AT&T Uverse 2007 Annual Report Download - page 35

2007 AT&T Annual Report
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distance revenue increase was also partially offset by
competitive pricing for large-business customers and
a decrease in demand for prepaid calling cards.
• Local wholesale revenues increased $324, or 20.9%,
in 2007 and decreased $548, or 26.1%, in 2006.
The increase in 2007 was primarily due to the acquisition
of BellSouth, which increased local wholesale revenues
approximately $615. Wholesale revenue decreased in
2007 and 2006 due to industry consolidation as certain
customers moved more traffic to their own networks.
We expect this trend to stabilize during 2008, absent
additional consolidation.
Data revenues increased $5,758, or 31.4%, in 2007
primarily due to the acquisition of BellSouth, which increased
data revenues approximately $5,230, and increased $7,534,
or 69.9%, in 2006 primarily due to the acquisition of ATTC.
Data revenues accounted for approximately 34% of our
wireline operating revenues in 2007, 32% in 2006 and
28% in 2005. Data revenues include transport, IP and
packet-switched data services.
IP data revenues increased $3,080, or 47.6%, in 2007
primarily due to the acquisition of BellSouth, which increased
IP data approximately $2,235, and increased $3,044, or 88.7%,
in 2006 primarily due to the acquisition of ATTC. Included in
IP data revenues are DSL, dedicated Internet access, VPN and
other hosting services. VPN, hosting and dedicated Internet
access services contributed to IP data growth in 2007 and
2006 due to continued growth in the customer base and
migration from other traditional circuit-based products.
Our transport services, which include DS1s and DS3s
(types of dedicated high-capacity lines) and SONET (a
dedicated high-speed solution for multisite businesses),
increased $2,640, or 29.7%, in 2007 almost entirely due
to the acquisition of BellSouth, which increased transport
services revenues $2,730. In 2007, SONET and other
transport data revenues increased due to continuing
high-speed volume growth. These increases were almost
entirely offset by DS1 and DS3 revenue decreases due to
continuing industry pricing pressures and higher levels of
customer adjustments. In 2006, transport services revenues
increased $2,362, or 36.3%, primarily due to the acquisition
of ATTC.
Our packet-switched services include frame relay, ATM
and managed packet services and increased $38, or 1.3%,
in 2007 primarily due to the acquisition of BellSouth, which
increased packet-switched service revenues $265. This
increase was almost entirely offset by both competitive
pricing and lower demand as customers continue to shift
to IP-based technology. We expect these services to
continue to decline as a percentage of our overall data
revenues. Packet-switched services increased $2,128 in
2006 primarily due to the acquisition of ATTC.
Other operating revenues increased $425, or 7.8%, in
2007 and $1,956, or 56.0%, in 2006. The increases were
due to incremental revenue from our acquisitions of BellSouth
in 2007 and ATTC in 2006. Major items included in other
operating revenues are integration services and customer
premises equipment, government-related services,
outsourcing and state and municipal fees, which account
for more than 67% of total revenue for all periods.
Operating Margin Trends
Our wireline segment operating income margin was 16.4% in
2007, compared to 13.8% in 2006 and 9.6% in 2005. Our
wireline segment operating income increased $3,848, or
48.6%, in 2007 and $4,235 in 2006 primarily reflecting the
addition of BellSouth’s operating results in 2007 and ATTC’s
operating results in 2006. Results for 2007 reflect lower
expenses as a result of merger synergies and the addition of
higher-margined operations of BellSouth, partially offset by
merger-related charges and additional amortization expense
on those intangibles identified at the time of our acquisitions
of BellSouth and ATTC. Our operating income continued
to be pressured by access line declines due to increased
competition, as customers disconnected 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 have the
opportunity to increase wireless segment revenues if
customers choose AT&T Mobility as an alternative provider.
Operating income and margins increased in 2006 primarily
due to lower expenses as a result of merger synergies
partially offset by additional amortization expense on those
intangibles identified at the time of our acquisition of ATTC
and lower voice revenue as a result of continued in-region
access line declines due to the reasons mentioned above.
Voice revenues increased $7,916, or 23.5%, in 2007 and
$9,534 or 39.4%, in 2006 primarily due to the acquisitions of
BellSouth and ATTC. Included in voice revenues are revenues
from local voice, long-distance and local wholesale services.
Voice revenues do not include VoIP revenues, which are
included in data revenues.
• Local voice revenues increased $6,831, or 38.4%, in 2007
and $826, or 4.9%, in 2006. The increase in 2007 was
primarily due to the acquisition of BellSouth, which
increased local voice revenues approximately $8,040.
Local voice revenues also increased in 2007 due to
pricing increases for regional telephone service, custom
calling features and inside wire maintenance agreements.
Local voice revenues in 2007 and 2006 were negatively
impacted by expected declines in revenues from ATTC’s
mass-market customers to which no proactive marketing
occurs and from customer demand-related declines for
calling features and inside wire agreements. We expect
our local voice revenue to continue to be negatively
affected by increased competition, including customers
shifting to competitors’ alternative technologies and the
disconnection of additional lines for DSL service and
other reasons.
• Long-distance revenues increased $761, or 5.3%, in 2007
primarily due to the acquisition of BellSouth, which
increased long-distance revenues approximately $2,075
and $9,256 in 2006, primarily due to the acquisition of
ATTC. Contributing to the revenue increases in 2007 and
2006 were continuing higher long-distance penetration
levels in our original 13-state region. These increases
were primarily offset by a continuing decrease in demand
for long-distance service, mostly due to an expected
decline in ATTC’s mass-market customers. Our long-