How much of AT&T's 2006 growth came from the BellSouth acquisition?

Very little. BellSouth and AT&T Mobility were consolidated only for the final two days of 2006, so reported 2006 results mainly reflect the full-year effect of the November 2005 AT&T Corp. acquisition. Management expects reported 2007 revenue to rise substantially as the full-year BellSouth and AT&T Mobility results are included.

Is AT&T's core wireline business growing?

Partly. Data revenue, including DSL, IP, and transport services, grew strongly, but voice revenue continues to face structural decline as in-region access lines fell 6.3% in 2006 to competitors using wireless, cable, and VoIP. Management expects the mix to keep shifting toward data and wireless.

What are the main risks to the Project Lightspeed U-verse video rollout?

The filing cites municipal refusals to grant right-of-way access, litigation over whether IP video should be subject to local cable franchising, and the possibility that deployment could be delayed or made more costly. AT&T notes that an adverse court ruling applying state and local rules could materially affect its deployment plans.

How is AT&T returning capital to shareholders?

AT&T paid $5.15 billion in dividends in 2006 and declared $1.35 per share. It repurchased 84 million shares for $2.68 billion in 2006 under a 400 million share authorization, plans about $7.3 billion of repurchases in 2007, and raised the quarterly dividend to $0.355 per share in December 2006.

What are the major pending legal matters?

The most prominent are NSA-related class actions alleging AT&T disclosed customer records to the government, which are consolidated in the Northern District of California and under appeal to the Ninth Circuit, and a Supreme Court-reviewed antitrust case over alleged local telephone market coordination. Management believes these actions are without merit and does not expect a material adverse effect.

AT&T INC. 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 26, 2007. Cited figures are marked; the original filing is the authoritative source.

AT&T's 2006 Form 10-K reports a transformational year driven by the December 29, 2006 acquisition of BellSouth, which gave AT&T 100%^a ownership of AT&T Mobility (formerly Cingular Wireless) and added nine southeastern states to its wireline footprint.

Consolidated operating revenues rose 44.1% to $63.1 billion^b and operating income rose 66.8% to $10.3 billion, largely reflecting the full-year inclusion of AT&T Corp. (acquired November 2005). Net income increased 53.7% to $7.4 billion, or $1.89 per diluted share, though the 2006 results include only two days of BellSouth and AT&T Mobility operations, so the year is not a clean picture of the combined company's earnings power. Total assets roughly doubled to $270.6 billion and long-term debt rose to $50.1 billion, while the debt ratio improved to 34.1% as stockholders' equity grew to $115.5 billion through the stock-based acquisitions.

The filing points to a shift in the business mix toward wireless and broadband/data. Wireline data revenues grew 68.3%^c, while wireline voice revenues, which are under structural pressure from access line losses to wireless, cable, and VoIP competitors, continued to decline on a same-store basis. Wireless ended the year with about 61 million customers, and ARPU fell 1.1% as prepaid and reseller mix increased, offset by a 44.8% rise in data revenue per customer.

Management expects 2007 reported revenue to increase substantially as BellSouth and AT&T Mobility are consolidated for the full year, while acquisition-related costs will weigh on 2007 and 2008 expenses. Capital expenditures are guided to the mid-teens as a percentage of revenue, and Project Lightspeed (U-verse IPTV) is budgeted at roughly $4.6 billion^d through 2008. Investors should weigh several items: significant integration and amortization charges, including $3.997 billion in accumulated intangible amortization and an estimated $5.87 billion of amortization expense in 2007; regulatory and municipal franchising risk to the U-verse video rollout; ongoing NSA-related litigation; and a substantial shareholder return program, with 2007 share repurchases expected near $7.3 billion alongside a $3.2 billion debt issuance in February 2007 and a quarterly dividend raised 6.8% to $0.355.

02—Key points

Key Highlights

Revenue grew 44.1% to $63.1 billion and operating income rose 66.8% to $10.3 billion, driven mainly by the AT&T Corp. acquisition, but 2006 includes only two days of BellSouth and AT&T Mobility results.
Net income increased 53.7% to $7.36 billion, or $1.89 per diluted share, versus $1.42 in 2005; the 2005 figure included a $902 million IRS settlement benefit.
The December 29, 2006 BellSouth acquisition (~$66.8 billion accounting value) brought AT&T Mobility to 100% ownership, added nine southeastern states, and pushed total assets to $270.6 billion and long-term debt to $50.1 billion.
Wireless served about 61 million customers at year-end, with churn falling to 1.8% and data ARPU up 44.8%, though overall wireless ARPU declined 1.1%.
Wireline data revenue rose 68.3% to $18.1 billion, while voice revenue grew only through acquisition effects as access lines fell 6.3% in-region, reflecting competition from wireless, cable, and VoIP.
Management plans roughly $7.3 billion of 2007 share repurchases, raised the quarterly dividend 6.8% to $0.355, and expects capex in the mid-teens percent of revenue in 2007 and 2008.
Project Lightspeed (U-verse) is budgeted at about $4.6 billion through 2008, with the company able to reach roughly 19 million living units, though municipal franchising disputes could delay deployment.

03—Questions

Frequently Asked Questions

How much of AT&T's 2006 growth came from the BellSouth acquisition?
Very little. BellSouth and AT&T Mobility were consolidated only for the final two days of 2006, so reported 2006 results mainly reflect the full-year effect of the November 2005 AT&T Corp. acquisition. Management expects reported 2007 revenue to rise substantially as the full-year BellSouth and AT&T Mobility results are included.
Is AT&T's core wireline business growing?
Partly. Data revenue, including DSL, IP, and transport services, grew strongly, but voice revenue continues to face structural decline as in-region access lines fell 6.3% in 2006 to competitors using wireless, cable, and VoIP. Management expects the mix to keep shifting toward data and wireless.
What are the main risks to the Project Lightspeed U-verse video rollout?
The filing cites municipal refusals to grant right-of-way access, litigation over whether IP video should be subject to local cable franchising, and the possibility that deployment could be delayed or made more costly. AT&T notes that an adverse court ruling applying state and local rules could materially affect its deployment plans.
How is AT&T returning capital to shareholders?
AT&T paid $5.15 billion in dividends in 2006 and declared $1.35 per share. It repurchased 84 million shares for $2.68 billion in 2006 under a 400 million share authorization, plans about $7.3 billion of repurchases in 2007, and raised the quarterly dividend to $0.355 per share in December 2006.
What are the major pending legal matters?
The most prominent are NSA-related class actions alleging AT&T disclosed customer records to the government, which are consolidated in the Northern District of California and under appeal to the Ninth Circuit, and a Supreme Court-reviewed antitrust case over alleged local telephone market coordination. Management believes these actions are without merit and does not expect a material adverse effect.

04—Continue

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