-hour installation to where an installer can do, on average, two installs per day. Across the base right now we’re at about seven hours. In markets where we have more experienced installation technicians we’re below that and those continue to get better. As we introduce next year some additional devices, largely the intelligent network interface device, that’ll help us as well take some time off the installation. And we continue to work across our base to generate best practices to reduce installation times. One of those, for example, is preloading the software on all of the set top boxes that was causing some down time at the installation. So now those boxes are being preloaded from a software perspective and therefore installation times will come down.

In terms of some of the customer metrics and ARPU, we’re still seeing over 50% of customers taking our top two video tiers and nearly 60% of customers taking our top two data speeds. And when you look across the combination of those, that produces ARPUs that if they’re in the top two tiers of video and data will produce ARPUs on a recurring basis, just the normal monthly charge of between $100 and $129, and then of course any video-on-demand or other charges right on top of that.

So all in all, you know, what we’re seeing I think is consistent with what we’ve shared before and certainly consistent with the plans we’ve had as we ramped the product this year and continue to ramp it into the fourth quarter.

Simon Flannery – Morgan Stanley

And on satellite partnerships?

Richard G. Lindner

On the satellite side, as we’ve said before, we have commercial agreements and contracts in place with both EchoStar and DIRECTV and we’ll continue to honour those contracts. As those contracts either expire or have windows then we’ll announce plans going forward. I would expect that to occur near the end of this year, end of this year, beginning of next year.

Simon Flannery – Morgan Stanley

Thank you.

Operator

The next question comes from Michael Rowlands from Citigroup. Please go ahead.

Michael Rowlands – Citigroup

Hi. Good morning.

Richard G. Lindner

Good morning, Michael.

Michael Rowlands – Citigroup

I just had a couple follow ups. I wanted to ask the wireless question maybe a little bit differently. It seems like the rapid pace of growth that you experience in the quarter, if you’re actually looking over the last couple of quarters, is diluting where margins could have gotten to in the short term, actually could have diluted earnings to where they could have gotten in the short term. As you look at your margin guidance for next year in wireless, is there an implicit expectation in a subscriber’s slow down in terms of the pace of net additions?

And the second question I had was on UNI-P (sic). As that base of customers continue to wind down, is it reasonable to expect the rate of retail line loss to pick up just as cable and wireless takes a certain percentage of customers from you every year or is the triple play efforts that you have enough to actually, I guess, hold down that rate of primary retail line loss? Thanks.

Richard G. Lindner

Good questions, Michael, on wireless additions and margins. I think the growth in the quarter, the increase in gross adds certainly has some impact on margins, as does the upgrades that we see as new handsets and new devices come out. So as I mentioned it in the presentation, we had about 4 million upgrades during the quarter. As we go into next year, you know, I think we’ve modelled the environment where we would expect over time some slowing in terms of net adds relative to penetration, but still a fairly strong market in terms of gross adds and a very competitive market in terms of handset pricing and devices. I think one of the things that’s driving that are the factors that I mentioned earlier on data, particularly around 3G, is there is some real benefits to getting more 3G devices, more data applications out there in terms of our ability to increase data ARPUs and sell more data packages. So I don’t see an environment there that’s significantly different from this year in terms of impacting margins. I think the growth for us on the margin side will continue to come from a combination of growth in data ARPU, as well as continued improvements on the cost side, particularly for next year in network as we bring the TDMA network down. That’s something that, you know, over the course of the year will be able to take additional costs out of the business and I think those will be the drivers off margin improvement as we go into 2008.

As UNI-P continues to wind down, you know, I don’t know whether that causes, I don’t know that that per se causes then a corresponding increase in retail line loss. I think it’s more a factor, I think the trend, in terms of what we’ve seen, the trend in retail and total consumer line loss tends to go with the launch of competitors in new markets and the time period they’ve been in those markets because obviously in the early stages they increase penetration faster and then after they’ve been in the market for a period of time the rate of penetration slows somewhat. And if you look at, for example, this third quarter, we would always certainly want to see less line loss and strive to reduce the amount of line loss, but this quarter in consumer, and this is a combination of both retail and wholesale, switch consumer line loss was up versus third quarter of last year about 47,000 lines. It was a pretty nominal increase. Last quarter it was almost flat with the year before. And that’s despite the fact that cable competition in terms of the number of households where we’re facing cable competition is up year over year about 30 percent. So I think that, for us, is a positive sign looking forward that the offers we bring to the table, the fact that we are increasing our penetration in our base of both broadband and video, you know, I think has served to put us in a position where we can compete, are competing very well, compete very well going forward.

Michael Rowlands – Citigroup

Thank you.

Operator

The next question comes from Tom Seitz from Lehman Brothers. Please go ahead.

Tom Seitz – Lehman Brothers

Yeah, thanks for taking the question. Just a couple quick ones. I didn’t hear you discuss, but I may have missed it, the outage that you had in U-verse over the weekend. I was wondering, you know, if you could tell us whether the problem has been identified and is this incident going to impact any sales effort as we head into the fourth quarter?

Secondly, can you just discuss the pipeline and Enterprise. Are you seeing any slowdown at all related to some of the economic factors out there? Thank you very much.

Richard G. Lindner

Thanks, Tom. First of all on the U-verse, we had U-verse outage on this past Sunday. The U-verse outage was caused by a software load that we put into our systems on Saturday night and that software load unfortunately impacted the database that’s used to track and maintain the programming packages that customers are subscribed to. And what that caused on Sunday is it caused customers to lose some channels for part of the day on Sunday. And when the problem was identified we were able to quickly restore all of the local channels, we were able to quickly restore most of the national channels that are most frequently watched, and then over the course of the day Sunday we restored all of the channels. In most cases, customers did not have to do anything for those channels to be restored, it was automatically done in the system. In some cases they could accelerate the restoration of channels by just hitting the reset button on the set top box. So from our standpoint, certainly the outage was regrettable, it was an error in the software load, and we are providing customers with some credits to compensate for that inconvenience, but it’s one that obviously, since we’ve identified what the issue is, we’re going to work to make sure that it does not happen again. I think an important thing to note is that it didn’t have anything to do with the basic platform or the scaling of the platform, it was unfortunately a software load into our OSS systems that drove it.

On the Enterprise side, you know, the truth is we’re seeing very good momentum of a very good pipeline right now. For example, the good results that we saw in this quarter were at least partially due to deals that we’ve talked about with you earlier in the year. For example, the General Motors contract that we mentioned a quarter or two ago is starting to produce revenues that were recognized this quarter. Likewise, the Treasury contract that we announced recently will start to provide revenues as we go into fourth quarter and certainly next year. I think the IBM agreement that we reached and announced will be key for us going forward. It positions us as the primary network provider for IBM, both internally for their networks as well as externally to customers that they provide data and other services to. I think that’s frankly a terrific partnership and that combined with other contracts that we’ll be able to bid on as part of networks will also be key. We’re seeing good growth this quarter in our government business. That’s one where frankly over the last year it’s lagged a little bit our own expectations, but we’re starting to see some nice growth there. So overall we’re very pleased with the pipeline and with the trajectory that we’re seeing in the Enterprise business right now.

Tom Seitz – Lehman Brothers

Thank you very much.

Operator

The next question comes from Mike McCormack from Bear Stearns. Please go ahead.

Mike McCormack – Bear Stearns

Hi, guys. Hi, Rick, how are you?

Richard G. Lindner

Hey, good, Mike. How are you?

Mike McCormack – Bear Stearns

Excellent. A couple quick ones. A follow up on John’s question on 2008 free cash flow. Can you, without obviously giving any particular guidance, but directionally, when you think about improving synergies potentially offset by what was presumably very low capped exit Singular this year, maybe more U-verse spending as well as potential Spectrum purchases, just your sort of outlook on available cash flow to share holders next year directionally.

Secondly, on the wireline margins it looked like you had some pressure there both year-over-year and sequentially in the face of improving revenues. I’m just trying to get a sense for what the cost pressures were that caused that, outside of the one-time items that you defined.

Richard G. Lindner

I’m trying to think, Mike, how to answer your o/a free cash flow question without giving guidance. That’s a tough call there. Well, we … I would say this. We expect continued strong growth in free cash flow. We’ll also be increasing dividends as a result of that as we go into 2008 and we have a couple of cash requirements, if you will, outside of capital expenditures. That’s namely, you know, we’ll be closing between now, hopefully between now and year end the Dobson acquisition and then as we go into next year upon approval we’ll be closing the Aloha acquisition and then we’ve announced that we will participate in the 700 megahertz auctions. But in addition to just free cash flow that we’re producing, we are pretty much and within the credit ranges, credit metrics, balance sheet metrics that we target, so as we grow cash flow into 2008 and beyond it gives us opportunity also to increase leverage. So I would just tell you I would expect, you should expect to see substantial cash that will be available to share owners both in terms of dividends and dividend growth, as well as share repurchases, as we go through next year.

Mike McCormack – Bear Stearns

Yeah, Rick, when you’re looking at next year’s debt profile I know there’s a couple of, maybe some short term maturities. Is there a preference there to stay where you are in total debt or are you saying we could even leverage further based on your comment a second ago?

Richard G. Lindner

Well, I think you’ll see similar to this year, you’ll see us increase our leverage slightly. And you know, we’ll stay in kind of a one-four debt to EBIDTA kind of range, one-four to one-five.

Mike McCormack – Bear Stearns

Okay.

Richard G. Lindner

On the wireline side, you mentioned that, there are some impacts that are both positive and negative in wireline margins. Certainly the one-time items we’d booked in the quarter. And normally these are items that we wouldn’t normalize and normally highlight because in most quarters they tend to offset one another. This quarter just happened to be we had some items that were negative that were recorded as part of operating expense and operating income. We had some items and adjustments that were positive on the income tax line. So we felt we ought to mention those and put that information out there because it impacted both our operating margins as well as our affected tax rate. The $171 million in operating expenses, as I mentioned earlier, impacted wireline margins by roughly 100 basis points. In addition to that, what you’re seeing is two factors in wireline. Primarily, one is it increases quarter by quarter in synergies that are achieved and attained and so that’s helping margins. At the same time, as we said from the beginning of this year, as we roll out U-verse, it will start to ring up in the third quarter and the fourth quarter and that will drive acquisition costs and it will drive hiring, for example, of premise technicians, and it will drive some expense that will impact results and we’ve seen that in the third quarter. So one way to look at it is if you compare third quarter to second quarter and you adjust out the $170 million in operating expenses, wireline margins were essentially flat and the additional U-verse dilution was offset by additional merger synergies.

The only other factor I think worth noting in the quarter is in the first two months of the quarter, particularly July and August, we had some unusually rainy, wet weather in the southwest which normally that time of the year is very dry. We had some very unusual rains there. We had some unusual weather in the Midwest, and both of those drove some overtime that we had to deal with in the quarter. But in our business that quarter-to-quarter.

Richard Dietz

Okay, Christine, we’re – I’m sorry, Mike. Did I cut you off?

Mike McCormack – Bear Stearns

No, I was just saying thanks to Rick.

Richard Dietz

Okay. Christine, that’s all the time we have for Q&A session. Rick has some closing comments before we complete the call this morning. So, Rick.

Richard G. Lindner

Well, thanks, Rich, and again thanks to everybody for being on the call with us today.

Almost two years ago, a little less than two years, in early 2006 we held an analyst conference and we provided at that conference a three-year outlook for the business. I think our results since then consistently, quarter after quarter, and again in this most recent quarter, have delivered on that outlook. We’re proud of the fact that we continue to grow our adjusted earnings per share at double-digit rates. We certainly focus a lot in the company on our cash flows and cash flow growth has been strong. We’ve used that cash to return value to share owners and we believe that’s important. But I think most encouraging and most important from what we saw in this most recent quarter is the continued ramp and some acceleration in the ramp on revenue growth. That revenue growth gives us confidence and gives us, I think, the ability as we go forward to continue to grow earnings and cash flow. So that’s an important part of what we’re trying to achieve this year.

We continue to be excited about the opportunities ahead, the opportunities we see in wireless, in wireless data, the opportunities we see in business services. Some of the transactions and the deals that we’ve announced, the IBM contract that we announced this quarter, I think those things tell you something about the access, the capabilities, and the position we are in the market today that are important. We continue to see opportunities in broadband in our business, and certainly broadband services have become the in the future and today are the access line of the past. That’s the most important connection we have into the home. We see opportunities in video, a substantial opportunity to grow top line revenues and to provide converged services between communications and entertainment. So we’re excited about those opportunities.

We look forward to covering those with you in a lot more detail when we hold our analyst conference in New York on December 11th. We hope that many of you can join us in person on that day. And again, thanks for taking part in the call and thank you, as always, for your interest in AT&T.

Richard Dietz

Great. Thank you, Rick, and thank all of you this morning. Christine, that does complete our conference call this morning.

Operator

Thank you. This concludes the AT&T third quarter earnings release 2007 conference call. Thank you for your participation. You may all disconnect at this time.

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