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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 SeniorExecutive 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 theAT&T third quarter earnings release 2007 conference call. At this time allparticipants are in a listen-only mode. Later we will conduct a question andanswer session. Please note that this conference is being recorded. I will nowturn the call over to Mr. Richard Dietz, Senior Vice-President InvestorRelations. 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 resultsthis morning. Joining me on the call this morning is Rick Lindner, AT&T’sChief Financial Officer.

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

Before I get started I need to cover our safe harbourstatement. Information set forth in this presentation contains financial estimatesand other forward-looking statements that are subject to risks anduncertainties and actual results may differ materially. A discussion of factorsthat may affect future results is contained in AT&T’s filings with theSecurities and Exchange Commission. AT&T disclaims any obligation to updateor revise statements contained in these presentations based on new informationor otherwise. This presentation may contain certain non-GAAP financialmeasures. Reconciliations between the non-GAAP financial measures and the GAAPfinancial measures are available on our website, ATT.com/investor.relations.

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

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

Richard G.Lindner

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

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

We continue to return substantial value to shareholders. We repurchased $2 billion worth of our shares in the quarter, $8.9billion year to date, and combined with dividends that’s $15.5 billion returnedto 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 thequarter. Slide seven lays out some of our recent initiatives. For AT&T, andfor the industry, growth is increasingly coming from robust, data centricmobility services, from business markets, and from converged services ascustomers expect seamless interactivity across wireless broadband, traditionalvoice, and video service platforms. Our focus is concentrated on these areas aswe work to innovate, to build smart alliances, define markets, and build afoundation for sustained growth.

First, as you’ve seen with our Dobson and Alohaannouncements, we’ve taken steps to expand our wireless coverage and ourSpectrum position. We’ve also been aggressive with exclusive launches ofcutting edge wireless devices that raise the bar in terms of data services andentertainment options. The Apple iPhone is certainly part of that and there area host of others.

We’ve also taken steps to add expertise and products toour Enterprise portfolio. Thelatest 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 networkmanagement provider.

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

In concert with this focus, we’re doing significantwork to reposition the AT&T brand. Brand migration work is largelycomplete. 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 onthe next transition. That’s to build into the AT&T brand a new world ofcapabilities and customer expectations.

With those comments as a backdrop, now let me cover foryou the quarter in some more detail. Slide eight shows earnings per sharegrowth and margin expansion. As Rich mentioned, before merger related effectsour third quarter EPS was 71 cents. Our adjusted consolidated operating incomemargin 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 wedid not include in our adjustments this quarter $171 million in items relatedto some legal matters, non-merger severance related to our IBM agreements, andother non-recurring items. These chargesincreased operating expenses, which negatively impacted the consolidatedadjusted operating margin by about 60 basis points, and impacted our wirelineadjusted operating margin by 100 basis points. But meanwhile, at the EPS level,these impacts were offset by benefits from tax adjustments. We continue toexpect to operate at the top end of the 23 to 24% adjusted operating marginrange, and of course we expect to deliver continued double-digit growth inadjusted EPS this year and next.

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

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

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

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

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

Revenue growth rates have been steadily improving andthis 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 strongdouble-digit growth in wireless, improved trends in Enterpriseand 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 2million net subscriber ads during the quarter, and over the past four quarterswe’ve grown our wireless subscriber base by 7 million, all organically. We’vealso grown ARPU. Total ARPUs is up 2 percent, our fifth straight quarter ofyear-over-year ARPU growth, and post-paid ARPU was even stronger, up more than5% year over year. The result is continued solid double-digit wireless revenuegrowth with total wireless revenues of $10.9 billion in the quarter and servicerevenues of $9.9 billion.

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

In addition to subscriber growth, the other big driverbehind wireless performance is growth in data and the highlights are on slide12. Year over year, wireless data revenue growth was 64% taking us to $1.8billion for the quarter, an annualized revenue base of more than $7 billion atthis point. This was our fifth quarter of wireless data revenue growth above 60percent. This growth reflects strong increases in both consumer and businessdata usage, including E-mail, media bundles, internet access, laptopconnectivity, smart phone connectivity, and Enterprisevertical market solutions.

Data now accounts for more than 18% of total wirelessservice revenues and more than $11 of our post-paid ARPU. And as strong as thatgrowth has been, it’s clear to us we’re still in the early stages of wirelessdata growth. There is a huge opportunity in front of us. At this point, nearly40 million of our subscribers are active data users. That’s up more than 30% overthe past year. But I think an important point is that only 35% of our post-paidsubscribers today are on monthly wireless data plans and growing that number isa 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 customerexpectations and redefining the market. And 3G growth is just getting underway. Today we have approximately 7 million customers using 3G devices; that’snearly triple the total two quarters ago. And most importantly, data ARPU forour 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 cuttingedge handsets and innovative data in entertainment services. We’ve highlightedsome of these on slide 13.

Our scale coverage and distribution make a compellingcombination, not only for customers, but for strategic partners as well, andwe’ve launched a number of high profile handset exclusives. The iPhone iscertainly the leading example and it continues to generate strong sales. Currentlywe have activated more than 1.1 million iPhones with more than 40% of those asnew customers to AT&T. And most recently we launched the AT&T Tilt, thefirst 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 Blackberry8820, which adds Wi-Fi capabilities to the Blackberry experience. AT&Tcontinues to be the world’s largest provider of Blackberry services.

In addition, we’ve introduced the Sierra WirelessLaptop Connect Card, the first device that’s fully compatible with the latestgeneration 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 morethan 5 million full track music library available through our service forover-the-air download. That gives AT&T the largest and most complete musicsolution among national wireless carriers.

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

In addition, we’re doing more to converge customerswireline broadband experience with their wireless experience. As I mentionedearlier, we now market a wireless broadband bundle and we’ve launched a servicecalled MediaNet, which gives customers new web-based tools to manage theirwireless homepage from their PC or from their handset. We’re being aggressiveas we work to expand customers options and to make their experiences on ournetworks richer.

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

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

Our view of margin potential going forward has notchanged. For next year we expect margins will expand further to a full yearaverage in the lower 40% range, with clear opportunities for additionalexpansion beyond 2008.

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

There are a number of drivers; demand is solid, datatransport volumes are strong, IP services – which included virtual privatenetworks, 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 endof this year we expect to have 38 deployed. And across our Enterpriseportfolio, best of all, we’re winning contracts, including our first under theGSA networks contract.

To drive sustained growth you’ve seen us take theinitiative to expand our capabilities for Enterprisecustomers. We announced an expansion of our alliance with IBM to be theirprimary network management services provider and we expect that will addapproximately $1 billion in revenues annually over the next five years withmost initially flowing to the wholesale category.

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

Now, while we drive toward growth and Enterprisewe’ve sustained solid results in regional business. Slide 16 provides a quickupdate. Regional business revenues grew by 3.4% in the quarter. Revenues fromsmall and midsized firms continue to be solid, up 6 percent, consistent withrecent results. Regional business data revenues grew 6.9 percent, the same aslast quarter. Data transport revenues in this category posted solidmid-single-digit growth. IP data services were up nearly 10 percent, lead byDSLs hosting and VPN. And voice revenues also continued to grow in regionalbusiness. Access lines increased in the quarter as they have over the pastseveral quarters and should (sic) remain stable.

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

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

As we show on slide 18, we also had a solid broadbandquarter with a net gain in total broadband subscribers of 499,000. We now have13.8 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 threemegabits or more. And our wireline broadband revenues grew 14% to $1.4 billionin the third quarter, an annualized revenue stream of more than $5 billion.

We believe that there’s a substantial opportunity forbroadband still ahead from the millions of dial-up users that remain, fromcable subscribers who are choosing our platform, and from a new generation ofconsumers 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 acombination 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 acrossour footprint.

As I mentioned at the outset, we’re seeing a verystrong ramp in U-verse. Slide 19 has the highlights. Six months ago we has16,000 U-verse video subscribers and at the end of the third quarter we had126,000. Service is now available in portions of 33 markets. Install rates haveclimbed throughout the third quarter. And at quarter’s end our install ratealready approached our year-end goal of 10,000 per week. That’s up from 5,500 a week three months ago. Ourtechnicians are gaining experience and expertise, and we’re climbing thelearning curve of video quickly.

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

So in summary, I think virtually by every measure wehad a strong third quarter. We accelerated our revenue ramp driven by strongwireless results and advances in Enterprise.Merger synergies continue on plan. Margins continue to run at the high end ofour full-year outlook. We delivered a tenth consecutive quarter of double-digitgrowth 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 thegood 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 openup the lines for questions?

Richard Dietz

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

Question-and-Answer Session

Operator

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

Jason Armstrong– Goldman Sachs

Thanks. Good morning.

Richard Dietz

Good morning, Jason.

Jason Armstrong– Goldman Sachs

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

And then second question on the wireless, Rick, youtalked about post-paid wireless data ARPU and I think your comments impliedsomething in the $20 range for post-paid data ARPU on the 3G user basespecifically. If you think about sort of framing the opportunity, does, youknow, sort of this level set the opportunity in terms of pricing and then thevolume components sort of driven by 3G handsetted options, that’s sort of howwe should think about it?

Richard G.Lindner

Okay, Jason. A lot of question are there. Let me try topick those off. First of all, in the video and the video footprint, you knowour plans right now to build would cover in the neighbourhood of 55% to 60% Ithink eventually of the households within our footprint. When you look at thatbase in terms of what’s addressable, I think here are some key facts. First ofall, within that footprint 80% or more of the homes are at 3,000 feet or less. Given where weare and where we see the technology heading, where compression technology isheading 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 startlooking at pair bonding it gives you the opportunity to open up the vastmajority of that face to the standard offer and, in fact, to be able to offerto 80 or 90% of that base with pair bonding multiple HD streams, higherbroadband 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 longway from the fiber at the node. But even in some of those situations, asneighbourhoods grow, you’ve got the option to split nodes and take fiber closerto some of those homes. So you eventually pick up those as well.

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

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

Jason Armstrong– Goldman Sachs

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

Richard G.Lindner

We’re talking about, I think, primarily, Jason, thatwhat you consider that logical extension, it’s the footprint within our 22states. You also ask about wireless 3G and ARPU and I think that’s a tremendousopportunity 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 thosecustomers that have adopted 3G handsets are running nearly double that. They’rein the $20 to low-$20 range. They’re currently running at about 30% or a littleover 30% of data as a percentage of their total ARPU. I think that kind offrames the opportunity out there, at least in the near term. Now, certainlythose first 7 million will tend to be more early adopters of data services andthat’s why they’re opting to go with the 3G handsets, but I do think that helpsdefine 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. Ifyou start ’07, say, in the sort of mid-point of the range at $6.5 billion, youadd the $2 billion in incremental synergies, the accelerating revenue growth,and the operational savings that you guys were talking about, you know, you’retalking about a big increase in free cash flow in a year-over-year basis. Howshould we think about, you know, getting more of that cash into shareholdershands, whether it’s through buy-backs or dividends, if you could just commenton what your current thinking is with these higher numbers.

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

Richard G.Lindner

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

John Hodulik –UBS

You got it.

Richard Dietz

Yeah.

Richard G.Lindner

Let me take that one first. We’ll lay out at theconference, as we typically have in the past, we’ll lay out a view of thebusiness. Where we see opportunities, where our focus is going to be. We’llhave presentations from each of the major business units, as well as share withyou a view from the chairman in terms of overall company strategy and sharewith you some of the things that we see occurring in the business from anetwork and technology standpoint, and in particular how the technologies areconverging between wireless and wireline, for example, and how we can utilizethat going forward with the assets we currently own. As part of that, we’ll layout as well where we see opportunities to take costs out of the business. I’mnot going to go into any numbers at this point. I think we’ll wait for theconference 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 ofwhat’s going on right now in the business and what will be going on certainlyas we look forward over the next year or two, this business and this industryis going through change and transformation at a rapid pace. We’re seeingchanges in technology, we’re seeing the way people communicate changing. Andcertainly we’re seeing traffic migrating to mobile applications and mobility isincreasing in importance. But we’re also seeing customers that continue to wantthe kind of bandwidth and the service quality that is available through wiretechnology. That’s where we believe opportunities are for us. But to make thosekinds of transitions this business is going through what we have to do is wehave to continue to become more efficient and cost out of the business, but atthe same time we’re going to be reinvesting in new technologies, we’re going tobe incurring acquisition costs to grow top line revenues in areas where we haveopportunities like in video. So you’ll see a balance between the two. In otherwords, I don’t want you to think of it simply as merger synergies and othercost opportunities and that creates all of this excess cash flow that all comesback to share owners. We’re going to generate a lot of cash, we’re going tocontinue to be very share owner friendly with the use of cash, but at the sametime we’re going to be investing in areas of the business that we think preparethis company for the future and give us the opportunity to continue to ramptop-line growth. So as you go forward and beyond 2007, yeah, I think we’ve laidout a pretty clear pattern of how we look at cash and how we utilize cash froma shareholder perspective. And you should continue to expect good growth andconsistent annual growth and dividends from us, and at the same time you shouldexpect to see that when we have excess cash beyond that we’re not utilizingback into reinvesting in the business that we’re going to be utilizing that torepurchase shares. So I don’t think you’ll see anything directionally that’sdifferent from what you’re seeing from us this year.

John Hodulik –UBS

Okay. Great. Thanks.

Operator

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

Jonathan Chaplin– JP Morgan Securities

Good morning. Just a quick question on wireless, if Imay. It seems like wireless EBIDTA margins are consistently tracking ahead ofexpectations, or at least they’reconsistently tracking ahead of our expectations. I’m wondering how much of the expansion in margin that’s coming fromthe 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 thenthere’s one piece of the wireless business, the only piece of the wirelessbusiness where it seems like you’re falling behind to some extent is in sellingdata cards. It seems like you might be hamstrung to some extent by what seemsto be a slower than expected roll out in your HSTPA footprint. It just seemslike that is ultimately going to be a very attractive market segment with highoutput and low churn (sic). I’m just wondering how you’re looking at thatstrategically, whether it doesn’t make sense to accelerate your HSTPA roll outto get as much of that market as possible. Thanks.

Richard G. Lindner

Goodquestions, Jonathan. First of all, on the wireless EBIDTA margins, we’reworking real hard to stay ahead of you analysts, at least, on one or twometrics. You’re doing a pretty good job these days of keeping up with us. Buton wireless EBIDTA margins we are pleased with the growth that we’re seeing andthe growth comes from, particularly the last quarter or two, I think from twoprimary drivers. One is the growth in customers and in ARPU, and that ARPUgrowth 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 ofAT&T Wireless and the integration of those networks, we’ve been in aposition this year where we’ve been able to continue to groom our networks. Wehave, throughout our footprint we have good spectrum positions, we have densecell site grids, we have equipment available, particularly 2G equipment, edgeequipment available, that we’re able to deploy for capacity reasons. So we’vebeen able to leverage that and will continue to leverage that as we go into nextyear to drive margins. A lot of those things are kind of interconnected, soit’s hard for me, I have to make some assumptions and do some math to kind ofbreak it down in terms of where we see the, you know, what component drives theEBIDTA margin growth how many basis points. But we are leveraging at thatnetwork position, so we’re able to grow ARPU, grow customers, grow revenues,and keep our network expenses relatively flat. If you step back from thebusiness and you look year over year, you know, we’re up 350 basis points. Iwould look at it kind of like this, we’ve actually seen in the businessprobably a 600 basis point improvement operationally. That is a function ofmerger synergies, network improvements, increases in ARPU and increases in customers.Six-hundred basis point improvement. We have reinvested probably 250 basispoints back into the business to make sure that we are competitive in terms ofour acquisition costs and our handset offers. That part of the market hasgotten more competitive over the last year, but the net result for us is the350 basis point improvement that you see.

Thedata 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 building3G footprint and capacity and we’ll be turning up a number of markets as we gothrough the fourth quarter, as well as expanding our footprint in existingmarkets. So we are investing in 3G and you’ll see us continue to invest andnow, as we’re getting more 3G devices out there, we’ll expand that footprint in2008. The other thing that’s important is the Sierra Wireless Card that Imentioned is the first card that really takes full advantage of the HSPAupgrade that we’re doing across the network that increases both the uplink anddownlink speeds of our UMTS networks significantly. So you’ll see that begin toroll out. You know, we have been versus a couple of competitors a little slowerin 3G roll out, but we’ve also had, I think, the luxury overall from a dataexperience of having a better data experience across our footprint by nature ofthe fact that we have Edge across our entire footprint. While Edge is a slowerdata speed, it is certainly a faster speed and a better experience than the 2Galternatives that other carriers have had. So Edge provides a good base acrossthe footprint and then has allowed us to build 3G on top and, of course, 3G isbackwards compatible with Edge across all our devices. But you’ll see usaccelerate that as we go through the fourth quarter and into 2008.

Jonathan Chaplin – JP MorganSecurities

Thankyou very much.

Operator

Thenext question comes from Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery – Morgan Stanley

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

Andthen on the DBS side, are you still intending to have one partnership acrossyour footprint with either DIRECTV or dish and what is the timing for signingnew 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 theother metrics. I think they continue to be very consistent with trends we’veshared earlier. There’s no real change in the expectation or guidance we’ve hadon the cost side in terms of the build. The build cost per home is continuingto run in the kind of low $300 range per home. And, you know, again, there’s noreal change there.

Interms of acquisition costs and installation costs, we’re continuing to work tomove our installation time, labour time down on new installations. We’d like toget that down eventually to about a four-hour installation to where aninstaller can do, on average, two installs per day. Across the base right nowwe’re at about seven hours. In markets where we have more experiencedinstallation technicians we’re below that and those continue to get better. Aswe introduce next year some additional devices, largely the intelligent networkinterface 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 reduceinstallation times. One of those, for example, is preloading the software onall 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 andtherefore installation times will come down.

Interms of some of the customer metrics and ARPU, we’re still seeing over 50% ofcustomers taking our top two video tiers and nearly 60% of customers taking ourtop two data speeds. And when you look across the combination of those, thatproduces ARPUs that if they’re in the top two tiers of video and data willproduce 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 ontop of that.

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

Simon Flannery – Morgan Stanley

And onsatellite partnerships?

Richard G. Lindner

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

Simon Flannery – Morgan Stanley

Thankyou.

Operator

Thenext question comes from Michael Rowlands from Citigroup. Please go ahead.

Michael Rowlands – Citigroup

Hi.Good morning.

Richard G. Lindner

Goodmorning, Michael.

Michael Rowlands – Citigroup

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

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

Richard G. Lindner

Goodquestions, Michael, on wireless additions and margins. I think the growth inthe 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. Soas I mentioned it in the presentation, we had about 4 million upgrades duringthe quarter. As we go into next year, you know, I think we’ve modelled theenvironment where we would expect over time some slowing in terms of net addsrelative to penetration, but still a fairly strong market in terms of grossadds and a very competitive market in terms of handset pricing and devices. Ithink one of the things that’s driving that are the factors that I mentionedearlier on data, particularly around 3G, is there is some real benefits togetting more 3G devices, more data applications out there in terms of ourability to increase data ARPUs and sell more data packages. So I don’t see anenvironment there that’s significantly different from this year in terms ofimpacting margins. I think the growth for us on the margin side will continueto come from a combination of growth in data ARPU, as well as continuedimprovements on the cost side, particularly for next year in network as webring the TDMA network down. That’s something that, you know, over the courseof the year will be able to take additional costs out of the business and Ithink those will be the drivers off margin improvement as we go into 2008.

AsUNI-P continues to wind down, you know, I don’t know whether that causes, Idon’t know that that per se causes then a corresponding increase in retail lineloss. I think it’s more a factor, I think the trend, in terms of what we’veseen, the trend in retail and total consumer line loss tends to go with thelaunch of competitors in new markets and the time period they’ve been in thosemarkets because obviously in the early stages they increase penetration fasterand then after they’ve been in the market for a period of time the rate ofpenetration slows somewhat. And if you look at, for example, this thirdquarter, we would always certainly want to see less line loss and strive toreduce the amount of line loss, but this quarter in consumer, and this is acombination of both retail and wholesale, switch consumer line loss was upversus third quarter of last year about 47,000 lines. It was a pretty nominalincrease. Last quarter it was almost flat with the year before. And that’sdespite the fact that cable competition in terms of the number of householdswhere we’re facing cable competition is up year over year about 30 percent. SoI think that, for us, is a positive sign looking forward that the offers webring to the table, the fact that we are increasing our penetration in our baseof both broadband and video, you know, I think has served to put us in aposition where we can compete, are competing very well, compete very well goingforward.

Michael Rowlands – Citigroup

Thankyou.

Operator

Thenext 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 youdiscuss, but I may have missed it, the outage that you had in U-verse over theweekend. I was wondering, you know, if you could tell us whether the problemhas been identified and is this incident going to impact any sales effort as wehead into the fourth quarter?

Secondly,can you just discuss the pipeline and Enterprise. Are you seeing any slowdown at allrelated 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 systemson Saturday night and that software load unfortunately impacted the databasethat’s used to track and maintain the programming packages that customers aresubscribed to. And what that caused on Sunday is it caused customers to losesome channels for part of the day on Sunday. And when the problem wasidentified we were able to quickly restore all of the local channels, we wereable to quickly restore most of the national channels that are most frequentlywatched, and then over the course of the day Sunday we restored all of thechannels. In most cases, customers did not have to do anything for thosechannels to be restored, it was automatically done in the system. In some casesthey could accelerate the restoration of channels by just hitting the resetbutton 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 somecredits 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 thatit does not happen again. I think an important thing to note is that it didn’thave anything to do with the basic platform or the scaling of the platform, itwas unfortunately a software load into our OSS systems that drove it.

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

Tom Seitz – Lehman Brothers

Thankyou very much.

Operator

Thenext 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. Canyou, without obviously giving any particular guidance, but directionally, whenyou think about improving synergies potentially offset by what was presumablyvery low capped exit Singular this year, maybe more U-verse spending as well aspotential Spectrum purchases, just your sort of outlook on available cash flowto share holders next year directionally.

Secondly,on the wireline margins it looked like you had some pressure there bothyear-over-year and sequentially in the face of improving revenues. I’m justtrying 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’mtrying to think, Mike, how to answer your o/a free cash flow question withoutgiving guidance. That’s a tough call there. Well, we … I would say this. Weexpect continued strong growth in free cash flow. We’ll also be increasingdividends as a result of that as we go into 2008 and we have a couple of cashrequirements, if you will, outside of capital expenditures. That’s namely, youknow, we’ll be closing between now, hopefully between now and year end theDobson acquisition and then as we go into next year upon approval we’ll beclosing the Aloha acquisition and then we’ve announced that we will participatein the 700 megahertz auctions. But in addition to just free cash flow thatwe’re producing, we are pretty much and within the credit ranges, creditmetrics, balance sheet metrics that we target, so as we grow cash flow into2008 and beyond it gives us opportunity also to increase leverage. So I wouldjust tell you I would expect, you should expect to see substantial cash thatwill be available to share owners both in terms of dividends and dividendgrowth, 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 coupleof, maybe some short term maturities. Is there a preference there to stay whereyou are in total debt or are you saying we could even leverage further based onyour comment a second ago?

Richard G. Lindner

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

Mike McCormack – Bear Stearns

Okay.

Richard G. Lindner

On thewireline side, you mentioned that, there are some impacts that are bothpositive and negative in wireline margins. Certainly the one-time items we’d bookedin the quarter. And normally these are items that we wouldn’t normalize andnormally 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 wererecorded as part of operating expense and operating income. We had some itemsand adjustments that were positive on the income tax line. So we felt we oughtto mention those and put that information out there because it impacted bothour operating margins as well as our affected tax rate. The $171 million inoperating expenses, as I mentioned earlier, impacted wireline margins byroughly 100 basis points. In addition to that, what you’re seeing is twofactors in wireline. Primarily, one is it increases quarter by quarter insynergies that are achieved and attained and so that’s helping margins. At thesame 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 thatwill drive acquisition costs and it will drive hiring, for example, of premisetechnicians, and it will drive some expense that will impact results and we’veseen that in the third quarter. So one way to look at it is if you comparethird 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 wasoffset by additional merger synergies.

Theonly other factor I think worth noting in the quarter is in the first twomonths of the quarter, particularly July and August, we had some unusuallyrainy, wet weather in the southwest which normally that time of the year isvery dry. We had some very unusual rains there. We had some unusual weather inthe Midwest, and both of those drove someovertime that we had to deal with in the quarter. But in our business thatquarter-to-quarter.

Richard Dietz

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

Mike McCormack – Bear Stearns

No, Iwas just saying thanks to Rick.

Richard Dietz

Okay.Christine, that’s all the time we have for Q&A session. Rick has someclosing 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 ustoday.

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

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

Welook forward to covering those with you in a lot more detail when we hold ouranalyst conference in New York on December 11th. Wehope that many of you can join us in person on that day. And again, thanks fortaking part in the call and thank you, as always, for your interest inAT&T.

Richard Dietz

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

Operator

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

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Source: AT&T Q3 2007 Earnings Call Transcript

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