Highlights From AT&T's Q2 Conference Call: Revenues Up...Lead By Wireless...A Surprise

AT&T (NYSE: T) reported Q2 EPS of $0.60, in-line with the analyst estimate of $0.60. Revenue for the quarter came in at $31.5 billion versus the consensus estimate of $31.33 billion.

Highlights From AT&T's Q2 Conference Call:

• (John J. Stephens, Senior Vice President and Controller) Consolidated revenues were up year-over-year and sequentially led by strong wireless growth and increasing stability in our wireline revenues.
  
• Earnings were solid, even when including Alltel integration and storm-related costs.
  
• Margins expanded sequentially, across the board, wireless, wireline and total, and were generally stable from a year ago.
  
• Free cash flow was strong and we continue to expect growth for the year.
  
• Driving these financial results was another incredible quarter in mobile broadband.
  
• Smartphone sales set another quarterly record. Postpaid ARPU grew for the tenth consecutive quarter, a record unmatched in the industry.
  
• Mobile data growth remains strong and is now an annualized $22 billion revenue stream.
  
• U-verse continues to be strong, adding subscribers, increasing triple play ARPU and is now a $6.5 billion annualized revenue stream. In fact, fast-growing consumer IP data now represents about half of our total consumer revenues.
  
• That's right. Our consumer Wireline business now has over half of its revenues from IP data. And strategic business services had almost 20% revenue growth, its best performance in six quarters, driving sequentially stable Business Wireline revenues, even without significant economic recovery.
  
• Consolidated revenues totaled $31.5 billion, up $687 million, versus the second quarter a year ago due to continued strong mobile broadband growth, U-verse revenue growth of more than 50% and increasing stability in Wireline business revenues with strategic business service revenues growing almost 20%.
  
• Revenues from these areas were up more than 8% or $1.8 billion in the second quarter. We expect this mixed shift to continue, giving us even stronger confidence in a long term view of our business.
  
• The stats are on Slide Eight. We had solid postpaid numbers adding 331,000 during the quarter. And when you exclude the impact of the Alltel integration, our postpaid net ads were more than 500,000. In prepaid, we had 137,000 net ads. But that number grows to 186,000 when excluding the integration impact from Alltel with continued strength in tablet activations.
  
• And we also had another solid reseller interconnected device quarter, adding 248,000 and 379,000 subscribers, respectively. Helping drive subscriber growth was our ability to keep churn in check. Excluding Alltel, migration impacts, postpaid churn was relatively stable with year ago numbers and improved from the first quarter of the year.
  
• They know our network advantages, the ability to use voice and data simultaneously, the nation's fastest mobile broadband network and international roaming to 224 countries thanks to our GSM network. All this a makes a big difference to our customers, and you see that in this quarter's results.
  
• Breaking that down a little further, we had 3.6 million iPhone activations during the quarter, up about 11% from the second quarter a year ago, when the iPhone floor was first introduced near the end of June, an impressive performance in this first quarter where exclusivity no longer exists. But our strongest gross was with other Smartphones, BlackBerrys, Androids and other devices, where we sold nearly 2.3 million devices during the second quarter. That's more than twice as many as we added in the second quarter 2010.
  
• ARPU for Smartphones continues to be strong - 1.8 times our other devices with more than 85% on Family or Business plans, and these customers tend to be sticky, with churn below our average. We also had our best quarter ever with branded computing devices, adding 545,000 this quarter, to reach 4 million.
  
• Looking ahead, we expect Smartphone sales to continue to be strong through the rest of the year, especially when you consider the new products and services that will be out, our LTE launch and holiday sales.
  
• (D. Wayne Watts, Senior Executive Vice President and General Counsel) We remain comfortable with the process so far and the pace at which we're moving. The staffs at the Department of Justice and the FCC, the two federal agencies that must approve the transaction are working extremely hard. They're asking all the right questions. We of course take each issue and question identified very seriously and respond quickly and thoroughly as we see this process through.
  
• We said when we announced this transaction, that our confidence in our ability to obtain approval is based on the facts. And while we still have work to do, we remain very confident that we can satisfy the DOJ and FCC, that this transaction should be and ultimately will be approved. Those facts including the enormous efficiencies we can realize from this merger demonstrate that this is the surest and fastest way to address the unique network capacity constraints and spectrum shortages faced by AT&T. The facts also demonstrate that the consumer and public interest benefits are enormous. These include better service in the form of fewer dropped calls, faster speeds and a better overall customer experience, more mobile broadband access for more Americans by expanding our 4G LTE deployment to more than 97% of the U.S. population, some 55 million more people will receive LTE coverage in America than would have occurred without this merger, and billions of dollars of increased investments in the U.S. economy, which drives more jobs and economic growth.
  
• More than three-quarters of our U-verse video subscribers have a triple or quad play bundle with us. ARPU for these customers now reaches $170, up more than 8% year-over-year. Penetration rates continue to grow in areas marketed to for more than 36 months, we've reached 25% penetration. We now pass 29 million living units and are on track to complete our U-verse build by the end of the year.
  
• Business service revenues were down 3.9% year-over-year on a reported basis, but when you adjust for last year's sales of assets in Japan, revenues were down just 3.2%. That's the best performance in over four quarters. And while businesses continue to work their way through the economic downturn, they are still investing in services that help drive productivity and efficiency. We see this in strong IP data growth. We also see it in continued strong growth of our strategic business services, which is now a $5 billion annual revenue stream growing at close to 20% year-over-year.
  
• For the second quarter consolidated margins were up sequentially and stable from a year ago at 19.6%. These results were achieved with pressure from a couple of areas: the completion of the Alltel integration, the storm-related costs and our record second quarter Smartphone sales. In wireline, our operating income margin was 13.1% in the second quarter, essentially flat from the second quarter last year but up 160 basis points sequentially. Improving revenue trends and our focus on cost initiatives throughout the company helped offset pressure from declines in voice revenues.
  
• Our cash flow summary is on Slide 15. In the first half of the year, cash from operations and working capital initiatives totaled $16.8 billion. Capital expenditures were 9.5 billion with a 29% year-over-year increase in wireless capital to reach $4.4 billion. Wireless capital includes work with our LTE build which is on track to be launched later this summer. And as noted in our earnings release, we're slightly increasing our guidance for full year capital investments. We now anticipate capital expenditures in the $20 billion range as we continue to invest in our wireless network.
  
• For the first six months of the year, free cash flow before dividends was $7.3 billion and dividend payments totaled $5.1 billion. In terms of uses of cash, debt is down almost $3.4 billion over the past 12 months and our debt to EBITDA ratio is 1.48. Our strong cash flow and balance sheet give us the flexibility to retire data as it comes due to invest in the business, including funding the T-Mobile acquisition and to continue to return substantial value to shareholders through dividends.
  
• In summary, we had a solid quarter, which adds to our confidence as we head into the second half. We expect continued solid results as we focus on executing on our strategy and growing our business. And we are excited about the industry's potential and about our position for long-term growth. Brooks, that concludes our prepared remarks.
  
• (Q&A) John, I wanted to come back to the point on the wireline revenue growth. I think you'd said wireline soon will be growing again. I know Randall has commented that enterprise revenues could turn positive exiting 2011. So can you perhaps just give us a little bit more specificity around when you think wireline may be able to turn positive overall and some of the - just get into some of the drivers of that? (A) Thanks for being on the call. We almost had sequential revenue growth this quarter, so we're on the cusp of that now. And whether that happens in the third quarter, the fourth quarter or soon thereafter, we're really right on the cusp of that now. What's driving it is a number of things. We're still getting great results out of our Wholesale business and Ethernet and other products, doing some good business in network integration and supporting some of our key partners in that. We're starting to see some improvement through the U-verse product and small business and our ability bundle that with wireless. And we are continuing to see some investment in the global enterprise space by companies. So we're real optimistic that we're going to see it. We just missed it this quarter.

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