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connect
AT&T INC. 2007 ANNUAL REPORT

Table of contents

  • Page 1
    connect AT&T INC. 2007 ANNUAL REPORT

  • Page 2
    Our Vision Connect people with their world, everywhere they live and work, and do it better than anyone else.

  • Page 3
    ... data and other businesses. We make communications simple, mobile and seamless. Our industry is in the early stages of an unprecedented explosion in connectivity. The technologies that make it possible are becoming more pervasive, mobile and accessible. Customer demand for connectivity has increased...

  • Page 4
    ...financial results: • Total revenues increased to nearly $119 billion. • Adjusted earnings per share grew at a strong double-digit pace. • Cash from operating activities topped $34 billion, a record for our company. • Our total return for the year (stock price appreciation plus dividends paid...

  • Page 5
    ... gave Cingular nationwide coverage. Then the BellSouth acquisition gave us 100 percent ownership of Cingular. Today, AT&T operates the nation's largest wireless digital voice and data network, with more than 70 million subscribers and the broadest international reach. 2007 AT&T Annual Report | 3

  • Page 6
    ..., we're making high speed Internet access mobile. And by the end of 2008, our Wi-Fi footprint will include more than 7,000 Starbucks locations in the U.S. Broadband usage is ramping. Customers are demanding higher speeds for such bandwidth-hungry applications as video. And there's substantial...

  • Page 7
    ... good benefits and ample opportunities for training and advancement. We also work hard to strengthen our communities and help sustain the world we all share. Going forward, we'll be placing an even sharper focus on supporting education and workforce readiness. Alarming high school dropout rates in...

  • Page 8
    The Desire to Connect 6 | AT&T Annual Report 62007 AT&T Annual Report | 2007

  • Page 9
    ...extend our ability to connect and power the latest generation of communications applications. As we drive IP technology through our networks, we can make communications more seamless, more interactive and more mobile. We're also adding more bandwidth to stay ahead of rapidly expanding customer needs...

  • Page 10
    ... including London's Heathrow Airport. We're reshaping our entire business to meet the rising customer demand for mobility-to make our wireless, broadband, TV and local search capabilities work together for people at home, at work and on the go. 8 |82007 AT&T AT&T Annual Annual Report Report | 2007

  • Page 11
    WIRELESS DATA TRAFFIC Wireless data traffic is growing exponentially, with usage quadrupling every year. 2007 AT&T Annual Report | 9

  • Page 12
    ...'s leading technology firms. The iPhone's success also raised the profile for our expanding array of smartphones, which customers can use to send e-mail, access the Internet, get directions, take pictures, download video and music and play games. THIRD, for both business customers and consumers, we...

  • Page 13
    ... of an industry. 2007 AT&T Annual Report In 2007, through strong internal growth combined with strategic acquisitions, we expanded our subscriber base by more than 9 million. As the largest provider of prepaid mobile phones, we're also expanding access to mobility to consumers who might not want...

  • Page 14
    .... And for millions of customers in rural and remote areas, we have significantly expanded our satellite-based broadband service to provide a better alternative to dial-up access. A growing number of customers are using AT&T high speed services on their mobile devices in addition to their PCs-as we...

  • Page 15
    ... a wireless device to a PC and a TV screen-just one of the many innovations being developed at the AT&T Labs. AT&T U-VERSE LIVING UNITS PASSED Like mobile phones in the 1980s and broadband in the 1990s, video now represents a once-in-a-decade opportunity to build our next billion-dollar business...

  • Page 16
    ... customers with a new and superior TV choice that offers better control and richer content than cable with more High Definition (HD) channels in nearly every market we serve. Delivered through our fiber-rich IP network, U-verse service offers television, broadband and voice over a single connection...

  • Page 17
    ...we offer wired voice and broadband, giving customers the ability to include television service as part of an AT&T bundle. AT&T U-verse TV Is Our Next-Generation Video Service It doesn't take U-verse TV customers long to experience the IP difference. For example, when they want to set a recording on...

  • Page 18
    ...new Internet data centers. Our 38 data centers, located around the globe, make us the world's largest network-based hosting provider. AT&T wireless customers enjoy the largest international roaming footprint available, covering more than 90 percent of the globe. Ron Spears and his business services...

  • Page 19
    RECURRING AT&T ENTERPRISE SERVICE REVENUE GROWTH RATES Recurring enterprise service revenues returned to growth a year ahead of schedule. 2007 AT&T Annual Report | 17

  • Page 20
    ...primary managed network services provider for the next five years. And in April 2007, through our affiliate in India, AT&T became the first foreign telecom company to offer service in the Indian market. We also launched a new business in Vietnam in 2007 to support the growing number of multinational...

  • Page 21
    ...with existing analog telephone systems. That lets businesses use Voice over IP (VoIP) technologies without replacing their existing systems. And AT&T's wireless leadership enables us to provide the mobile voice and data solutions that businesses of all sizes need to compete. 2007 AT&T Annual Report...

  • Page 22
    ... site connected buyers to sellers on mobile devices, PCs and U-verse TV screens more than 1.5 billion times in 2007. That was a 50 percent year-over-year increase in the number of YELLOWPAGES.COM searches. In 2008, we're introducing a capability that enables advertisers to pay only for the calls...

  • Page 23
    .... To capture the unique atmosphere, he included a video with his YELLOWPAGES.COM listing. These days, business at Chez Ben/Fahrenheit is cooking. AT&T YELLOWPAGES.COM SEARCHES Local searches on AT&T's YELLOWPAGES.COM network have increased 150 percent since 2004. 2007 AT&T Annual Report | 21

  • Page 24
    ... connections spurs growth and creates new opportunities to help the world communicate. From our Board of Directors to our front-line employees, ours is a company where corporate citizenship and sustainability are everybody's business. 22 22 AT&T AT&T Annual Annual Report Report | 2007 | 2007

  • Page 25
    ... efficiently connecting people and businesses worldwide with innovative communications. Our products help reduce the need for carbon emission-intensive travel by facilitating video conferencing, telecommuting and online local search, among others. We work hard to conserve energy in company buildings...

  • Page 26
    ...voices of concerned friends and loved ones, to emergency services, to the Internet. By daybreak, AT&T was providing vital communications support to emergency responders. For their heroic work to keep customers connected in the best AT&T tradition, Lucht and Stauth became the first winners of the new...

  • Page 27
    ... Financial Statements Report of Management Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Board of Directors Senior Officers 26 27 53 57 80 81 82 83 84 2007 AT&T Annual Report | 25

  • Page 28
    ... with dilution (000,000) End of period common shares outstanding (000,000) Operating Data Wireless customers (000)7 In-region network access lines in service (000)8 Broadband connections (000)9 Number of employees 1 2 $118,928 $ 98,524 $ 20,404 $ 3,507 $ 692 $ 615 $ 6,253 $ 11,951 $ - $ 11...

  • Page 29
    ... both primary and additional lines and switched to competitors' wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data. While we lose the wireline voice revenues, we have the opportunity to increase wireless service revenue should customers choose AT&T Mobility as their...

  • Page 30
    ...-market customers, which represent consumer and small business. Pro forma data growth was led by an increase in Internet Protocol (IP) data revenues of 13.3% in 2007 and 14.1% in 2006, with strength in high-speed Internet, managed Internet, Virtual Private Network (VPN) and hosting services. Data...

  • Page 31
    ... and wholesale landline communications services, including local and long-distance voice, switched access, IP and Internet access data, messaging services, managed networking to business customers, AT&T U-verseSM TV service (U-verse) and satellite television services through our agency agreements...

  • Page 32
    ... growth rate of new wireless users reflecting a maturing domestic wireless industry. The improvement in churn levels benefited from network and customer service improvements and continued high levels of advertising. Also contributing to the increase in net additions was a significant increase in...

  • Page 33
    ... number of subscribers using our 3G network. The increase in 2006 was related to increased use of text messaging and Internet access services, which resulted in an increase in data ARPU of 44.8%. Data service revenues represented approximately 18.0% of our wireless segment service revenues in 2007...

  • Page 34
    ...network, which was slightly offset by expense declines due to equipment that had become fully depreciated in 2006. Percent Change 2007 2006 2005 2007 vs. 2006 2006 vs. 2005 Segment operating revenues Voice Data Other Total Segment Operating Revenues Segment operating expenses Cost of sales Selling...

  • Page 35
    ... both primary and additional lines and switched to alternative technologies, such as wireless, VoIP and cable for voice and data. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video and voice. For example, we...

  • Page 36
    ... been recording both revenue and expenses for AT&T | DISH Network satellite TV customers, resulting in relatively high initial customer-acquisition costs. • Lower employee levels, which decreased expenses, primarily salary and wages, by $296. • A change made during 2006 in our policy regarding...

  • Page 37
    ... reported. Revenue from these lines is reported in the Other segment. 5 Broadband connections include DSL, U-verse high-speed Internet access and satellite broadband. 6 Satellite service includes connections under our agency and resale agreements with EchoStar and DIRECTV. 2007 AT&T Annual Report...

  • Page 38
    ... primarily due to the addition of BellSouth's operating results, which increased total operating expenses by approximately $2,110 in 2007. The increase in 2006 was primarily due to higher costs for Internet traffic, brand advertising and employee benefits. Cost of sales increased $612, or 54.6%, in...

  • Page 39
    ... declines in traditional access lines being offset by growth in broadband and video services. We expect solid growth in broadband revenues with improvement in ARPU as customers continue to choose higher-speed services. We expect to continue to expand our U-verse service offerings with the goal...

  • Page 40
    ... wireless, broadband, voice and video. Our Universal Mobile Telecommunications System/HighSpeed Downlink Packet Access 3G network technology covers most major metropolitan areas of the U.S. This technology provides superior speeds for data and video services, and it offers operating efficiencies...

  • Page 41
    ..., we agreed to a voluntary cap on our receipt of federal universal service high-cost support. The cap will be set at the amount of wireless universal service support we received as of June 30, 2007, which was approximately $225. Additionally, the FCC is considering an 2007 AT&T Annual Report | 39

  • Page 42
    ..., Remote Network Access, SONET, Optical Network or Wave-based broadband services. This order gives us substantial flexibility to offer individually tailored contractual arrangements that better meet our customers' needs while enabling us to reduce costs and operate more efficiently. Long-Distance...

  • Page 43
    ... services, including wireless and video, large-business data services, broadband and long-distance service. In most markets, we compete with large cable companies, such as Comcast Corporation, Cox Communications, Inc. and Time Warner Inc., for local, high-speed Internet and video services customers...

  • Page 44
    ... in the expected long-term rate of return would cause 2008 combined pension and postretirement cost to increase $814 over 2007. The 10-year return on our pension plan assets was 9.18% through 2007. Under GAAP, the expected long-term rate of return is calculated on the market-related value of assets...

  • Page 45
    ...January 2008. Spectrum Sale In February 2007, we agreed to sell to Clearwire Corporation (Clearwire), a national provider of wireless broadband Internet access, education broadband service spectrum and broadband radio service spectrum valued at $300. The transaction received the necessary regulatory...

  • Page 46
    ..., the issuance of long-term debt, net cash received from dispositions of non-strategic real estate and the sale of marketable securities and other assets. These inflows were offset by cash used to meet the needs of the business including, but not limited to, payment of operating expenses, funding...

  • Page 47
    ...Mobile's exercise of its option to purchase an additional 10 MHz of spectrum in the San Diego market, the sale of cost investments and the sale of wireless towers. To provide high-quality communications services to our customers, we must make significant investments in property, plant and equipment...

  • Page 48
    ... issuances of $1,500, partially offset by long-term debt repayments of $4,242 during 2006. Stockholders' equity also increased due to our net income and was partially offset by dividend payments and our repurchases of common shares through our stock repurchase program. | 2007 AT&T Annual Report

  • Page 49
    .../discounts and derivative instruments included in debt amounts on the balance sheet are excluded from the table. The non-current portion of the unrecognized tax benefits is included in the "More than 5 Years" column as we cannot reasonably estimate the timing or amounts of additional cash payments...

  • Page 50
    ... from a hypothetical 10% change in market prices was not significant as of December 31, 2007. QUALITATIVE INFORMATION ABOUT MARKET RISK Foreign Exchange Risk From time to time, we make investments in businesses in foreign countries, are paid dividends and receive proceeds from sales or borrow funds...

  • Page 51
    ... mix of fixed and floating rate debt. Interest rate forward contracts are utilized to hedge interest expense related to debt financing. We do not seek to make a profit from changes in interest rates. We manage interest rate sensitivity by measuring potential increases in interest expense that would...

  • Page 52
    ... in the last several years. The development of wireless, cable and IP technologies has significantly increased the commercial viability of alternatives to traditional wireline telephone service and enhanced the capabilities of wireless networks. In order to remain competitive, we have begun to...

  • Page 53
    ... are deploying a new broadband network to offer IP-based voice, data and video services. Using a new and sophisticated technology on a very large scale entails risks but also presents opportunities to expand service offerings to customers. Should deployment of our network be delayed or costs exceed...

  • Page 54
    ... revenue losses caused by increasing competition, including offerings using alternative technologies (e.g., cable, wireless and VoIP), and our ability to maintain capital expenditures. • The extent of competition and the resulting pressure on access line totals and wireline and wireless operating...

  • Page 55
    ...share amounts 2007 2006 2005 Operating Revenues Voice Data Wireless service Directory Other Total operating revenues Operating Expenses Cost of services and sales (exclusive of depreciation and amortization shown separately below) Selling...718 932 $ 4,786 $ $ 1.42 1.42 2007 AT&T Annual Report | 53

  • Page 56
    ... Assets Total Assets Liabilities and Stockholders' Equity Current Liabilities Debt maturing within one year Accounts payable and accrued liabilities Advanced billing and customer deposits Accrued taxes Dividends payable Total current liabilities Long-Term Debt Deferred Credits and Other Noncurrent...

  • Page 57
    ...of three months or less Issuance of long-term debt Repayment of long-term debt Purchase of treasury shares Issuance of treasury shares Repurchase of preferred shares of subsidiaries Dividends paid Stock-based compensation tax benefit Other Net Cash Used in Financing Activities Net increase (decrease...

  • Page 58
    ... cost arising during period, net of taxes of $3,411 Amortization of net actuarial loss and prior service benefit included in net income, net of taxes of $125 Other Other comprehensive income Adoption of FAS 158, net of tax Balance at end of year Total Comprehensive Income Net income Additional...

  • Page 59
    ... increase to additional paid-in capital rather than a reduction of income tax expense. EITF 06-11 applies prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal periods beginning after December 15, 2007...

  • Page 60
    ... wireless, local telephone, long-distance, data and video services are recognized when services are provided. This is based upon either usage (e.g., minutes of traffic processed), period of time (e.g., monthly service fees) or other established fee schedules. Our wireless service revenues are billed...

  • Page 61
    ... communications services. While FCC licenses are issued for a fixed time, renewals of FCC licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful...

  • Page 62
    ... Corporation In December 2006, we acquired BellSouth, issuing 2.4 billion shares. BellSouth was the leading communications service provider in the southeastern U.S., providing wireline communications services, including local exchange, network access, long-distance services and Internet services...

  • Page 63
    ... of participant count estimates used in the opening balance sheet valuation for the pension and postretirement plans, a gain on a contingency related to an insurance claim recovery for Hurricane Katrina damages, AT&T Mobility's purchase accounting adjustments and tax impacts related thereto, the...

  • Page 64
    ..., offering a variety of global communications services, including large domestic and multinational businesses, small and medium-size businesses and government agencies, and operated one of the leading telecommunications networks in the U.S. ATTC also provided domestic and international long-distance...

  • Page 65
    ... and wholesale landline communications services, including local and longdistance voice, switched access, Internet protocol and Internet access data, messaging services, managed networking to business customers, AT&T U-verseSM TV service (U-verse) and satellite television services through our agency...

  • Page 66
    ...- - Consolidation and Elimination At December 31, 2005 or for the year ended Wireless Wireline Other Wireless Elimination Revenues from external customers Intersegment revenues Total segment operating revenues Operations and support expenses Depreciation and amortization expenses Total segment...

  • Page 67
    ... advertising & publishing segments. During our allocation period, we completed purchase accounting adjustments to the AT&T Mobility and BellSouth goodwill (see Note 2). Other changes to goodwill include adjustments totaling $42 for the tax effect of stock options exercised. 2007 AT&T Annual Report...

  • Page 68
    ... communications services. While FCC licenses are issued for a fixed time, renewals of FCC licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful...

  • Page 69
    ... rate of 9.1%. • $904 related to the early repayment of a Dobson long-term credit facility. • $218 related to the early redemption of a convertible note held by Dobson. • $44 related to scheduled principal payments on other debt and repayments of other borrowings. 2007 AT&T Annual Report...

  • Page 70
    ...our available-for-sale equity securities was principally determined based on quoted market prices, and the carrying amount of the remaining securities approximates fair value. Our short-term investments, other short-term and longterm held-to-maturity investments and customer deposits are recorded at...

  • Page 71
    ... rate lock activity: Rate Lock Execution Period Notional Amount Utilized Notional Amount Settlement Gain/(Cost) Settlement Gain/(Cost) - net of tax changes in currency exchange rates related to foreigncurrency-denominated transactions. At December 31, 2007 and 2006, our foreign exchange contracts...

  • Page 72
    ...State Income Tax Benefits Balance at January 1, 2007 Increases for tax positions related to the current year Increases for tax positions related to prior years Decreases for tax positions related to prior years Settlements Balance at December 31, 2007 Less: tax attributable to timing items included...

  • Page 73
    ... pension plan for those employees was amended to freeze benefit accruals previously earned under a cash balance formula. Each employee's existing cash balance continues to earn interest at a variable annual rate. After this change, those management employees, at retirement, may elect to receive the...

  • Page 74
    ..., related to AT&T Mobility. The following table presents this reconciliation and shows the change in the projected benefit obligation for the years ended December 31: Pension Benefits 2007 2006 Postretirement Benefits 2007 2006 Benefit obligation at beginning of year Service cost - benefits earned...

  • Page 75
    ...determined our discount rate based on a range of factors, including a yield curve comprised of the rates of return on high-quality, fixed-income corporate bonds available at the measurement date and the related expected duration for the obligations. For the year ended December 31, 2007, we increased...

  • Page 76
    ... and net pension cost and accumulated postretirement benefit obligation and postretirement benefit cost would be affected in future years. Expected Long-Term Rate of Return Our expected long-term rate of return on plan assets of 8.50% for 2008 and 2007 reflects the average rate of earnings expected...

  • Page 77
    ... Retirement Plans We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. While these plans are unfunded, we have assets in a designated nonbankruptcy remote trust that are used to provide for these benefits. These plans include...

  • Page 78
    ... contributions to the savings plans is fulfilled with purchases of our stock on the open market or company cash. Benefit cost is based on the cost of shares or units allocated to participating employees' accounts and was $633, $412 and $334 for the years ended December 31, 2007, 2006 and 2005...

  • Page 79
    ...Under our various plans, senior and other management and nonmanagement employees and nonemployee directors have received stock options, performance stock units and other nonvested stock units. Stock options issued through December 31, 2007 carry exercise prices equal to the market price of our stock...

  • Page 80
    ...sold to AT&T Mobility. These revenues were primarily from access and long-distance services sold to AT&T Mobility on a wholesale basis and commissions revenue related to customers added through AT&T sales sources. Statements of Income 2007 2006 2005 Advertising expense Interest expense incurred...

  • Page 81
    ...represents our quarterly financial results: Stock Price Calendar Quarter Total Operating Revenues Operating Income Net Income Basic Earnings Per Share1 Diluted Earnings Per Share1 High Low Close 2007 First Second Third Fourth Annual 2006 First Second Third Fourth Annual 1 $ 28,969 29,478 30,132...

  • Page 82
    ... report on the company's internal control over financial reporting. The attestation report is included on Page 82. Randall Stephenson Chairman of the Board, Chief Executive Officer and President Richard G. Lindner Senior Executive Vice President and Chief Financial Officer 80 | 2007 AT&T Annual...

  • Page 83
    ... operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 2007 the Company changed its method of accounting for income taxes...

  • Page 84
    ... statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect...

  • Page 85
    ... manufacturing Jon C. Madonna, 64 (1,2,4) President and Chief Executive Officer Girls Incorporated Director since October 1998 Southern New England Telecommunications Director 1997-1998 Background: Marketing Chairman and Chief Executive Officer Jazz Technologies, Inc. Director since February 2001...

  • Page 86
    ... Strategy and Development Ron Spears, 59 Group President-Global Business Services John Stankey, 45 Group President-Telecom Operations Wayne Watts, 54 Senior Executive Vice President and General Counsel Ray Wilkins Jr., 56 Group President-Diversified Businesses 84 | 2007 AT&T Annual Report

  • Page 87
    .... is available on the Internet at www.att.com. 100 W. Houston St. San Antonio, TX 78205 Corporate Offices AT&T Inc. Whitacre Tower 175 E. Houston St. P.O. Box 2933 San Antonio, TX 78299-2933 210-821-4105 Annual Meeting The annual meeting of stockholders will be held at 9 a.m. Central time Friday...

  • Page 88
    AT&T Inc. Whitacre Tower 175 E. Houston St. P.O. Box 2933 San Antonio, TX 78299-2933 att.com