AT&T INC.
SEPTEMBER 30, 20112012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Revenue growth continues to be tempered by declines in our wireline voice revenues. For the first nine months of 2011, totalTotal switched access lines decreased 12.3%.12.8% since September 30, 2011. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose wireline voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.
Cost of services and sales expenses decreased $440,increased $62, or 3.2%0.5%, in the third quarter and increased $1,460,decreased $225, or 3.8%0.6%, for the first nine months of 2011. Decreased costs2012. The sale of our Advertising Solutions segment reduced expenses $277 in the third quarter wereand $499 for the first nine months. The increase in the third quarter was primarily due to lowerhigher wireless handset costs resulting fromrelated to smartphone sales including the timinglaunch of the latest iPhone release datesmodel and wireline costs attributable to growth in U-verse subscribers, which were mostly offset by lower employee-related charges. Increased costsnon-employee related charges and the sale of our Advertising Solutions segment. The decrease for the first nine months wereis primarily due to the sale of our Advertising Solutions segment and lower non-employee related to strong sales of wireless smartphones to new subscribers, a high number of customers upgrading theirexpenses, partially offset by higher U-verse, wireless handset and costs associated with transferring primarily former Alltel Wireless (Alltel) customers to our network. Lower employee-related charges during the first nine months partially offset these increases.wireless network costs.
Selling, general and administrative expenses decreased $212,increased $223, or 2.8%2.8%, in the third quarter and $214,$347, or 1.0%1.4%, for the first nine months of 2011. These decreases2012. The increases were primarily due to lower financing-related costs associated with our pensionhigher wireless commissions and postretirement benefits (referred to as Pension/OPEB expenses) and decreases in other employee-related expensesadministrative costs. The increases were partially offset by decreased sales and advertising costs, employee related expenses, related toand the sale of our pending acquisition of T-Mobile USA, Inc. (T-Mobile). The decreaseAdvertising Solutions segment, which reduced expenses $277 in the third quarter and $435 for the first nine months.
Depreciation and amortization expense decreased $106, or 2.3%, in the third quarter and $233, or 1.7%, for the first nine months was partially offset by higher wireless commission and sales related expenses.
Depreciation and amortization expense decreased $255, or 5.2%,of 2012. The sale of our Advertising Solutions segment reduced expenses $94 in the third quarter and $668, or 4.6%,$195 for the first nine months of 2011. The third quarter and year-to-date decrease was primarily relatedmonths. Expenses also decreased due to lower amortization of intangibles for customer lists related to acquisitions.acquisitions, partially offset by increased depreciation associated with ongoing capital spending for network upgrades and expansion.
Interest expense increased $160,decreased $65, or 21.9%, in the third quarter and $335, or 14.9%, for the first nine months of 2011. Increased interest expense was primarily due to no longer capitalizing interest on spectrum that will be used to support our Long Term Evolution (LTE) technology, partially offset by a decrease in our average debt balances for the first nine months. Effective January 1, 2011, we ceased capitalization of interest on spectrum for LTE as this spectrum was determined to be ready for its intended use.
Equity in net income of affiliates decreased $24, or 11.1%7.3%, in the third quarter and increased $20,$41, or 3.2%1.6%, for the first nine months of 2012. 2011. Decreased equity in net income of affiliatesThe decrease in the third quarter iswas due to our lower operating results at Télefonos de México, S.A. de C.V. (Telmex). Increased equityaverage debt balances and interest rates, partially offset by call premiums paid on the early redemption of debt in net income of affiliatesSeptember 2012. The increase for the first nine months was primarily due to improved operating resultsa net charge of approximately $151 related to call premiums paid for the early redemption of debt, which were partially offset by net gains on the settlement of associated interest-rate swaps. The increase from the early debt redemptions was partially offset by lower expense resulting from lower average debt balances and interest rates and an increase in the amount of interest capitalized on wireless spectrum that will be used in the future.
Equity in net income of affiliates decreased $11, or 5.7%, in the third quarter and $112, or 17.3%, for the first nine months of 2012. Decreased equity in net income of affiliates was due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil), resulting from foreign exchange losses and increased taxes. Partially offsetting the decreases were earnings from YP Holdings LLC (YP Holdings).
Other income (expense) – net We had other income of $46$47 in the third quarter and $132$122 for the first nine months of 2011,2012, compared to other income of $124$46 in the third quarter and $825$132 for the first nine months of 2011. Income in the third quarter and for the first nine months of 2012 included interest and dividend income of $17 and $51, leveraged lease income of $5 and $46 and net gains on the sale of investments of $83 and $82. This income was partially offset by a third-quarter investment impairment of $55.
2010. ResultsOther income in the third quarter and for the first nine months of 2011 included interest and dividend income of $13 and $56 and leveraged lease income of $17 in the third quarter$4 and $71 for the first nine months.$15, respectively. In addition, third quarter 2011 results included an $8 gain on the sale of nonstrategic assets along with foreign exchange gains of $7, while results for the first nine months of 2011 included a net gain of $66 from the sale of investments.
ResultsIncome taxes decreased $158, or 8.3%, in the third quarter of 2010 included gains from the sale of investments of $121. In addition, resultsand increased $78, or 1.4%, for the first nine months of 2010 included a $647 gain on the exchange of Telmex Internacional, S.A.B. de C.V. (Telmex Internacional) shares2012. Our effective tax rate was 32.0% for América Móvil shares.
Income taxes increased $8,472 in the third quarter and $7,144 for the first nine months of 2011. The increase in income taxes for the third quarter and for the first nine months of 2011 was due to a settlement with the Internal Revenue Service (IRS) that occurred in the third quarter of 2010 related to a restructuring of our wireless operations, which lowered our income taxes in 2010 by $8,300. The tax benefit of the IRS settlementand 33.4% for the first nine months of 2010 was partially offset by a $995 charge2012, as compared to income tax expense recorded during34.0% for the third quarter and 34.1% for the first quarternine months of 2010 to reflect the deferred tax impact of enacted U.S. healthcare legislation (See Note 1). Our2011. The decrease in effective tax rate was 34.0% for the thirdin this quarter and 34.1% for the first nine monthsis due primarily to recognition of 2011, as comparedbenefits related to (130.3)% for third quarter and (9.3)% for the first nine monthsresolution of 2010.audit issues.
AT&T INC.
SEPTEMBER 30, 20112012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
DollarsDollars in millions except per share amounts
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In July 2009, in the case regarding the tax treatment of Universal Service Fund (USF) receipts on our 1998 and 1999 tax returns, the U.S. District Court granted the Government’s motion for summary judgment and entered final judgment for the Government. We appealed the final judgment to the U.S. Court of Appeals for the Fifth Circuit who affirmed the judgment of the District Court in January 2011. In October 2011, the U.S. Supreme Court denied our request to review the decision of the Fifth Circuit. The decision has no impact on our financial statements.
Income (loss) from discontinued operations, net of tax decreased $780 in the third quarter and $777 for the first nine months of 2011 due to our third-quarter 2010 sale of our subsidiary Sterling Commerce Inc., which resulted in a gain of $767.
Selected Financial and Operating Data | | | | | | |
| | September 30, | |
| | 2011 | | | 2010 | |
Wireless customers (000) | | | 100,738 | | | | 92,761 | |
Postpaid wireless customers (000) | | | 68,614 | | | | 67,688 | |
Prepaid wireless customers (000) | | | 7,059 | | | | 6,209 | |
Reseller wireless customers (000) | | | 13,028 | | | | 11,021 | |
Connected device customers (000) | | | 12,037 | | | | 7,843 | |
Wireline consumer revenue connections (000)1,2 | | | 41,852 | | | | 43,733 | |
Network access lines in service (000)2,7,8 | | | 37,956 | | | | 43,302 | |
Broadband connections (000)2,3,7 | | | 16,476 | | | | 16,100 | |
Video connections (000)4 | | | 5,392 | | | | 4,735 | |
Debt ratio5,7 | | | 38.5 | % | | | 37.9 | % |
Ratio of earnings to fixed charges6,7 | | | 5.41 | | | | 5.38 | |
Number of AT&T employees | | | 256,210 | | | | 267,720 | |
Selected Financial and Operating Data | | | | | | |
| | September 30, | |
| | 2012 | | | 2011 | |
Wireless subscribers (000) | | | 105,871 | | | | 100,738 | |
Network access lines in service (000) | | | 33,088 | | | | 37,956 | |
Total wireline broadband connections (000) | | | 16,392 | | | | 16,476 | |
Debt ratio1 | | | 38.6 | % | | | 38.5 | % |
Ratio of earnings to fixed charges2 | | | 5.36 | | | | 5.41 | |
Number of AT&T employees3 | | | 241,130 | | | | 256,210 | |
1Wireline consumer revenue connections includes retail access lines, U-verse VoIP connections, broadband and video. |
2 Represents services provided by AT&T’s Incumbent Local Exchange Carriers (ILECs) and affiliates.
|
3 Broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
|
4 Video connections include customers that have satellite service under our agency arrangements and U-verse video connections (of 3,583 in 2011 and 2,741 in 2010).
|
5 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and doesdo not consider cash
available to pay down debt. See our “Liquidity and Capital Resources” section for discussion. |
6 See Exhibit 12.
7 Prior-year amounts restated to conform to current-period reporting methodology.
8 At September 30, 2011, total switched access lines were 37,956, retail business switched access lines totaled 15,951 and wholesale and coin switched access lines totaled 2,206.2
| See Exhibit 12. |
3 | Includes the reduction of approximately 8,200 employees as a result of the sale of our Advertising Solutions segment. |
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 43 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. We make our capital allocations decisions primarily based on our strategic direction of the business, needs of the network (wireless or wireline) providing services.services and other assets needed to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have fourthree reportable segments: (1) Wireless, (2) Wireline, and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions. On May 8, 2012, we completed the sale of our Advertising Solutions segment and (4) Other.received a 47 percent equity interest in the new entity YP Holdings (see Note 1).
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services. The Wireless segment results have been reclassified to include the operating results of a subsidiary that provides services for subscribers to wirelessly monitor their homes that was previously reported in the Wireline segment’s results.
The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, U-verse TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements. The Wireline segment results have been reclassified to exclude the operating results of the home monitoring business moved to our Wireless segment and to include the operating results of customer information services, which were previously reported in our Other segment’s results.
The Advertising Solutions segment includesincluded our directory operations, which publishpublished Yellow and White Pages directories and sellsold directory advertising and Internet-based advertising and local search.
The Other segment includes results from customer information services, our portion of the results from our international equity investments, our 47 percent equity interest in YP Holdings, and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement benefit plans.
In January 2011, we announced a change The Other segment results have been reclassified to exclude the operating results of customer information services, which are now reported in our method of recognizing actuarial gains and losses for pension and other postretirement benefits as well as the attribution of those benefit costs to our segments. Historically, the total benefit costs were attributed to our various segments. As part of the benefit accounting change, the service cost and the amortization of prior service costs, which represent the benefits earned by active employees during the period, will continue to be attributed to the segment in which the employee is employed, while interest cost and expected return on assets are recorded in the Other segment as those financing activities are managed on a corporate level. Actuarial gains and losses resulting from the remeasurement of our pension and postretirement benefit plans, which generally occurs in the fourth quarter, will be reflected in AT&T’s consolidated results only. We have adjusted prior-period segment information to conform to the current period’s presentation.Wireline segment’s results.
The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Wireless | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2011 | | | 2010 | | | Percent Change | | | 2011 | | | 2010 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Service | | $ | 14,261 | | | $ | 13,675 | | | | 4.3 | % | | $ | 42,379 | | | $ | 39,711 | | | | 6.7 | % |
Equipment | | | 1,345 | | | | 1,505 | | | | (10.6 | ) | | | 4,138 | | | | 3,608 | | | | 14.7 | |
Total Segment Operating Revenues | | | 15,606 | | | | 15,180 | | | | 2.8 | | | | 46,517 | | | | 43,319 | | | | 7.4 | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 9,367 | | | | 10,032 | | | | (6.6 | ) | | | 29,007 | | | | 26,758 | | | | 8.4 | |
Depreciation and amortization | | | 1,619 | | | | 1,640 | | | | (1.3 | ) | | | 4,737 | | | | 4,776 | | | | (0.8 | ) |
Total Segment Operating Expenses | | | 10,986 | | | | 11,672 | | | | (5.9 | ) | | | 33,744 | | | | 31,534 | | | | 7.0 | |
Segment Operating Income | | | 4,620 | | | | 3,508 | | | | 31.7 | | | | 12,773 | | | | 11,785 | | | | 8.4 | |
Equity in Net Income (Loss) of Affiliates | | | (7 | ) | | | (6 | ) | | | (16.7 | ) | | | (19 | ) | | | 14 | | | | - | |
Segment Income | | $ | 4,613 | | | $ | 3,502 | | | | 31.7 | % | | $ | 12,754 | | | $ | 11,799 | | | | 8.1 | % |
2012
The following table highlights other key measures of performance for the Wireless segment: | |
| | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2011 | | | 2010 | | | Percent Change | | | 2011 | | | 2010 | | | Percent Change | |
|
Wireless Subscribers (000) | | | | | | | | | | | | 100,738 | | | | 92,761 | | | | 8.6 | % |
Gross Subscriber Additions (000)1 | | | 5,946 | | | | 6,231 | | | | (4.6 | ) % | | | 17,154 | | | | 16,367 | | | | 4.8 | |
Net Subscriber Additions (000)1 | | | 2,123 | | | | 2,631 | | | | (19.3 | ) | | | 5,202 | | | | 6,050 | | | | (14.0 | ) |
Total Churn | | | 1.28 | % | | | 1.32 | % | | -4 BP | | | | 1.36 | % | | | 1.30 | % | | 6 BP | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid Subscribers (000) | | | | | | | | | | | | | | | 68,614 | | | | 67,688 | | | | 1.4 | % |
Net Postpaid Subscriber Additions (000)1 | | | 319 | | | | 745 | | | | (57.2 | ) % | | | 712 | | | | 1,753 | | | | (59.4 | ) |
Postpaid Churn | | | 1.15 | % | | | 1.14 | % | | 1 BP | | | | 1.16 | % | | | 1.08 | % | | 8 BP | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Prepaid Subscribers (000) | | | | | | | | | | | | | | | 7,059 | | | | 6,209 | | | | 13.7 | % |
Net Prepaid Subscriber Additions (000)1 | | | 293 | | | | 321 | | | | (8.7 | ) % | | | 515 | | | | 645 | | | | (20.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Reseller Subscribers (000) | | | | | | | | | | | | | | | 13,028 | | | | 11,021 | | | | 18.2 | |
Net Reseller Subscriber Additions (000)1 | | | 473 | | | | 406 | | | | 16.5 | | | | 1,282 | | | | 545 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Connected Device Subscribers (000)2 | | | | | | | | | | | | | | | 12,037 | | | | 7,843 | | | | 53.5 | |
Net Connected Device Subscriber Additions (000) | | | 1,038 | | | | 1,159 | | | | (10.4 | ) % | | | 2,693 | | | | 3,107 | | | | (13.3 | ) % |
1 Excludes merger and acquisition-related additions during the period. | |
2 Includes data-centric devices such as eReaders, home security monitoring, fleet management, and smart grid devices. Tablets | |
are primarily reflected in our prepaid subscriber category. | |
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Wireless Metrics
Subscriber Additions As of September 30, 2011, we served 100.7 million wireless subscribers. Lower net subscriber additions (net additions) in the third quarter and first nine months of 2011 were primarily attributable to lower net postpaid additions and lower net connected devices additions. The declines in net postpaid additions in the third quarter and first nine months of 2011 reflect slowing growth in the industry’s subscriber base, higher postpaid churn attributable in part to the integration of Alltel customers into our network, and the expiration of Apple iPhone exclusivity in the first quarter of 2011. The 4.6% decrease in gross additions in the third quarter of 2011 was primarily related to lower activations of postpaid smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) associated with a delay in the launch of the latest iPhone model, partially offset by higher activations of Android devices and other non-iPhone smartphones. The 4.8% increase in gross additions for the first nine months of 2011 was primarily related to higher activations of postpaid smartphones, sales of connected devices and tablets, and growth in our reseller subscriber base.
Average service revenue per user (ARPU) from postpaid subscribers increased 1.4% in the third quarter and 1.9% for the first nine months of 2011, driven by an increase in postpaid data services ARPU of 14.2% in the third quarter and an increase of 15.5% for the first nine months of 2011. Of our total postpaid subscriber base, 69% now use more advanced handsets (with 53% using smartphones), up from 57% a year earlier (with 39% using smartphones). Approximately 70% of our postpaid subscribers were on data plans as of September 30, 2011, up from 61% as of September 30, 2010. The growth in postpaid data services ARPU in the third quarter and for the first nine months of 2011 was partially offset by a 5.6% decrease in the third quarter and a 5.0% decrease for the first nine months of 2011 in postpaid voice and other service ARPU. Postpaid voice and other service ARPU declined due to lower access and airtime charges and roaming revenues. Continued growth in our FamilyTalk® Plans (family plans) subscriber base, which generates lower ARPU compared to ARPU for our traditional postpaid subscribers, has also contributed to these declines. The postpaid ARPU for both periods also reflected ARPU declines resulting from the inclusion of subscribers from the acquisition of Alltel properties.
Total ARPU declined 4.4% in the third quarter and 3.8% for the first nine months of 2011, reflecting stronger growth in connected devices, tablet subscribers, and reseller subscribers compared to postpaid subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid plans, which have voice and data features. Accordingly, ARPU for these subscribers is typically lower compared to that generated from our subscribers on postpaid and other plans. Data services ARPU increased 8.2% in the third quarter and 9.6% for the first nine months of 2011, reflecting subscriber growth trends. Voice and other service ARPU declined 11.1% in the third quarter and 10.5% for the first nine months of 2011. We expect continued pressure on voice and other service ARPU.
Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Churn rate is calculated by dividing the aggregate number of wireless subscribers who canceled service during a period by the total number of wireless subscribers at the beginning of that period. The churn rate for the annual period is equal to the average of the churn rate for each month of that period. Higher total, postpaid, and connected device churn rates in the first nine months of 2011 contributed to the decline in net additions for the period. Year-to-date postpaid churn increased as we transitioned former Alltel subscribers to our network. Reseller subscribers, who generally have the lowest churn rate among our wireless subscribers, partially offset the churn rate increases for the first nine months of 2011 due to their increasing share of net additions. A lower prepaid churn rate in the third quarter and the first nine months of 2011, due in part to the introduction of additional tablets to the marketplace after the first quarter of 2010, also partially offset a higher postpaid churn rate in both periods and contributed to the lower total churn rate in the third quarter.
Wireless Subscriber Relationships
The wireless industry continues to mature. Accordingly, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices. To attract and retain subscribers, we offer a wide variety of service plans in addition to offering a broad handset line. Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. We also offer data plans at different price levels to attract a wide variety of subscribers and to differentiate us from our competitors. Many of our subscribers are on family plans or business plans, which provide for service on multiple handsets at discounted rates, and such subscribers tend to have higher retention and lower churn rates. As of September 30, 2011, more than 85% of our postpaid subscribers are on family plans or business discount plans. Moreover, the vast majority of postpaid subscribers (including family plan users) are allowed to accumulate unused minutes (known as Rollover Minutes®), a feature that is currently not offered by other major postpaid carriers in the United States, and users would lose these minutes if they switched carriers. We also introduced our Mobile to Any Mobile feature, which enables our new and existing subscribers on these and other qualifying plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In the first nine months of 2011, we continued to see a significant portion of our subscriber base upgrade from their current devices to smartphones.
We offer a large variety of handsets, including at least 16 smartphones with advanced operating systems from 10 manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models (e.g., various Windows, Android, and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of handsets reduces dependence on any single product as these products continue to evolve in terms of technology and subscriber appeal. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our subscribers by providing incentives not to move to a new carrier. As is common in the industry, most of our phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. While the expiration of our iPhone exclusivity arrangement in the first quarter of 2011 contributed slightly to the increase in postpaid churn for the first nine months of 2011, this increase was largely due to customers that were not currently using an iPhone. While the expiration of our iPhone exclusivity arrangement may continue to affect our net postpaid subscriber additions, we do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.
We also believe future wireless growth will depend upon a wireless network that has sufficient spectrum and capacity to support innovative services and devices, and makes these innovations available to more wireless subscribers. Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. Unless a solution is obtained, these constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services. To address these constraints, in March 2011, we announced an agreement to acquire T-Mobile, which is currently under ongoing regulatory review (see “T-Mobile” discussed in “Other Business Matters” for recent developments). While AT&T has and will continue to attempt to address spectrum and capacity constraints on a market-by-market basis, we believe this acquisition provides the surest, fastest, and most efficient solution to these spectrum and capacity constraints. We also anticipate that the acquisition will enhance our ability to provide LTE network technology to over 97% of the U.S. population, including those in various rural areas.
Wireless Operating Results
Our Wireless segment operating income margin in the third quarter increased from 23.1% in 2010 to 29.6% in 2011, and for the first nine months increased from 27.2% in 2010 to 27.5% in 2011. The margin increase in the third quarter reflected higher data revenues and non-iPhone sales and upgrades. The delay in the launch of the latest iPhone model until early in the fourth quarter of 2011, compared to late second-quarter timing for prior models, also contributed to the third-quarter margin increase. The margin increase for the first nine months of 2011 was primarily due to higher data revenues generated by our subscribers during the period, partially offset by higher equipment and selling costs associated with smartphone activations and costs associated with the transition of former Alltel subscribers to our network. While we subsidize the sales prices of various smartphones, we expect to recover that cost over time from increased usage of the devices (especially data usage by the subscriber).
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Service revenues are comprised of local voice and data services, roaming, long-distance and other revenue. Service revenues increased $586, or 4.3%, in the third quarter and $2,668, or 6.7%, for the first nine months of 2011. The increases for these periods consisted of the following:
· | Data service revenues increased $857, or 18.0%, in the third quarter and $2,868, or 21.6%, for the first nine months of 2011. The increases were primarily due to the increased number of subscribers, heavier text and multimedia messaging and increased Internet access by subscribers using integrated devices and data-centric devices, such as eReaders, tablets, and mobile navigation devices. Data service revenues accounted for approximately 38% of our wireless service revenues for the first nine months of 2011, compared to 33% for the first nine months of 2010. |
· | Voice and other service revenues decreased $271, or 3.0%, in the third quarter, and $200, or 0.8%, for the first nine months of 2011. While the number of wireless subscribers increased 8.6% over the last 12 months, ARPU continues to decline for voice and other non-data wireless services. |
Equipment revenues decreased $160, or 10.6%, in the third quarter and increased $530, or 14.7%, for the first nine months of 2011. The third-quarter decline was primarily due to the delay in the launch of this year’s iPhone model, which resulted in lower iPhone upgrades when compared to a record quarter of iPhone upgrades during last year’s model launch. Higher sales of other smartphones partially offset this decline. As previously noted, an increasing share of our postpaid subscriber base now uses a smartphone, and manufacturers continue to introduce smartphones to the marketplace. Our mix of smartphone sales as a percentage of total sales and upgrades to postpaid subscribers has continued to increase year over year, contributing to the year-over-year increase in equipment revenues for the first nine months of 2011.
Operations and support expenses decreased $665, or 6.6%, in the third quarter, and increased $2,249, or 8.4%, for the first nine months of 2011. The third-quarter decrease was primarily due to the following:
· | Lower overall smartphone upgrades, reducing equipment costs $504 and commission expenses $210. Higher equipment sales and upgrades of Android devices and other smartphones partially offset lower iPhone upgrade levels. During the quarter, we also substantially completed our efforts to migrate former Alltel subscribers to our network. |
· | Administrative expenses decreased $146 due in part to lower legal and tax costs and a reclassification of shared information technology costs, partially offset by higher payroll costs in the period. |
· | Reseller, USF, and incollect roaming fees decreased $123 primarily due to lower usage and handset insurance costs. |
Partially offsetting these decreases, network system, interconnect, and long-distance costs increased $299 in the third quarter due to higher network traffic, higher recurring, personnel-related network support costs in conjunction with our network enhancement efforts, and higher leasing costs, and bad debt expense increased $74.
The increase for the first nine months of 2011 was primarily due to the following:
· | Higher levels of smartphone sales and upgrades, as well as handsets provided to former Alltel subscribers, increased equipment costs $1,353 and commission expenses $172. |
· | Network system, interconnect, and long-distance costs increased $889 due to higher network traffic, higher recurring, personnel-related network support costs in conjunction with our network enhancement efforts, and higher leasing costs. |
· | Selling expenses (other than commissions) increased $282 due to increased employee-related costs, bad debt expense, and advertising. |
Partially offsetting these increases for the first nine months were the following:
· | Administrative expenses decreased $220 due in part to lower legal, tax, and payroll costs and a reclassification of shared information technology costs. |
· | Reseller, USF, and incollect roaming fees decreased $222 primarily due to lower usage and handset insurance costs. |
Depreciation and amortizationexpenses decreased $21, or 1.3%, in the third quarter and $39, or 0.8%, for the first nine months of 2011. Amortization expense decreased $139, or 42.5%, in the third quarter and $386, or 38.2%, for the first nine months primarily due to an accelerated method of amortization for customer lists related to acquisitions.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Depreciation expense increased $118, or 9.0%, in the third quarter and $347, or 9.2%, in the first nine months primarily due to ongoing capital spending for network upgrades and expansion and the reclassification of shared information technology costs partially offset by certain network assets becoming fully depreciated.
Wireline | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2011 | | | 2010 | | | Percent Change | | | 2011 | | | 2010 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Data | | $ | 7,472 | | | $ | 6,947 | | | | 7.6 | % | | $ | 22,008 | | | $ | 20,464 | | | | 7.5 | % |
Voice | | | 6,243 | | | | 6,978 | | | | (10.5 | ) | | | 19,136 | | | | 21,685 | | | | (11.8 | ) |
Other | | | 1,246 | | | | 1,379 | | | | (9.6 | ) | | | 3,702 | | | | 4,023 | | | | (8.0 | ) |
Total Segment Operating Revenues | | | 14,961 | | | | 15,304 | | | | (2.2 | ) | | | 44,846 | | | | 46,172 | | | | (2.9 | ) |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,259 | | | | 10,220 | | | | 0.4 | | | | 30,629 | | | | 31,021 | | | | (1.3 | ) |
Depreciation and amortization | | | 2,892 | | | | 3,099 | | | | (6.7 | ) | | | 8,726 | | | | 9,280 | | | | (6.0 | ) |
Total Segment Operating Expenses | | | 13,151 | | | | 13,319 | | | | (1.3 | ) | | | 39,355 | | | | 40,301 | | | | (2.3 | ) |
Segment Operating Income | | | 1,810 | | | | 1,985 | | | | (8.8 | ) | | | 5,491 | | | | 5,871 | | | | (6.5 | ) |
Equity in Net Income of Affiliates | | | - | | | | 2 | | | | - | | | | - | | | | 7 | | | | - | |
Segment Income | | $ | 1,810 | | | $ | 1,987 | | | | (8.9 | ) % | | $ | 5,491 | | | $ | 5,878 | | | | (6.6 | ) % |
Operating Income and Margin Trends
Our Wireline segment operating income decreased $175, or 8.8%, in the third quarter and $380, or 6.5%, for the first nine months of 2011. Segment operating income margin in the third quarter decreased from 13.0% in 2010 to 12.1% in 2011, and for the first nine months decreased from 12.7% in 2010 to 12.2% in 2011. Our operating income and margins continued to be pressured by access line declines as our wireline consumer and business customers either reduced usage or disconnected traditional landline services and switched to alternative technologies, such as wireless and VoIP. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video, and U-verse voice. Additionally, we have the opportunity to increase Wireless segment revenues if customers choose AT&T Mobility as an alternative provider. The Wireline operating margins also reflect increases in data revenue growth and decreases in employee-related costs, driven by continuing cost initiatives and workforce reductions.
Operating Results
Data revenues increased $525, or 7.6%, in the third quarter and $1,544, or 7.5%, for the first nine months of 2011. Data revenues accounted for approximately 49% of wireline operating revenues for the first nine months of 2011 and 44% for the first nine months of 2010. Data revenues include transport, IP and packet-switched data services.
· | IP data revenues increased $617, or 15.5%, in the third quarter and $1,894, or 16.6%, for the first nine months of 2011 primarily driven by U-verse expansion, broadband additions and growth in IP-based strategic business services, which include Ethernet and application services. In the third quarter and for the first nine months U-verse video revenues increased $279 and $902, strategic business service revenues increased $233 and $664 and broadband high-speed Internet access increased $83 and $270, respectively. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services.
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· | Traditional packet switched data services revenue, which include frame relay and asynchronous transfer mode services, decreased $95, or 24.9%, in the third quarter and $286, or 23.3%, for the first nine months of 2011. This decrease was primarily due to lower demand as customers continue to shift to IP-based technology such as Virtual Private Networks, DSL and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.
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AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Voice revenues decreased $735, or 10.5%, in the third quarter and $2,549, or 11.8%, for the first nine months of 2011 primarily due to declining demand for traditional voice services by our consumer and business customers. Included in voice revenues are revenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.
· | Local voice revenues decreased $491, or 11.4%, in the third quarter and $1,605, or 12.0%, for the first nine months of 2011. The decrease was driven primarily by a 12.3% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies and the disconnection of additional lines.
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· | Long-distance revenues decreased $226, or 9.5%, in the third quarter and $879, or 11.8%, for the first nine months of 2011. Lower demand for long-distance service from global businesses and consumer customers decreased revenues $170 in the third quarter and $694 for the first nine months of 2011. Additionally, expected declines in the number of our national mass-market customers decreased revenues $55 in the third quarter and $188 for the first nine months of 2011.
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Other operating revenues decreased $133, or 9.6%, in the third quarter and $321, or 8.0%, for the first nine months of 2011. Major items included in other operating revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for more than 60% of total other revenue for both periods.
Operations and support expenses increased $39, or 0.4%, in the third quarter and decreased $392, or 1.3%, for the first nine months of 2011. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as salary, wage and bonus accruals. Costs in this category include certain network planning and engineering expenses, information technology, our repair technicians and repair services and property taxes. Operations and support expenses also include bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement service costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees. Our Wireless and Wireline segments also include certain network planning and engineering expenses, information technology, repair technicians and repair services, and property taxes as operations and support expenses.
The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”
The third quarter increase was primarily due to higher U-verse related spending of $117, primarily for software upgrades, and increased contract services and material and supplies expense of $100, reflecting a higher incidence of storms. These increases were partially offset by decreases in employee-related expense of $112, reflecting ongoing workforce reduction initiatives and lower bad debt expense of $70 due to lower business revenue and improvements in cash collections.Wireless | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine-Month Period |
| | 2012 | | 2011 | | Percent Change | | 2012 | | 2011 | | Percent Change |
| | | | | | | | | | | | | | | | | | |
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Service | | $ | 14,906 | | | $ | 14,261 | | | | 4.5 | % | | $ | 44,237 | | | $ | 42,379 | | | | 4.4 | % |
Equipment | | | 1,726 | | | | 1,345 | | | | 28.3 | | | | 4,884 | | | | 4,140 | | | | 18.0 | |
Total Segment Operating Revenues | | | 16,632 | | | | 15,606 | | | | 6.6 | | | | 49,121 | | | | 46,519 | | | | 5.6 | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,549 | | | | 9,376 | | | | 12.5 | | | | 30,337 | | | | 29,023 | | | | 4.5 | |
Depreciation and amortization | | | 1,730 | | | | 1,620 | | | | 6.8 | | | | 5,092 | | | | 4,741 | | | | 7.4 | |
Total Segment Operating Expenses | | | 12,279 | | | | 10,996 | | | | 11.7 | | | | 35,429 | | | | 33,764 | | | | 4.9 | |
Segment Operating Income | | | 4,353 | | | | 4,610 | | | | (5.6) | | | | 13,692 | | | | 12,755 | | | | 7.3 | |
Equity in Net Income (Loss) of Affiliates | | | (17) | | | | (8) | | | | - | | | | (45) | | | | (19) | | | | - | |
Segment Income | | $ | 4,336 | | | $ | 4,602 | | | | (5.8) | % | | $ | 13,647 | | | $ | 12,736 | | | | 7.2 | % |
The year-to-date decrease was primarily due to lower employee-related expense of $599, reflecting ongoing workforce reduction initiatives, decreased traffic compensation of $335 and lower bad debt expense of $165 due to lower business revenue and improvements in cash collections. These decreases were partially offset by increases in U-verse related spending of $336, increased nonemployee-related expenses of $251, and increased contract services expense of $138 reflecting storm-related expenses.
Depreciation and amortization expenses decreased $207, or 6.7%, in the third quarter and $554, or 6.0%, for the first nine months of 2011. The third quarter and year-to-date decrease was primarily related to lower amortization of intangibles for the customer lists associated with acquisitions, partially offset by increased depreciation related to capital spending for network upgrades and expansion.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Supplemental Information2012
Telephone, Wireline Broadband and Video Connections Summary
Our switched access lines and other services provided by our local exchange telephone subsidiaries at September 30, 2011 and 2010 are shown below.
| | September 30, | | | September 30, | | | Percent | |
(in 000s) | | 2011 | | | 2010 | | | Change | |
Switched Access Lines1 | | | | | | | | | |
Retail Consumer | | | 19,799 | | | | 23,414 | | | | (15.4 | ) % |
Retail Business2 | | | 15,951 | | | | 17,375 | | | | (8.2 | ) |
Retail Subtotal2 | | | 35,750 | | | | 40,789 | | | | (12.4 | ) |
| | | | | | | | | | | | |
Wholesale Subtotal2 | | | 2,156 | | | | 2,448 | | | | (11.9 | ) |
| | | | | | | | | | | | |
Total Switched Access Lines2,3 | | | 37,956 | | | | 43,302 | | | | (12.3 | ) % |
| | | | | | | | | | | | |
Total Retail Consumer Voice Connections6 | | | 21,941 | | | | 24,908 | | | | (11.9 | ) % |
| | | | | | | | | | | | |
Total Wireline Broadband Connections4 | | | 16,476 | | | | 16,100 | | | | 2.3 | % |
| | | | | | | | | | | | |
Satellite service5 | | | 1,809 | | | | 1,994 | | | | (9.3 | ) % |
U-verse video | | | 3,583 | | | | 2,741 | | | | 30.7 | |
Video Connections | | | 5,392 | | | | 4,735 | | | | 13.9 | % |
1 Represents access lines served by AT&T’s ILECs and affiliates.
2 Prior-period amounts restated to conform to current-period reporting methodology.
3 Total switched access lines includes payphone access lines of 50 at September 30, 2011 and 65 at September 30, 2010.
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4 Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
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5 Satellite service includes connections under our agency and resale agreements.
6 Includes consumer U-verse VoIP connections of 2,142 at September 30, 2011 and 1,494 at September 30, 2010.
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Advertising Solutions | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine-Month Period | |
| 2011 | | 2010 | | | Percent Change | | 2011 | | 2010 | | | Percent Change | |
Total Segment Operating Revenues | | $ | 803 | | | $ | 961 | | | | (16.4 | ) % | | $ | 2,512 | | | $ | 3,009 | | | | (16.5 | ) % |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 553 | | | | 631 | | | | (12.4 | ) | | | 1,706 | | | | 1,957 | | | | (12.8 | ) |
Depreciation and amortization | | | 94 | | | | 123 | | | | (23.6 | ) | | | 301 | | | | 393 | | | | (23.4 | ) |
Total Segment Operating Expenses | | | 647 | | | | 754 | | | | (14.2 | ) | | | 2,007 | | | | 2,350 | | | | (14.6 | ) |
Segment Income | | $ | 156 | | | $ | 207 | | | | (24.6 | ) % | | $ | 505 | | | $ | 659 | | | | (23.4 | ) % |
Operating Results
Our advertising solutions operating income margin in the third quarter decreased from 21.5% in 2010 to 19.4% in 2011, and for the first nine months decreased from 21.9% in 2010 to 20.1% in 2011. The declines were primarily attributable to decreased print advertising revenue.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsThe following table highlights other key measures of performance for the Wireless segment: | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine-Month Period |
| | 2012 | | 2011 | | Percent Change | | 2012 | | 2011 | | Percent Change |
Wireless Subscribers (000)1 | | | | | | | | | | | | 105,871 | | | | 100,738 | | | | 5.1 | % |
Gross Subscriber Additions (000)2 | | | 4,914 | | | | 5,946 | | | | (17.4 | )% | | | 15,162 | | | | 17,154 | | | | (11.6 | ) |
Net Subscriber Additions (000)2 | | | 678 | | | | 2,123 | | | | (68.1 | ) | | | 2,670 | | | | 5,202 | | | | (48.7 | ) |
Total Churn4 | | | 1.34 | % | | | 1.28 | % | | 6 BP | | | | 1.33 | % | | | 1.36 | % | | (3) BP | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid Subscribers (000) | | | | | | | | | | | | | | | 69,747 | | | | 68,614 | | | | 1.7 | % |
Net Postpaid Subscriber Additions (000)2 | | | 151 | | | | 319 | | | | (52.7 | )% | | | 658 | | | | 712 | | | | (7.6 | ) |
Postpaid Churn4 | | | 1.08 | % | | | 1.15 | % | | (7) BP | | | | 1.05 | % | | | 1.16 | % | | (11) BP | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Prepaid Subscribers (000) | | | | | | | | | | | | | | | 7,545 | | | | 7,059 | | | | 6.9 | % |
Net Prepaid Subscriber Additions (000)2 | | | 77 | | | | 293 | | | | (73.7 | )% | | | 294 | | | | 515 | | | | (42.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Reseller Subscribers (000) | | | | | | | | | | | | | | | 14,573 | | | | 13,028 | | | | 11.9 | % |
Net Reseller Subscriber Additions (000)2 | | | 137 | | | | 473 | | | | (71.0 | )% | | | 793 | | | | 1,282 | | | | (38.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Connected Device Subscribers (000)3 | | | | | | | | | | | | | | | 14,006 | | | | 12,037 | | | | 16.4 | % |
Net Connected Device Subscriber Additions (000) | | | 313 | | | | 1,038 | | | | (69.8 | )% | | | 925 | | | | 2,693 | | | | (65.7 | ) |
1 | Represents 100% of AT&T Mobility customers. |
2 | Excludes merger and acquisition-related additions during the period. |
3 | Includes data-centric devices such as eReaders, home security and automobile monitoring systems, and fleet management. Tablets are primarily reflected in our prepaid subscriber category, with the remainder in postpaid. |
4 | Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period. |
Wireless Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers. To attract and retain subscribers, we offer a broad handset line and a wide variety of service plans.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsOur handset offerings include at least 16 smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) from nine manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models (e.g., various Android, Apple, Windows and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first nine months of 2012, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid subscriber base, 63.8% (or 44.5 million subscribers) use smartphones, up from 52.6% (or 36.1 million subscribers) a year earlier. As is common in the industry, most of our subscribers’ phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our subscribers by providing incentives not to migrate to a different carrier. We do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.
Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. About 89% of our postpaid smartphone subscribers are on FamilyTalk® Plans (family plans), Mobile Share plans or business discount plans (discount plans), which provide for service on multiple devices at discounted rates, and such subscribers tend to have higher retention and lower churn rates. During the first quarter of 2011, we introduced our Mobile to Any Mobile feature, which enables our new and existing subscribers with qualifying messaging plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions. We also offer data plans at different price levels (usage-based data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 10.8% year over year. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with 63.9% (or 28.5 million subscribers) on these plans as of September 30, 2012, up from 49.8% (or 18.0 million subscribers) as of September 30, 2011. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In late August 2012, we launched new Mobile Share data plans (which allow postpaid subscribers to share data at discounted prices among devices covered by their plan), and early sales results have been positive.
As of September 30, 2012, more than 40% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or Long Term Evolution (LTE) network). Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the Federal Communications Commission (FCC) make new or existing spectrum available to the wireless industry to meet the needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.
Also as part of our efforts to improve our network performance and help address the need for additional spectrum capacity, we intend to redeploy spectrum currently used for basic 2G services to support more advanced mobile Internet services on our 3G and 4G networks. We will manage this process consistent with previous network upgrades and will transition customers on a market-by-market basis from our Global System for Mobile Communications (GSM) and Enhanced Data rates for GSM Evolution (EDGE) networks (referred to as 2G networks) to our more advanced 3G and 4G networks. We expect to fully discontinue service on our 2G networks by approximately January 1, 2017. As of September 30, 2012, about 10% of AT&T’s postpaid subscribers were using 2G-capable handsets. We do not expect this transition to have a material impact on our operating results, but will continue to evaluate the financial impact of transitioning customers from 2G devices to 3G or 4G devices.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsWireless Metrics
Subscriber Additions As of September 30, 2012, we served 105.9 million wireless subscribers, an increase of 5.1%. We continue to see a declining rate of growth in the industry’s subscriber base compared to prior years, as reflected in a 17.4% decrease in gross subscriber additions (gross additions) in the third quarter and an 11.6% decrease for the first nine months of 2012. Lower net subscriber additions (net additions) in the third quarter and in the first nine months were primarily attributable to lower connected device and reseller additions when compared to the prior year, which reflected higher churn rates for customers not using such devices (zero-revenue customers). Lower net prepaid additions in the third quarter reflected a decrease in net prepaid tablet additions, as the introduction of our Mobile Share plans has accelerated a shift from prepaid to postpaid tablet subscribers. Postpaid subscriber additions in the third quarter of 2012 reflected, in part, inventory shortages of the latest iPhone model following its September launch.
Average service revenue per user (ARPU) – Postpaid increased 2.4% in the third quarter and 1.9% for the first nine months of 2012, driven by an increase in data services ARPU of 14.6% in the third quarter and for the first nine months, reflecting greater use of smartphones and data-centric devices. The growth in data services ARPU was partially offset by a 5.6% decrease in voice and other service ARPU in the third quarter and a 6.0% decrease for the first nine months. Voice and other service ARPU declined due to lower access and airtime charges, triggered in part by continued growth in our discount plans, which generates lower ARPU compared to our traditional postpaid subscribers, and lower roaming revenues.
ARPU – Total declined 1.3% in the third quarter and 2.1% for the first nine months, reflecting growth in connected device, tablet and reseller subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid smartphone plans, which have voice and data features. Accordingly, ARPU for these subscribers is typically lower compared to that generated from our smartphone subscribers on postpaid and other plans. Data services ARPU increased 11.7% in the third quarter and 11.6% for the first nine months, reflecting greater smartphone and data-centric device use. We expect continued revenue growth from data services as more subscribers use smartphones and data-centric devices, and as we continue to expand our network. Voice and other service ARPU declined 9.7% in the third quarter and 10.5% for the first nine months due to voice access and usage trends and a shift toward a greater percentage of data-centric devices. We expect continued pressure on voice and other service ARPU.
Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn rates were lower in the third quarter and for the first nine months, reflecting popularity of our discount plans, and last year’s postpaid churn rates reflected integration efforts connected to a prior merger. The total churn rate was also lower for the first nine months due to these integration efforts. The total churn rate was higher in the third quarter of 2012 due primarily to connected devices and a higher number of zero-revenue customers.
Operating Results
Our Wireless segment operating income decreased $257, or 5.6%, in the third quarter and increased $937, or 7.3%, for the first nine months of 2012. Segment operating income margin in the third quarter decreased from 29.5% in 2011 to 26.2% in 2012 and for the first nine months increased from 27.4% in 2011 to 27.9% in 2012. The third-quarter margin decrease reflected higher smartphone upgrades and total device sales, partially offset by higher data revenues generated by our postpaid subscribers. The year-to-date margin increase reflected higher data revenues generated by our postpaid subscribers, fewer smartphone upgrades and total device sales, and operating efficiencies.
Service revenues are comprised of local voice and data services, roaming, long-distance and other revenue. Service revenues increased $645, or 4.5%, in the third quarter and $1,858, or 4.4%, for the first nine months of 2012. The increases consisted of the following:
· | Data service revenues increased $1,028, or 18.3%, in the third quarter and $3,060, or 19.0%, for the first nine months. The increases were primarily due to the increased number of subscribers and increased Internet usage by subscribers using smartphones and data-centric devices, such as eReaders, tablets, and mobile navigation devices. Data service revenues accounted for 43.4% of our wireless service revenues for the first nine months, compared to 38.0% last year. |
· | Voice and other service revenues decreased $383, or 4.4%, in the third quarter and $1,202, or 4.6%, for the first nine months. While we had a 5.1% year-over-year increase in the number of wireless subscribers, ARPU continues to decline for voice and other non-data wireless services due to voice access and usage trends. |
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
OperatingEquipment revenues decreased $158, increased $381, or 16.4% 28.3%, in the third quarter and $497,$744, or 16.5% 18.0%, for the first nine months of 2012 due to a year-over-year increase in smartphone sales as a percentage of total device sales to postpaid subscribers. During the first quarter of 2012, we introduced an increase in the handset upgrade fee, which also contributed to the year-over-year increases in equipment revenues this year.
Operations and support expenses increased $1,173, or 12.5%, in the third quarter and $1,314, or 4.5%, for the first nine months of 2012. The third-quarter increase was primarily due to the following:
· | Equipment costs increased $496 reflecting the overall increase in handset upgrade activity and total device sales, as well as the sales of the more expensive smartphones, including the September launch of the latest iPhone model. |
· | Selling expenses (other than commissions) and administrative expenses increased $326 due primarily to a $73 increase in information technology costs in conjunction with ongoing support systems development, $99 increase in professional fees and taxes, $87 increase in advertising costs, and $46 increase in payroll and benefit costs. |
· | Commission expenses increased $293 due primarily to the overall increase in handset upgrade activity and total device sales and a year-over-year increase in smartphone sales as a percentage of total device sales. |
· | USF and reseller fees increased $54 primarily due to federal USF rate increases and higher handset insurance costs. A majority of USF fees are recovered and reported as revenues. |
The increase for the first nine months of 2012 was primarily due to the following:
· | Commission expenses increased $467 due to a year-over-year increase in smartphone sales as a percentage of total device sales, partially offset by the overall decline in handset upgrade activity and total device sales. |
· | Selling expenses (other than commissions) and administrative expenses increased $446 due primarily to a $149 increase in information technology costs in conjunction with ongoing support systems development, $117 increase in professional fees and taxes, $96 increase in payroll and benefit costs, and $93 increase in bad debt expense due to higher write-offs, and, partially offset by a $73 decline in advertising costs. |
· | Network system, interconnect, and long-distance costs increased $214 due to higher network traffic, personnel-related network support costs in conjunction with our network enhancement efforts, and higher leasing costs. |
· | USF and reseller fees increased $212 primarily due to federal USF rate increases and higher handset insurance costs. A majority of USF fees are recovered and reported as revenues. |
· | Equipment costs increased $73 reflecting sales of the more expensive smartphones, partially offset by the overall decline in upgrade activity and total device sales. |
Partially offsetting these increases, incollect roaming fees decreased $101 for the first nine months due to rate declines and lower roaming use associated with the integration of previously acquired subscribers into our network.
2011Depreciation and amortization expenses increased $110, or 6.8%, reflecting migration from printin the third quarter and $351, or 7.4%, for the first nine months of 2012. Depreciation expense increased $184, or 12.9%, in the third quarter and $582, or 14.1%, for the first nine months primarily due to online search,ongoing capital spending for network upgrades and expansion and the reclassification of shared information technology costs partially offset by an increase in interactive advertising.certain network assets becoming fully depreciated. We expect substantially all of our GSM and EDGE network assets to be fully depreciated by end-of-year 2016.
Operating expenses Amortization expense decreased $107,$74, or 14.2% 39.2%, in the third quarter and $343,$231, or 14.6% 36.8%, for the first nine months of 2011, largely driven by decreased product related expense of $62 in the third quarter and $184 for the first nine months and lower bad debt expense of $19 in the third quarter and $87 for the first nine months. Also contributing to the decreases was lower amortization expense of $34 in the third quarter and $102 for the first nine months, primarily due to an accelerated method of amortization for customer listlists related to acquisitions.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsWireline | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine-Month Period |
| | 2012 | | 2011 | | Percent Change | | 2012 | | 2011 | | Percent Change |
| | | | | | | | | | | | | | | | | | |
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Data | | $ | 7,977 | | | $ | 7,459 | | | | 6.9 | % | | $ | 23,695 | | | $ | 21,979 | | | | 7.8 | % |
Voice | | | 5,565 | | | | 6,242 | | | | (10.8 | ) | | | 17,155 | | | | 19,132 | | | | (10.3 | ) |
Other | | | 1,271 | | | | 1,354 | | | | (6.1 | ) | | | 3,795 | | | | 4,025 | | | | (5.7 | ) |
Total Segment Operating Revenues | | | 14,813 | | | | 15,055 | | | | (1.6 | ) | | | 44,645 | | | | 45,136 | | | | (1.1 | ) |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,134 | | | | 10,295 | | | | (1.6 | ) | | | 30,516 | | | | 30,752 | | | | (0.8 | ) |
Depreciation and amortization | | | 2,774 | | | | 2,892 | | | | (4.1 | ) | | | 8,348 | | | | 8,726 | | | | (4.3 | ) |
Total Segment Operating Expenses | | | 12,908 | | | | 13,187 | | | | (2.1 | ) | | | 38,864 | | | | 39,478 | | | | (1.6 | ) |
Segment Operating Income | | | 1,905 | | | | 1,868 | | | | 2.0 | | | | 5,781 | | | | 5,658 | | | | 2.2 | |
Equity in Net Income (Loss) of Affiliates | | | - | | | | - | | | | - | | | | (1) | | | | - | | | | - | |
Segment Income | | $ | 1,905 | | | $ | 1,868 | | | | 2.0 | % | | $ | 5,780 | | | $ | 5,658 | | | | 2.2 | % |
Operating Income and Margin TrendsOur Wireline segment operating income increased $37, or 2.0%, in the third quarter and $123, or 2.2%, for the first nine months of 2012. Segment operating income margin in the third quarter increased from 12.4% in 2011 to 12.9% in 2012, and for the first nine months increased from 12.5% in 2011 to 12.9% in 2012. Our increased operating margins reflect increased data revenue growth and lower operating expenses which include depreciation and amortization. Our operating income and margins continued to be pressured as our consumer and business customers either reduced usage or disconnected traditional landlines and switched to alternative technologies, such as wireless and VoIP. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video, and U-verse voice. Additionally, we have the opportunity to increase Wireless segment revenues if customers choose AT&T Mobility as an alternative provider.
Operating Results
Data revenues increased $518, or 6.9%, in the third quarter and $1,716, or 7.8%, for the first nine months of 2012. Data revenues accounted for approximately 53% of wireline operating revenues for the first nine months of 2012 and 49% for the first nine months of 2011. Data revenues include transport, IP and packet-switched data services.
· | Strategic business services, which include Ethernet, Virtual Private Networks (VPN), Hosting, IP Conferencing and application services, increased $164, or 11.5%, in the third quarter and $598, or 14.5%, for the first nine months of 2012. These increases were driven by increased VPN revenues, which contributed additional revenues of $85 and $351 and Ethernet revenues, which increased by $75 and $216 in the third quarter and for the first nine months. |
· | IP data revenues (excluding strategic services) increased $512, or 14.9%, in the third quarter and $1,502, or 15.1%, for the first nine months of 2012 primarily driven by higher U-verse penetration. In the third quarter and for the first nine months U-verse video revenues increased $263 and $794, broadband high-speed Internet access revenue increased $161 and $433 and U-verse voice revenue increased $63 and $182, respectively. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services. New and existing U-verse customers are shifting from traditional landlines to our U-verse Voice and from DSL to our premium High Speed Internet access offerings. |
· | Traditional data revenues, which include transport (excluding Ethernet) and packet-switched data services, decreased $158, or 6.1%, in the third quarter and $384, or 4.9%, for the first nine months of 2012. This decrease was primarily due to lower demand as customers continue to shift to IP-based technology such as VPN, U-verse High Speed Internet access and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues. |
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsVoice revenues decreased $677, or 10.8%, in the third quarter and $1,977, or 10.3%, for the first nine months of 2012 primarily due to declining demand for traditional voice services by our consumer and business customers. Included in voice revenues are revenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.
· | Local voice revenues decreased $388, or 10.2%, in the third quarter and $1,183, or 10.1%, for the first nine months of 2012. The decrease was driven primarily by a 12.8% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies and the disconnection of additional lines. |
· | Long-distance revenues decreased $285, or 13.2%, in the third quarter and $779, or 11.9%, for the first nine months of 2012. Lower demand for long-distance service from global businesses and consumer customers decreased revenues $242 in the third quarter and $650 for the first nine months of 2012. Additionally, continuing declines in the number of our national mass-market customers decreased revenues $43 in the third quarter and $129 for the first nine months of 2012. |
Other operating revenues decreased $83, or 6.1%, in the third quarter and $230, or 5.7%, for the first nine months of 2012. Major items included in other operating revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for approximately 60% of total other revenue for both periods.
Other | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine-Month Period | |
| 2011 | | 2010 | | | Percent Change | | 2011 | | 2010 | | | Percent Change | |
|
Total Segment Operating Revenues | | $ | 108 | | | $ | 136 | | | | (20.6 | ) % | | $ | 345 | | | $ | 419 | | | | (17.7 | ) % |
Total Segment Operating Expenses | | | 459 | | | | 405 | | | | 13.3 | | | | 906 | | | | 1,249 | | | | (27.5 | ) |
Segment Operating Loss | | | (351 | ) | | | (269 | ) | | | (30.5 | ) | | | (561 | ) | | | (830 | ) | | | 32.4 | |
Equity in Net Income of Affiliates | | | 200 | | | | 221 | | | | (9.5 | ) | | | 668 | | | | 608 | | | | 9.9 | |
Segment Income (Loss) | | $ | (151 | ) | | $ | (48 | ) | | | - | | | $ | 107 | | | $ | (222 | ) | | | - | |
Operations and support expenses decreased $161, or 1.6%, in the third quarter and $236, or 0.8%, for the first nine months of 2012. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.
The Other segment includes results fromdecrease in the third quarter and for the first nine months of 2012 was primarily due to lower nonemployee related expenses of $36 and $270, employee related expenses of $128 and $236, reflecting ongoing workforce reduction initiatives, traffic compensation expenses of $121 and $229, and contract services of $27 and $100, respectively. These decreases were partially offset by increased cost of sales of $127 and $389, primarily related to U-verse related expenses, and USF fees of $39 and $237, respectively.
Depreciation and amortization expenses decreased $118, or 4.1%, in the third quarter and $378, or 4.3%, for the first nine months of 2012. The decrease was primarily related to lower amortization of intangibles for the customer information serviceslists associated with acquisitions and all corporatelower depreciation as assets become fully depreciated.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts Supplemental Information
Telephone, Wireline Broadband and Video Connections Summary
Our switched access lines and other operations. Thisservices provided by our local exchange telephone subsidiaries at September 30, 2012 and 2011 are shown below.
| | September 30, | | | September 30, | | | Percent |
(in 000s) | | 2012 | | | 2011 | | | Change |
Switched Access Lines | | | | | | | | | |
Retail Consumer | | | 16,489 | | | | 19,799 | | | | (16.7 | )% |
Retail Business1 | | | 14,619 | | | | 15,989 | | | | (8.6 | ) |
Retail Subtotal1 | | | 31,108 | | | | 35,788 | | | | (13.1 | ) |
| | | | | | | | | | | | |
Wholesale Subtotal1 | | | 1,930 | | | | 2,118 | | | | (8.9 | ) |
| | | | | | | | | | | | |
Total Switched Access Lines2 | | | 33,088 | | | | 37,956 | | | | (12.8 | )% |
| | | | | | | | | | | | |
Total Retail Consumer Voice Connections3 | | | 19,222 | | | | 21,941 | | | | (12.4 | )% |
| | | | | | | | | | | | |
Total Wireline Broadband Connections4,5 | | | 16,392 | | | | 16,476 | | | | (0.5 | )% |
| | | | | | | | | | | | |
Satellite service6 | | | 1,633 | | | | 1,809 | | | | (9.7 | )% |
U-verse video | | | 4,344 | | | | 3,583 | | | | 21.2 | |
Video Connections | | | 5,977 | | | | 5,392 | | | | 10.8 | % |
1 | Prior-period amounts restated to conform to current-period reporting methodology. |
2 | Total switched access lines includes payphone access lines of 50 at September 30, 2012 and 50 at September 30, 2011. |
3 | Includes consumer U-verse VoIP connections of 2,733 at September 30, 2012 and 2,142 at September 30, 2011. |
4 | Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband. |
5 | Includes U-verse High Speed Internet connections of 7,107 at September 30, 2012 and 4,636 at September 30, 2011. |
6 | Satellite service includes connections under our agency and resale agreements. |
Advertising Solutions | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine-Month Period |
| | 2012 | | | 2011 | | | Percent Change | | 2012 | | | 2011 | | | Percent Change |
Total Segment Operating Revenues | | $ | - | | | $ | 803 | | | | - | | | $ | 1,049 | | | $ | 2,512 | | | | (58.2 | )% |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | - | | | | 554 | | | | - | | | | 773 | | | | 1,707 | | | | (54.7 | ) |
Depreciation and amortization | | | - | | | | 94 | | | | - | | | | 106 | | | | 301 | | | | (64.8 | ) |
Total Segment Operating Expenses | | | - | | | | 648 | | | | - | | | | 879 | | | | 2,008 | | | | (56.2 | ) |
Segment Income | | $ | - | | | $ | 155 | | | | - | | | $ | 170 | | | $ | 504 | | | | (66.3 | )% |
Operating ResultsOn May 8, 2012, we completed the sale of our Advertising Solutions segment to an affiliate of Cerberus Capital Management, L.P. Following the sale, we are no longer recording operating results for this segment. Our Advertising Solutions segment operating income margin for the first nine months decreased from 20.1% in 2011 to 16.2% in 2012. Operating revenues decreased $1,463, or 58.2%, and operating expenses decreased $1,129, or 56.2%, for the first nine months of 2012.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsOther | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | | | Nine-Month Period |
| | 2012 | | | 2011 | | | Percent Change | | 2012 | | | 2011 | | | Percent Change |
Total Segment Operating Revenues | | $ | 14 | | | $ | 14 | | | | - | % | | $ | 41 | | | $ | 53 | | | | (22.6 | )% |
Total Segment Operating Expenses | | | 235 | | | | 412 | | | | (43.0 | ) | | | 729 | | | | 762 | | | | (4.3 | ) |
Segment Operating Loss | | | (221) | | | | (398) | | | | 44.5 | | | | (688) | | | | (709) | | | | 3.0 | |
Equity in Net Income of Affiliates | | | 199 | | | | 201 | | | | (1.0 | ) | | | 583 | | | | 668 | | | | (12.7 | ) |
Segment Income (Loss) | | $ | (22) | | | $ | (197) | | | | 88.8 | % | | $ | (105) | | | $ | (41) | | | | - | |
The Other segment includes our portion of the results from our international equity investments.investments, our 47 percent equity interest in YP Holdings, and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including the interest cost and expected return on pension and postretirement benefitsbenefit plan assets.
Segment operating revenues decreased $28, or 20.6%,were flat in the third quarter, and $74,decreased $12, or 17.7%22.6%, for the first nine months of 20112012 primarily due to reduced revenues from our operator services.leased equipment programs.
Segment operating expenses increased $54,decreased $177, or 13.3%43.0%, in the third quarter and decreased $343,$33, or 27.5%4.3%, for the first nine months of 2011. Increased operating expenses in the third quarter were2012. The decrease was primarily due to higher costs associated with our pending acquisition of T-Mobile and legal and other accrual adjustmentsrelated expenses in 2011, which were partially offset by reduced financing-related costs associated with our pension and postretirement benefits and lower other employee-relatedhigher employee related charges. Expense decreases for the first nine months reflect the reduced financing-related costs associated with our pension and postretirement benefits and lower other employee-related charges, partially offset by T-Mobile related costs.
Our Other segment also includes our equity investments in América Móvil and Telmex,YP Holdings, the income from which we report as equity in net income of affiliates. Our earnings from foreign affiliates are sensitive to exchange-rate changes in the value of the respective local currencies.
Equity in net income of affiliates decreased $21,$2, or 9.5%1.0%, in the third quarter and increased $60,$85, or 9.9%12.7%, for the first nine months of 2011.2012. Decreased equity in net income of affiliates in the third quarter was due to lower operating results at Telmex. Increased equity in net income of affiliates for the first nine months was primarily due to improved operating results at América Móvil. In June 2010,decreased earnings by América Móvil acquired control of Telmexduring 2012, resulting from foreign exchange losses and Telmex Internacional, which contributed to the improved operating results at América Móvilincreased taxes. Decreases were partially offset by decreases at Telmex.earnings from YP Holdings.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Our equity in net income of affiliates by major investment is listed below:
| | Third Quarter | | | Nine-Month Period | | | Third Quarter | | Nine-Month Period |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | | | 2012 | | 2011 | | 2012 | | 2011 |
América Móvil | | $ | 176 | | | $ | 171 | | | $ | 594 | | | $ | 454 | | América Móvil | $ | 126 | | $ | 176 | | $ | 490 | | $ | 594 |
Telmex | | | 26 | | | | 50 | | | | 75 | | | | 121 | | |
Telmex Internacional | | | - | | | | - | | | | - | | | | 34 | | |
YP Holdings | | YP Holdings | | 75 | | - | | 94 | | - |
Telmex1 | | Telmex1 | | - | | 26 | | - | | 75 |
Other | | | (2 | ) | | | - | | | | (1 | ) | | | (1 | ) | Other | | (2) | | (1) | | (1) | | (1) |
Other Segment Equity in Net Income of Affiliates | | $ | 200 | | | $ | 221 | | | $ | 668 | | | $ | 608 | | Other Segment Equity in Net Income of Affiliates | $ | 199 | | $ | 201 | | $ | 583 | | $ | 668 |
1 | Acquired by América Móvil in late 2011. |
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts OTHER BUSINESS MATTERS
U-verse Services We continue to expand our deploymenthad approximately 4.3 million U-verse TV subscribers as of U-verse High Speed Internet and TV services. As of September 30, 2011, we have passed 29.8 million2012. U-verse penetration of eligible living units (constructed housing units as well as platted housing lots) and are marketingat the services to 77%end of those units. We are now nearing completionthe third quarter of our deployment goal of 30 million living units by year-end 2011.2012 was approximately 18.0%.
We believe that our U-verse TV service is subject to federal oversight as a “video service” under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local regulations applicable to cable regulation. Certain municipalities have delayed our request or have refused us permission to use our existing right-of-ways to deploy or activate our U-verse-related services and products, resulting in litigation. Pending negotiations and current or threatened litigation involving municipalities could delay our deployment plans in those areas.systems. Petitions have been filed at the Federal Communications Commission (FCC)FCC alleging that the manner in which we provision “public, educational and governmental” (PEG) programming over our U-verse TV service conflicts with federal law, and a lawsuit has been filed in a California state superior court raising similar allegations under California law. If courts having jurisdiction where we have significant deployments of our U-verse services were to decide that federal, state and/or local cable regulation were applicable to our U-verse services, or if the FCC, state agencies or the courts were to rule that we must deliver PEG programming in a manner substantially different from the way we do today or in ways that are inconsistent with our current network architecture, it could have a material adverse effect on the cost timing and extent of our deployment plans.U-verse offerings.
Retiree Phone Concession Litigation In May 2005, we were served with a purported class action in U.S. District Court, Western District of Texas (Stoffels v. SBC Communications Inc.), in which the plaintiffs, who are retirees of Pacific Bell Telephone Company, Southwestern Bell and Ameritech, contend that the cash reimbursement formerly paid to retirees living outside their company’s local service area, for telephone service they purchased from another provider, is a “defined benefit plan” within the meaning of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In October 2006, the Court certified two classes. The issue of whether the concession is an ERISA pension plan was tried before the judge in November 2007. In May 2008, the court ruled that the concession was an ERISA pension plan. We asked the court to certify this ruling for interlocutory appeal, and in August 2008, the court denied our request. In May 2009, we filed a motion for reconsideration withJanuary 2011, the trial court. That motion was granted in January 2011, andcourt entered a final judgment was entered in our favor. Plaintiffs have appealed the judgment to the Fifth Circuit Court of Appeals. In June 2011,Appeals and in April 2012, the Fifth Circuit affirmed the lower court’s judgment in our favor dismissing the case. In July 2012, Plaintiffs filed a petition for a writ of certiorari in the U.S. Supreme Court, of Appeals held that a similar cash reimbursement program currently offered to out-of-region retirees of BellSouth is not a defined benefit plan. The Court’s decision lends significant support to our belief that an adverse outcome having a material effectwhich was denied on our financial statements in this case is unlikely, but we will continue to evaluateOctober 1, 2012, thereby ending the potential impact of this suit on our financial results as it progresses.litigation.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
NSA Litigation Twenty-four lawsuits were filed alleging that we and other telecommunications carriers unlawfully provided assistance to the National Security Agency in connection with intelligence activities that were initiated following the events of September 11, 2001. In the first filed case, Hepting et al v. AT&T Corp., AT&T Inc. and Does 1-20, a purported class action filed in U.S. District Court in the Northern District of California, plaintiffs alleged that the defendants disclosed and are currently disclosing to the U.S. Government content and call records concerning communications to which Plaintiffs were a party. Plaintiffs sought damages, a declaratory judgment and injunctive relief for violations of the First and Fourth Amendments to the U.S. Constitution, the Foreign Intelligence Surveillance Act (FISA), the Electronic Communications Privacy Act and other federal and California statutes. We filed a motion to dismiss the complaint. The United States asserted the “state secrets privilege” and related statutory privileges and also filed a motion asking the court to dismiss the complaint. The Courtcourt denied the motions, and we and the United States appealed. In August 2008, the U.S. Court of Appeals for the Ninth Circuit remanded the case to the district court without deciding the issue in light of the passage of the FISA Amendments Act, a provision of which addresses the allegations in these pending lawsuits (immunity provision). The immunity provision requires the pending lawsuits to be dismissed if the Attorney General certifies to the court either that the alleged assistance was undertaken by court order, certification, directive or written request or that the telecom entity did not provide the alleged assistance. In September 2008, the Attorney General filed his certification and asked the district court to dismiss all of the lawsuits pending against the AT&T Inc. telecommunications companies. The court granted the Government's motion to dismiss and entered final judgments in July 2009. In addition, a lawsuit seeking to enjoin the immunity provision’s application on grounds that it is unconstitutional was filed. In March 2009, we and the Government filed motions to dismiss this lawsuit. The court granted the motion to dismiss and entered final judgment in July 2009. All cases brought against the AT&T entities have been dismissed. In August 2009, plaintiffs in all cases filed an appeal with the Ninth Circuit Court of Appeals. On August 31,In December 2011, the appeal was argued before a panel of the Ninth Circuit Court of Appeals and we are waitingaffirmed the dismissals in all cases. In March 2012, the Plaintiffs in all but three cases filed a petition for writ of certiorari with the Court’s decision. Management believes this appeal is without merit and intends to continue to defend these matters vigorously.United States Supreme Court. The plaintiffs in two of the three cases filed petitions for rehearing with the Ninth Circuit Court of Appeals, both of which have been denied. The plaintiffs in the third case did not file a petition in either court. On October 9, 2012, the U.S. Supreme Court denied the remaining plaintiffs’ petition, thereby ending the litigation.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Universal Service Fees Litigation In October 2010, our wireless subsidiary was served with a purported class action in Circuit Court, Cole County, Missouri (MBA Surety Agency, Inc. v. AT&T Mobility, LLC), in which the plaintiffs contend that we violated the FCC’s rules by collecting Universal Service Fees on certain services not subject to such fees, including Internet access service provided over wireless handsets commonly called “smartphones” and wireless data cards, as well as collecting certain other state and local fees. Plaintiffs define the class as all persons who from April 1, 2003, until the present had a contractual relationship with us for Internet access through a smartphone or a wireless data card. Plaintiffs seek an unspecified amount of damages as well as injunctive relief. On October 25, 2012, the Circuit Court in St. Louis, Missouri, to which the case had been transferred, granted preliminary approval to a settlement in which we receive a complete release of claims from members of the settlement class. Under the settlement, our liability to the class and its counsel is capped at approximately $150, the amount that was collected from customers but not owed or remitted to the government. The Court has scheduled a final fairness hearing in February 2013, at which time the Court will consider, among other things, whether the settlement should be finally approved as fair, reasonable and adequate.
Wage and Hour Litigation Two wage and hour cases were filed in federal court in December 2009 each asserting claims under the Fair Labor Standards Act (Luque et al. v. AT&T Corp. et al., U.S. District Court in the Northern District of California) (Lawson et al. v. BellSouth Telecommunications, Inc., U.S. District Court in the Northern District of Georgia). Luque also alleges violations of a California wage and hour law, which varies from the federal law. In each case, plaintiffs allege that certain groups of wireline supervisory managers were entitled to paid overtime and seek class action status as well as damages, attorneys’ fees and/or penalties. Plaintiffs have been granted conditional collective action status for their federal claims and also are expected to seek class action status for their state law claims. We believehave contested the collective and class action treatment of the claims, the merits of the claims and the method of calculating damages for the claims. A jury verdict was entered in favor of the Company in October 2011 in the U.S. District Court in Connecticut on similar FLSA claims. In April 2012, we settled these cases, subject to court approval, on terms that will not have a material effect on the Company’s financial statements. On October 12, 2012, the court granted preliminary approval of the settlement in Luque.
Advertising Solutions and Interactive Business Sale In May 2012, we completed the sale of our Advertising Solutions segment to an adverse outcome havingaffiliate of Cerberus Capital Management, L.P. We received approximately $740 in cash after closing price adjustments, a $200 note and a 47% equity interest in the new entity YP Holdings. This transaction did not have a material effect on our financial statements in this case is unlikely.statements.
NextWave Acquisition On August 2, 2012, we announced an agreement to acquire NextWave Wireless Transactions
Qualcomm Spectrum Purchase In December 2010, we agreed to purchase spectrumInc. (NextWave), which holds wireless licenses in the Lower 700 MHz frequency band from Qualcomm Incorporated for approximately $1,925 in cash. TheWireless Communication Services (WCS) and Advanced Wireless Service (AWS) bands. We will acquire all the equity and purchase agreement expires on January 13, 2012, although either party may extend the agreement for an additional 90 days if regulatory approval by the FCC is still pending on that date. The spectrum covers more than 300 million people total nationwide, including 12 MHz of Lower 700 MHz D and E block spectrum covering more than 70 million people in fivea portion of the top 15 metropolitan areas and 6 MHzdebt of Lower 700 MHz D block spectrum covering more than 230 million people across the restNextWave for $600. In addition certain of NextWave's assets will be paid to its holders of debt in redemption of the United States. We planremainder of its debt. NextWave's shareholders voted to deploy this spectrum as supplemental downlink capacity, using carrier aggregation technology once compatible handsetsapprove the merger on October 2, 2012, and network equipment are developed. The transactionthe holders of NextWave’s debt have agreed to support our acquisition. This acquisition is subject to regulatory approvalsapproval and other customary closing conditions. We anticipate closing this transaction by the end of 2012.
WCS Spectrum WCS spectrum has not been suitable for mobile Internet usage due to technical rules designed to avoid possible interference to satellite radio users in adjacent spectrum bands. In February 2011,June 2012, AT&T and Sirius XM filed a joint proposal with the waiting period underFCC that would protect the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) expired withoutadjacent satellite radio spectrum from interference and enable WCS spectrum to be used for mobile Internet service. On October 17, 2012, the DepartmentFCC approved our joint proposal thereby allowing us to add needed spectrum for mobile broadband service. We expect to begin to deploy this spectrum within approximately three years of Justice (DOJ) requesting additional information. We are awaiting approval by the FCC to complete this transaction. We anticipate closing the purchasefor WCS spectrum currently held by the endCompany and within a similar period of the first quarter of 2012.closing for pending WCS spectrum acquisitions.
Labor Contracts Contracts covering approximately 40,000 collectively-bargained wireline employees expired in early April 2012 (covering AT&T’s Midwest, West and East regions as well as AT&T Corp.). An additional contract covering approximately 22,000 wireline employees in the AT&T Southeast region expired on August 4, 2012. The Company and the employees’ union continue to negotiate new contracts in the Southeast, West and East regions and have reached certain agreements, as updated below. In the absence of an effective contract, the union is entitled to call a work stoppage.
In August 2012, members of the Communications Workers of America (CWA) ratified three-year agreements covering approximately 13,000 and 5,700 wireline employees in the AT&T Midwest region and AT&T Corp., respectively, which expired in April. Additionally, we have extended a contract with the International Brotherhood of Electrical Workers covering nearly 7,000 employees in primarily the Midwest region by one year until June 2013, bringing the total employees under new contracts to approximately 25,000. In addition, in early October a new four-year national agreement covering healthcare benefits for more than 40,000 Mobility employees represented by the CWA was ratified. The agreement provides modest increases to employee costs over the four-year term.
AT&T INC.
SEPTEMBER 30, 20112012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
T-Mobile In March 2011, we agreed to acquire from Deutsche Telekom AG (Deutsche Telekom) all of the issued and outstanding shares of T-Mobile in exchange for approximately $39,000, consisting of $25,000 cash and approximately $14,000 of our common stock, subject to certain adjustments, and the right to nominate a person to a seat on our Board of Directors. T-Mobile serves approximately 34 million wireless subscribers, and we anticipate this transaction will strengthen and expand our U.S. mobile broadband infrastructure and make LTE network technology available to more wireless broadband users in the United States, including those in rural areas. The transaction is subject to regulatory approvals and other customary closing conditions. In March 2011, we filed with the U.S. DOJ notice of the transaction as required under the HSR Act. In April 2011, we filed our application for approval of the merger with the FCC. We also filed applications or notices in five states (Arizona, California, Hawaii, Louisiana and West Virginia), and have received approvals from Arizona, Louisiana and West Virginia. On August 31, 2011, the U.S. DOJ filed a complaint against us in the U.S. District Court for the District of Columbia alleging that the proposed acquisition would substantially lessen competition and likely raise prices in markets for mobile wireless services. We dispute the allegations and intend to vigorously contest the matter. The U.S. District Court has set a trial date in that case for February 13, 2012. On September 6, 2011, Sprint Nextel Corporation (Sprint) also filed a complaint against us in the same U.S. District Court that is hearing the U.S. DOJ's complaint. Like the U.S. DOJ, Sprint alleged that the proposed acquisition of T-Mobile would substantially lessen competition in markets for mobile wireless services. Sprint also asserted that the proposed acquisition would adversely affect its access to certain inputs used to provide mobile wireless services; specifically, Sprint claimed that, as a result of the proposed acquisition, its costs to obtain mobile wireless devices, roaming services, and dedicated transmission services known as “backhaul��� would increase. On September 19, 2011, Cellular South, Inc. and its subsidiary Corr Wireless Communications, L.L.C. (collectively, “Cellular South”) filed a complaint against us raising claims similar to those contained in the Sprint complaint. Both Sprint and Cellular South have requested injunctive relief. We filed motions to dismiss Sprint’s and Cellular South’s complaints. On November 2, 2011, the U.S. District Court granted our motion in part and denied it in part. The order dismissed both plaintiffs’ complaints insofar as they involved alleged harm to competition in markets for mobile wireless services and access to backhaul. It also dismissed the claims regarding roaming services, except insofar as they pertained to Corr Wireless, Cellular South’s subsidiary. The order allowed Sprint’s and Cellular South’s complaints to proceed insofar as they involved the proposed acquisition’s effects on the market for mobile wireless devices. Accordingly, the complaints will go forward with respect to a portion of the Sprint’s and Cellular South’s claims. We dispute those allegations and intend to vigorously contest the matter. The U.S. District Court has set an initial scheduling conference in Sprint’s and Cellular South’s cases for December 9, 2011. No trial date for those cases has been set. We anticipate closing the transaction in the first half of 2012. In the event this transaction does not close, we could be required to pay a breakup fee of $3,000, enter into a broadband roaming agreement and transfer to Deutsche Telekom certain wireless spectrum.
In March 2011, we entered into a credit agreement with certain banks to provide unsecured bridge financing of up to $20,000 in connection with the T-Mobile acquisition. The obligations of the lenders under the agreement to provide advances will terminate on September 20, 2012, unless prior to that date: (i) we reduce to $0 the commitments of the lenders under the agreement, (ii) the T-Mobile purchase agreement is terminated prior to the date the advances are made, or (iii) certain events of default occur. The agreement contains certain representations and warranties and covenants, including a debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization, and other modifications described in the agreement) financial ratio covenant effective after the acquisition closes, that AT&T will maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.0 to 1.0.
We must repay all advances no later than the first anniversary of the date on which advances are made. The agreement also provides that in the event of certain asset sales or certain debt or stock offerings, we must use the net proceeds to prepay any outstanding advances or to reduce the amount of the lenders' commitments.
Tender of Telmex Shares In August 2011, the Board of Directors of América Móvil approved a tender offer for the remaining outstanding shares of Telmex that were not already owned by América Móvil. The offer was for $10.50 Mexican pesos per share (payable in cash). The tender offer was launched in October 2011. We have announced our intent to tender all of our shares of Telmex for approximately $1,200 of cash. We expect the transaction to close in the fourth quarter and do not anticipate a material gain or loss on the tender.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. We are pursuing additional legislative and regulatory measures to reduce these and other regulatory burdens that are no longer appropriate in atoday’s competitive telecommunications marketmarketplace and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers. The current FCC appearsAt the same time, we also seek to be more open to maintaining or expanding regulatory requirements on entities subject to its jurisdiction and has declared a national policy objective of ensuringensure that all Americans have accesssuch legacy regulations are not extended to broadband technologies and services. To that end, the FCC delivered a National Broadband Plan to Congress in 2010. The FCC has issued dozens of notices seeking comment on whether and how it should modify its rules and policies on a host of issues, which would affect all segments of the communications industry, to achieve universal access to broadband. These issues include rules and policies relating to universal service support, intercarrier compensation (ICC) and regulation of special access services, as well as a variety of others that could affect AT&T’s operations and revenues. The Commission has opened proceedings to address some of these issues. For example, in February 2011, the Commission released a notice of proposed rulemaking to consider whether and how it should modify its policies and rules relating to ICC and universal service support to encourage deployment of broadband to all Americans.
On October 27, 2011, the FCC adopted new rules governing USF support and ICC reform. Among other things, the FCC adopted a new ICC regime that will result in the elimination of all terminating switched access charges over six years for AT&T. Additionally, the FCC will redirect $4,500 in high-cost USF support that is used currently for basic telephone service to support for broadband (including mobile broadband) service in unserved geographical areas. While the text of these new rules was not available at the time of filing of this Form 10-Q and any analysis is therefore preliminary and subject to change, we expect the overall long-term financial impact of the new rules to be positive for AT&T.
In addition, states representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer competitive video services. We also are supporting efforts to update and improve regulatory treatment for retailwireless services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
OurWe provide wireless operations operateservices in robustrobustly competitive markets, but those services are likewise subject to substantial and increasing governmental regulation. Wireless communications providers must be licensed byobtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum as adopted by the FCC.spectrum. The FCC has recognized that the importanceexplosive growth of providing carriersbandwidth-intensive wireless data services requires the Government to make more spectrum available. In February 2012, Congress authorized the FCC to conduct an “incentive auction,” to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees. The FCC has initiated a proceeding to establish rules that would govern this process. It also initiated a separate proceeding to review its policies governing mobile spectrum holdings and consider whether there should be limits on the amount of spectrum a wireless service provider may possess. We seek to ensure that we have the opportunity, through the incentive auction and otherwise, to obtain the spectrum we need to provide our customers with access to adequate spectrum to permit continued wireless growth and has begun investigating how to develop policies to promote that goal.high-quality service. While wireless communications providers’ prices and service offerings are generally not subject to state regulation, states sometimes continue to attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.
Wireless Broadband CompetitionIntercarrier Compensation/Universal Service In AprilOctober 2011, the FCC released a wireless data roamingadopted an order requiring wirelessfundamentally overhauling its high-cost universal service program, through which it disburses approximately $4,500 per year to carriers providing telephone service in high-cost areas, and its existing intercarrier compensation (ICC) rules, which govern payments between carriers for the exchange of traffic. The order adopts rules to offer wireless data roaming services on “commercially reasonable terms” to other wireless carriers in places where those operators do not have their own systems. As of October 2011, we have entered into approximately 50 data roaming agreements (including 16 broadband data roaming agreements) most of which were entered into prior to the effective data of the order. We do not expect this order to have a material impact on our operating results.
Net Neutrality Rules In December 2010, the FCC adopted “net neutrality” rulesaddress immediately certain practices that impose certain transparency and “no blocking” obligations on fixed and mobile broadband Internet access services,artificially increase ICC payments, as well as other practices to avoid such payments. The order also establishes a “no unreasonable discrimination” obligationnew ICC regime that applies onlywill result in the elimination of virtually all terminating switched access charges and reciprocal compensation payments over a six-year transition. In the order, the FCC also repurposed its high-cost universal service program to fixed services. The rules are scheduledencourage providers to become effective on November 20, 2011. Verizondeploy broadband facilities in unserved areas. To accomplish this goal, the FCC will transition support amounts disbursed through its existing high-cost program to its new Connect America Fund, which eventually will award targeted high-cost support amounts to providers through a competitive process. We support many aspects of the order and new rules. AT&T and other parties have filed appeals of the FCC’s rules, which are pending in the D.C.Tenth Circuit Court of Appeals. Our appeal challenges only certain, narrow aspects of the order; AT&T intervened in support of the broad framework adopted by the order. We do not expect the FCC’s rules to have a material impact on our operating results.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts LIQUIDITY AND CAPITAL RESOURCES
We had $10,762$2,217 in cash and cash equivalents available at September 30, 2011.2012. Cash and cash equivalents included cash of $1,478$374 and money market funds and other cash equivalents of $9,284.$1,843. In the first nine months of 2011,2012, cash inflowsoutflows were primarily provided by cash receipts from operations and the issuance of long-term debt. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures dividendsand repayment of debt. In addition, we returned value to stockholders through dividends and by repurchasing shares of common stock. These outflows were partially offset by cash received from operations and the repaymentissuance of long-term debt. We discuss many of these factors in detail below.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Cash Provided by or Used in Operating Activities
During the first nine months of 2011,2012, cash provided by operating activities was $27,150,$28,944, compared to $25,350$27,150 for the first nine months of 2010. Our higher operating cash flows reflected decreased tax payments of $3,134 partially offset by employee and other accrued liabilities.2011.
In September 2010, we reached a settlement with the IRS on the calculation of the tax basis of certain assets relating to a restructuring of our wireless operations. The allowed amortization deductions on these settlement-related assets are expected to cover a 15-year period, which began in 2008. As a result of this settlement, we decreased our net tax liabilities approximately $8,300 and expect to recognize the cash flow impacts of the settlement over a 15-year period, which began in 2008. The effect of the change to our net tax liabilities was recognized through our income statement in the third quarter of 2010 as a reduction in income tax expense.
Cash Used in or Provided by Investing Activities
For the first nine months of 2011,2012, cash used in investing activities totaled $15,025 and$13,251, which consisted primarily of $14,625$13,619 for capital expenditures excluding(excluding interest during construction.construction), and acquisitions of $551, which included wireless spectrum of $465. These expenditures were partially offset by cash of approximately $740 received from the sale of our Advertising Solutions segment.
Virtually all of our capital expenditures are spent on our wireless and wireline subsidiaries’ networks, our U-verse services, and support systems for our communications services. The Wireline segment which includes U-verse services represented 53% of the total capital expenditures, excluding interest during construction, and was flat in the first nine months. Wireline expenditures related to expanding Ethernet access and IP-data services. Capital spending in our Wireless segment of $7,240, excluding capitalized interest during construction, represented 47%53% of our total spending and increased 27%6% in the first nine months.months. Wireless expenditures were primarily used for network capacity expansion, integration and upgrades to our High-Speed Downlink Packet AccessHSPA+ network and the initial deployment of LTE (4G) equipment for our recent commercial launch.
The Wireline segment, which includes U-verse services, represented 47% of total capital expenditures, excluding interest during construction, and decreased 18% in the first nine months.
We expect that our capital expenditures during 2011 will be2012 to come in at the $20,000low-end of the $19,000 to $20,000 range while still meeting network build targets, assuming that the regulatory environment remains favorable for investment. We continue to expect to fund 2011 capital expenditures for our Wireless and Wireline segments, including international operations, using cash from operations and incremental borrowings, depending on interest rate levels and overall market conditions. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations.
Cash Used in or Provided by Financing Activities
For the first nine months of 2011,2012, our financing activities included proceeds of $7,935$6,935 from the following:following debt issuances:
· | August 2011 issuance$1,000 of $1,500 of 2.40%0.875% global notes due 2016, $1,5002015, $1,000 of 3.875%1.6% global notes due 2021,2017, and $2,000$1,000 of 5.55%3% global notes due 2041. 2022 issued in February 2012. |
· | April 2011 issuance£1,250 of $1,750 of 2.95%4.875% global notes due 2016 and 2044 issued in May 2012 (equivalent to $1,979 when issued).
|
· | $1,2501,150 of 4.45%1.7% global notes due 2021.2017 and $850 of 3% global notes due 2022 issued in June 2012. |
Our other financing activities primarilyDuring the first nine months of 2012, debt redemptions totaled $8,021 with a weighted average interest rate of 5.58% and consisted of the payment of dividends and the repayment of debt.following:
· | $1,200 of 6.375% senior notes due 2056 redeemed in February 2012. |
· | $1,000 of 5.875% notes due August 2012 redeemed in March 2012. |
· | $800 of 4.75% notes due November 2012, $2,500 of 4.95% notes due January 2013, and $1,500 of 6.7% notes due November 2013 redeemed in June 2012. |
· | $1,000 of 4.85% notes due February 2014 redeemed in September 2012. |
In December 2010, our Board of Directors authorized the repurchase of up to 300 million shares of AT&T common stock. We began buying back stock under this program in the first quarter of 2012. In July 2012, the Board of Directors authorized the repurchase of an additional 300 million shares. As of September 30, 2012, we have repurchased 244.5 million shares totaling $8,374. We intend to continue repurchasing shares.
AT&T INC.
SEPTEMBER 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts We paid dividends of $7,627$7,738 during the first nine months of 2011,2012, compared with $7,436$7,627 for the first nine months of 2010,2011, primarily reflecting an increase in the quarterly dividend approved by our Board of Directors in December 2010.2011 and partially offset by the decline in shares outstanding due to our repurchases during the year. Dividends declared by our Board of Directors totaled $0.43$0.44 per share in the third quarter of 2012 and $1.32 per share for the first nine months of 2012 and $0.43 per share in the third quarter and $1.29$1.29 per share for the first nine months of 2011 and $0.42 per share in the third quarter and $1.26 per share for the first nine months of 2010.2011. Our dividend policy considers the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
At September 30, 2011,2012, we had $8,900$3,433 of debt maturing within one year, all of which included $8,895 ofwere long-term debt maturities and $5 of other short-term borrowings. Debt repayments due in the fourth quarter of $3,250 were paid in October 2011. On October 26, 2011, we called $1,000 of 5.875% notes due in the first quarter of 2012. The notes will have a redemption date of November 22, 2011.maturities. Debt maturing within one year includes the following notes that may be put back to us by the holders:
· | $1,000 of annual put reset securities issued by BellSouth Corporation (BellSouth) that may be put back to us each April until maturity in 2021. |
· | An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030. |
During the first nine months of 2011, we repaid $1,298 of long-term debt with a weighted average interest rate of 6.23%.
AT&T INC.
SEPTEMBER 30, 2011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
In December 2010, we entered intoWe have two revolving credit facilitiesagreements with a syndicate of banks –banks: a four-year, $5,000 agreement expiring in December 2015 and a $3,000 364-day agreement. In the event advances are madeagreement expiring in December 2012. Advances under either agreement those advances wouldmay be used for general corporate purposes, which could include repayment of maturing commercial paper. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. Under the four-yearmulti-year agreement, we must maintain a debt-to-EBITDA ratio, including modifications described in the agreement, financial debt ratio of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge assets or permit liens on our property, then any advances must also be secured. At September 30, 2011,2012, we had no advances outstanding under either agreement and were in compliance with all covenants under each agreement.
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by our international equity investees.América Móvil or YP Holdings. At September 30, 2011,2012, our debt ratio was 38.5%38.6%, compared to 37.9%38.5% at September 30, 2010,2011, and 37.1%38.0% at December 31, 2010.2011. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances.
In October 2012, we filed an application with the U.S. Department of Labor (DOL) for approval to contribute a preferred equity interest in our Mobility business to the trust used to pay pension benefits under plans sponsored by AT&T. The preferred interest does not have any voting rights, has a liquidation value of $8,000 and is entitled to receive cumulative cash distributions of $560 per annum. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares.
At December 31, 2011, the present value of AT&T’s pension liabilities exceeded the fair value of trust assets by approximately $10,200. The preferred equity interest is estimated to be valued at $9,500 upon contribution and will significantly improve the funded status of the plans, enhancing the strength of the trust for AT&T’s employees and retirees. Prior to the contribution of the preferred interest, the estimated required contribution for 2013 is approximately $300. We will work with the DOL to obtain approval before the end of 2013.
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AT&T INC.
SEPTEMBER 30, 20112012
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At September 30, 2011,2012, we had interest rate swaps with a notional value of $11,800$3,000 and a fair value of $595.$306.
We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $7,502$9,481 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(748)$(319) at September 30, 2011.2012. We have rate locks with a notional value of $800 and a fair value of $(159) and foreign exchange contracts with a notional value of $210$122 and a net fair value of $(4)$(1) at September 30, 2011.2012.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of September 30, 2011.2012. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2011.2012.
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AT&T INC.
SEPTEMBER 30, 20112012
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
· | Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets and at favorable rates. |
· | Changes in available technology and the effects of such changes, including product substitutions and deployment costs. |
· | Increases in our benefit plans’ costs, including increases due to adverse changes in the U.S. and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates and adverse medical cost trends and unfavorable healthcare legislation, and regulations.regulations or related court decisions. |
· | The final outcome of Federal Communications CommissionFCC and other federal agency proceedings and reopenings of such proceedings and judicial review,reviews, if any, of such proceedings, including issues relating to access charges, intercarrier compensation, universal service, broadband deployment, E911 services, competition, net neutrality, unbundled loop and transport elements, availability of new spectrum from the FCC on fair and balanced terms, wireless license awards and renewals and wireless services, including data roaming agreements.agreements and spectrum allocation. |
· | The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings and judicial review,reviews, if any, of such proceedings, including proceedings relating to Interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates,rates; broadband deployment including our U-verse services,services; net neutrality,neutrality; performance measurement plans,plans; service standardsstandards; and intercarrier and other traffic compensation. |
· | Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs. |
· | Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures. |
· | The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless operating margins. |
· | Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets. |
· | The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP). |
· | The development of attractive and profitable U-verse service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings. |
· | Our continued ability to attract and offer a diverse portfolio of wireless devices, some on an exclusive basis. |
· | The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, andobtaining additional spectrum, technical standards and deployment and usage, including network management rules. |
· | Our ability to manage growth in wireless data services, including network quality.quality and acquisition of adequate spectrum at reasonable costs and terms. |
· | The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against third parties. |
· | The impact on our networks and business from major equipment failures,failures; security breaches related to the network or customer information,information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers,suppliers; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks. |
· | The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards. |
· | The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions. |
· | Our ability to adequately fund our wireless operations, including payment for additional spectrum;spectrum network upgrades and technological advancements. |
· | Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments. |
· | The uncertainty surrounding the January 2013 implementation of the Budget Control Act of 2011, and associated spending reductions; the expiration of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010; and the uncertainty as to whether the United States will reach the debt ceiling prior to year-end may result in a significant reduction in government spending and reluctance of businesses and consumers to spend in general and on our products and services specifically, due to this fiscal uncertainty. |
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
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AT&T INC.
SEPTEMBER 30, 20112012
PART II – OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. The additional Risk Factor below reflectshas been updated since our pending acquisition of T-Mobile. See “Other Business Matters” for recent developments relating to this acquisition,Form 10-K was filed.
Equipment failures, natural disasters, computer hacking and terrorist attacks may materially adversely affect our operations.
Major equipment failures or natural disasters, including the August 31, 2011 filing of a lawsuit by the U.S. Department of Justice (“DOJ”).
The impact of our pending acquisition of T-Mobile, including our ability to obtain governmental approvals on favorable terms including any required divestitures; the risk that such approvals are not obtained and we must pay a break-up fee; the risk that the businesses will not be integrated successfully; the risk that the cost savings and anysevere weather, computer hacking, terrorist acts or other synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.
We have agreed to acquire T-Mobile for approximately $39,000. We believe that the acquisition will give us the scale, resources and spectrum to enable us to deploy LTE technology to more customers than otherwise possible and to address impending spectrum and network capacity constraints thereby enabling us to provide higher quality service including fewer dropped calls, fewer failed calls attempted and increased data speeds. In addition, we believe the acquisition will result in cost savings and other potential synergies. Achieving these results first will depend upon obtaining governmental approvals on favorable terms within the time limits set forth in the purchase agreement. To this point, the recently filed lawsuit by the DOJ has created uncertainty regarding both the eventual outcome of the case and the possibility of delays to the approval process beyond the termination date set forth in the agreement. Other delays also could jeopardize our ability to complete the acquisition and divert attention from ongoing operations on the part of management and employees, adversely affecting customers and suppliers and therefore revenues. If such approvals are obtained, then we must integrate a large numberbreaches of network or IT security that affect our wireline and wireless networks, including telephone switching offices, microwave links, third-party owned local and long-distance networks on which we rely, our cell sites or other operationalequipment, or our customer account support and information systems, and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in the past, and therefore expect a successful integration in this case, delays in the process could have a material adverse affecteffect on our revenues,operations. While we have been subject to security breaches or cyber attacks, these did not result in a material adverse effect on our operations. Our inability to operate our wireline, wireless or customer-related support systems as a result of such events, even for a limited time period, could result in significant expenses, operating results and financial condition. In addition, events outsidepotential legal liability, a loss of our control, including changes in regulation and laws as well as economic trends, could adversely affectcustomers or impair our ability to realize the expected benefits from this acquisition.attract new customers, which could have a material adverse effect on our business, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | |
| | | | | | | | | |
(c) A summary of our repurchases of common stock during the third quarter of 2012 is as follows: |
| | | | | | | | | |
Period | | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid Per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs1 | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs2 |
| | | | | | | | | |
July 1, 2012 - July 31, 2012 | | 37,206,416 | | $ | 36.81 | | 37,206,416 | | 419,327,635 |
August 1, 2012 - August 31, 2012 | | 22,242,480 | | | 37.00 | | 22,242,480 | | 397,085,155 |
September 1, 2012 - September 30, 2012 | | 41,601,200 | | | 37.45 | | 41,601,200 | | 355,483,955 |
Total | | 101,050,096 | | $ | 37.12 | | 101,050,096 | | |
1 In December 2010, we announced our stock repurchase plan, under which our Board of Directors authorized the repurchase of up to 300 million shares of our common stock. The plan has no expiration date. |
2 In July 2012, the Board authorized the repurchase of an additional 300 million shares. The plan has no expiration date. |
39
AT&T INC.
SEPTEMBER 30, 20112012
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
10-zz | BellSouth Corporation Supplemental Executive Retirement Plan, amended and restated as of December 31, 2011 |
12 | Computation of Ratios of Earnings to Fixed Charges |
31 | Rule 13a-14(a)/15d-14(a) Certifications 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer |
32 | Section 1350 Certifications |
101 | XBRL Instance Document |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
November 3, 2011 2, 2012 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer