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Connect people with their
world, everywhere they live
and work, and do it better
than anyone else.
AT&T Inc. 2008 Annual Report

Table of contents

  • Page 1
    AT&T Inc. 2008 Annual Report Connect people with their world, everywhere they live and work, and do it better than anyone else.

  • Page 2
    ... 2008 Customer Revenue Mix Pro Forma Consolidated Revenues Wireless 40% Local Search/Other Consumer 5% 37% Business $116.8 $117.1 $119.9 $124.0 08 08 $1.61 18% In billions *05 Wireless is AT&T's largest and fastest-growing area. *06 *07 AT&T's revenues were up more than 3 percent in 2008...

  • Page 3
    ... increasing demand for connectivity. The volatile economy demanded even more financial strength, flexibility and disciplined execution, and we delivered. We spotted the economic slowdown early in the year and quickly moved to reduce costs without sacrificing growth opportunities or customer service...

  • Page 4
    ...devices, networks and services. They can't get enough of the communications capabilities that make their lives better and their businesses more productive. AT&T is in the best position to satisfy this demand. We've built our business around the pillars of mobility, data and Internet Protocol (IP) to...

  • Page 5
    ... our business around the pillars of mobility, data and Internet Protocol to provide the fully integrated, everywhere connectivity that our customers want and expect. AT&T Senior Officers Left to right: Jim Cicconi, Senior Executive Vice President-External and Legislative Affairs, AT&T Services, Inc...

  • Page 6
    ... continues to set the standard for serving the complex connectivity needs of businesses worldwide. We help them stay connected with their employees and customers through a broad array of IP-based networking solutions that allow them to extend their reach, reduce costs and seize competitive advantage...

  • Page 7
    ...couple of thoughts: Our long-term future remains very bright. The underlying global demand for connectivity continues to grow - and no company is better positioned to meet it than AT&T. My confidence flows from the knowledge that we offer the best products and services in every customer segment. As...

  • Page 8
    AT&T Annual Report 2008 6 Above: Great services. Great devices. Great networks. They all work together to keep our customers connected - anytime and in more places.

  • Page 9
    ...we'll continue to expand and enhance our 3G wireless network; we plan to begin testing peak speeds up to 20 megabits per second - about six times faster than today's top speeds. Over the next few years, our wireless networks will be even faster. So as the demand for connectivity grows, AT&T will be...

  • Page 10
    ....COM Mobile and international mapping and directions with AT&T Navigator. As customers used their wireless devices to do more things, we saw our wireless data revenues grow by more than 50 percent each quarter in 2008. Today, we are the leader in wireless data, and we remain focused on helping...

  • Page 11
    ... services we offer and stay ahead of our customers' expectations. For example, our Total Home DVR lets users record up to four shows at once on a single DVR - and play them back on up to eight connected TVs. And last year, we introduced AT&T U-verse Voice, our IP home phone service that provides new...

  • Page 12
    ...addition to wireless broadband access in nearly 350 major metropolitan areas in the U.S., we offer wired broadband service in our 22-state footprint. For millions of homes with access to AT&T U-verse, that includes Internet service at speeds up to 18 megabits per second. To provide even more options...

  • Page 13
    ...and services businesses need to make sales, solve problems and serve customers from any location. We're the leader in wireless data. And we continue to invest in our wireless networks to deliver even more speed and bandwidth in the years ahead. Enterprise IP Data Revenues $2.1 $2.5 $2.9 $3.4 08...

  • Page 14
    ... IP network for multinational corporations. In 2008, we invested significantly to improve the reach, quality and reliability of our global IP-based network. And we increased our global data center capacity to handle the exploding demand for increasingly datarich applications and services. Last year...

  • Page 15
    ...the sales reports. Good thing I've got wireless access even in France. I call the team and get the data I need before heading into my meeting. Even after a long, long day, it's nice to deliver good news. AT&T has the best wireless coverage worldwide of any U.S. wireless provider. "AT&T makes my day...

  • Page 16
    ... and operations continues, we're also at the forefront of providing services that help customers reduce their IT costs even as they expand their connectivity. For example, Scottrade, a leading online investment firm, turned to AT&T to manage its Internet services and connect its data centers. Small...

  • Page 17
    .... tool is AT&T Tech Support 360SM, which delivers live technical support for software installation, network and security setup, mobile device maintenance and PC performance enhancement. Another is AT&T's Onward Small Business Web site, which was named by Compass Intelligence in 2008 as one of the...

  • Page 18
    AT&T Annual Report 2008 16 Local Search Local search is a simple enough concept. It puts at consumers' fingertips - anywhere, anytime - the ability to find and connect with businesses that have what they need. But, as consumers have more and more ways to search, making those connections can be a ...

  • Page 19
    ... Road Cycle World expand their reach to customers with ads on wireless devices through YELLOWPAGES.COM Mobile. given our customers a competitive advantage. And it's made us an industry leader in local search. As consumers increasingly go online to find local businesses, YELLOWPAGES.COM has become

  • Page 20
    ...2008 Innovation 18 Delivering the connectivity and integrated applications our customers demand begins with the world's most powerful and advanced network. Right: AT&T Labs employees work every day to develop innovative applications - such as the ability to access live traffic cameras via wireless...

  • Page 21
    AT&T Annual Report 2008 19 Advancing network capability Delivering the connectivity and integrated applications our customers demand begins with the world's most powerful and advanced network. It carries nearly 17 petabytes of IP and data traffic on an average business day - the equivalent of a ...

  • Page 22
    ... communities, and 2008 was no exception. We moved to align our corporate citizenship and sustainability initiatives more closely than ever with our daily business operations. Our board of directors expanded the responsibility of its Public Policy Committee to include oversight of this crucial area...

  • Page 23
    ... 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 22 23 49 53 76 77 78 79 80 AT&T Annual Report 2008 | 21

  • Page 24
    ... outstanding with dilution (000,000) End of period common shares outstanding (000,000) Operating Data Wireless customers (000)5 In-region network access lines in service (000)6 Broadband connections (000)7 Number of employees 1 2 1 $124,028 $100,965 $ 23,063 $ 3,390 $ 819 $ (589) $ 7,036 $ 12,867...

  • Page 25
    ... lines and switched to 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 alternative provider. Operating...

  • Page 26
    ...-market customers, which are composed of consumers and small businesses. Pro forma data growth was led by an increase in IP data revenues of 13.3% in 2007, with strength in high-speed Internet, managed Internet, Virtual Private Network (VPN) and hosting services. Data transport service revenues were...

  • Page 27
    ... income as compared to 55% in 2007. This segment provides both retail 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 and...

  • Page 28
    ... increase in data revenue was related to increased use of text messaging, Internet access, e-mail and other data services. We expect continued growth from data services as more customers purchase advanced handsets, such as iPhone 3G, and laptop cards and as our 26 | AT&T Annual Report 2008

  • Page 29
    ... savings initiatives, slowing international growth and lower regulatory cost recovery charges. We expect continued pressure on voice service ARPU. In 2007, data service ARPU grew 46.9% compared to 2006. The continued increase in data revenue was related to increased use of text messaging, Internet...

  • Page 30
    ... on certain network assets related to acquiring BellSouth's 40% ownership interest of AT&T Mobility. Percent Change 2008 2007 2006 2008 vs. 2007 2007 vs. 2006 Segment operating revenues Voice Data Other Total Segment Operating Revenues Segment operating expenses Cost of sales Selling, general and...

  • Page 31
    ... strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video and voice. Additionally, we have the opportunity to increase wireless segment revenues if customers choose AT&T Mobility as an alternative provider. As noted above, 2007...

  • Page 32
    ...migration of long-distance calls onto our network and a lower volume of calls from ATTC's declining national mass-market customer base. • Lower net pension and postretirement cost of $387, primarily due to changes in our actuarial assumptions, including the increase of our discount rate from...

  • Page 33
    ... (CLECs). 4 Revenue from retail payphone lines is reported in the Other segment. We are in the process of ending our retail payphone operations. 5 Total wired broadband connections include DSL, U-verse high-speed Internet access and satellite broadband. 6 Satellite service includes connections under...

  • Page 34
    ... the customer list acquired as part of the BellSouth acquisition, and lower employee, professional and contract related expenses. These expense decreases were partially offset by increased YELLOWPAGES.COM expansion costs. In 2007, operating expenses increased $2,250 primarily due to the addition of...

  • Page 35
    ... continuing declines in traditional access lines but offsets in growth in broadband and video services. We expect solid growth in broadband revenues as customers continue to choose higher-speed services. We expect to continue to expand our U-verse service offerings in 2009. 2009 Expense Trends...

  • Page 36
    ... 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 by using the same spectrum and infrastructure for voice and data on an IP-based platform. Our wireless networks...

  • Page 37
    ...in a timely manner, the requisite hardware and software technology. Our deployment plans could be delayed if we do not receive required equipment and software on schedule. We believe that our U-verse TV service is subject to federal oversight as a "video service" under the Federal Communications Act...

  • Page 38
    ...bundling of products and services, including wireless and video, large-business data services and broadband. 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 39
    ...using the largest class of nationwide Internet networks (Internet backbone), wireless carriers, CLECs, regional phone ILECs, cable companies and systems integrators. These services are subject to additional competitive pressures from the development of new technologies and the increased availability...

  • Page 40
    ... our belief that we expect greater revenue generation from these customer relationships during the earlier years of their lives. Alternatively, we could have chosen to amortize customer relationships using the straight-line method, which would allocate the cost equally over the amortization period...

  • Page 41
    .... FSP FAS 132(R)-1 is effective for fiscal years ending after December 2009. This FSP will significantly increase the amount of disclosures for plan assets in our 2009 Annual Report. EITF 08-6 In November 2008, the Emerging Issues Task Force (EITF) reached a consensus on EITF 08-6, "Equity Method...

  • Page 42
    ..., 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 43
    ... $113 related to other activities. Our capital expenditures are primarily for our wireless and wireline subsidiaries' networks, our U-verse services, and support systems for our communications services. Capital spending (excluding interest during construction) in our wireless segment increased 42...

  • Page 44
    ...were more than offset by our increased share repurchase activity and dividend distributions. CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES Current accounting standards require us to disclose our material obligations and commitments to making future payments under contracts, such as debt and...

  • Page 45
    ... from the above table as the fees would not be paid every year and the timing of such payments, if any, is uncertain. 4 We calculated the minimum obligation for certain agreements to purchase goods or services based on termination fees that can be paid to exit the contract. If we elect to exit these...

  • Page 46
    ... 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 47
    ... on reducing debt levels rather than share repurchases in 2009. Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs Purchase Period Total Number of Shares Purchased Average Price Paid...

  • Page 48
    ... to access these markets, severely affecting our business operations. Changes in available technology could increase competition and our capital costs. The telecommunications industry has experienced rapid changes in the last several years. The development of wireless, cable and IP technologies has...

  • Page 49
    ... service areas and compete for customers based principally on price, service/device offerings, call quality, coverage area and customer service. In addition, we are likely to experience growing competition from providers offering services using alternative wireless technologies and IP-based networks...

  • Page 50
    ... of disputes with any taxing jurisdictions. • Our ability to adequately fund our wireless operations, including access to additional spectrum; network upgrades and technological advancements. • Changes in our corporate strategies, such as changing network requirements or acquisitions...

  • Page 51
    ...millions except per share amounts 2008 2007 2006 Operating Revenues Wireless service Voice Data Directory Other Total operating revenues Operating Expenses Cost of services and sales (exclusive of depreciation and amortization shown separately below) Selling, general and administrative Depreciation...

  • Page 52
    ... 31, 2008 2007 Assets Current Assets Cash and cash equivalents Accounts receivable - net of allowances for uncollectibles of $1,270 and $1,364 Prepaid expenses Deferred income taxes Other current assets Total current assets Property, Plant and Equipment - Net Goodwill Licenses Customer Lists and...

  • Page 53
    ... Net change in short-term borrowings with original maturities of three months or less Issuance of long-term debt Repayment of long-term debt Purchase of treasury shares Issuance of treasury shares Dividends paid Share-based payment tax benefit Other Net Cash Used in Financing Activities Net increase...

  • Page 54
    ... of net actuarial loss and prior service benefit Included in net income, net of taxes of $(74) and $125 Other Other comprehensive income (loss) Adoption of FAS 158, net of tax Balance at end of year Total Comprehensive Income Net income Additional minimum pension liability adjustments per above...

  • Page 55
    ...related costs) be recognized separately from the acquisition. In addition, in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141), restructuring costs that the acquirer expected but was not obligated to incur, which included changes to benefit plans...

  • Page 56
    ... and the adjustments thereto. 12/31/07 Balance Cash Payments Adjustments and Accruals 12/31/08 Balance Severance accruals paid from: Company funds Pension and postemployment benefit plans Lease terminations Equipment removal and other related costs Total $ 540 $(321) $(79) $140 129 425 (26...

  • Page 57
    ... 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 58
    ... 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 lives...

  • Page 59
    ... U.S., providing wireline communications services, including local exchange, network access, longdistance services and Internet services to substantial portions of the population across nine states. BellSouth also provided long-distance services to enterprise customers throughout the country...

  • Page 60
    ..., the Independent Line of Business segment of the L.M. Berry Company for $230. In May 2007, we sold to Clearwire Corporation (Clearwire), a national provider of wireless broadband Internet access, education broadband service spectrum and broadband radio service spectrum valued at $300. Sale of this...

  • Page 61
    ... retail 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 and satellite television services through our agency...

  • Page 62
    ...: At December 31, 2008 or for the year ended Wireless Wireline Advertising & Publishing Other Consolidation and Elimination Consolidated Results Revenues from external customers Intersegment revenues Total segment operating revenues Operations and support expenses Depreciation and amortization...

  • Page 63
    ... period, we completed purchase accounting adjustments to the AT&T Mobility and BellSouth goodwill in 2007 and Dobson goodwill in 2008 (see Note 2). Other changes to goodwill include adjustments totaling $10 in 2008 for the tax effect of stock options exercised. AT&T Annual Report 2008 | 61

  • Page 64
    ... 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 lives...

  • Page 65
    ...interest rate of 3.98 66 related to repayments of Edge Wireless term loan. • $29 related to scheduled principal payments on other debt and repayments of other borrowings. During 2008, we received net proceeds of $12,416 from the issuance of $12,475 in long-term debt. Debt proceeds were used...

  • Page 66
    ...-term and long-term held-to-maturity investments and customer deposits are recorded at amortized cost, and the carrying amounts approximate fair values. We held other short-term marketable securities of $25 at December 31, 2008 compared to $1 at December 31, 2007. Derivatives We use interest rate...

  • Page 67
    ... to unrecognized tax benefits. As a result of the implementation of FIN 48, we recognized a $50 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. A reconciliation of the AT&T Annual Report 2008 | 65

  • Page 68
    ... will assess additional taxes related primarily to the timing of certain deductions related to our network assets. We expect to make a deposit in the $800 to $1,200 range to reduce the accrual of interest while we continue to work with the IRS to resolve any contested issues. The IRS plans to begin...

  • Page 69
    ... 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 70
    ...of benefits based on employee service and compensation as of a certain date and does not include an assumption about future compensation levels. The accumulated benefit obligation for our pension plans was $48,618 at December 31, 2008, and $51,357 at December 31, 2007. Net Periodic Benefit Cost and...

  • Page 71
    ... cost, we used the following significant weighted-average assumptions: 2008 2007 2006 Discount rate for determining projected benefit obligation at December 31 Discount rate in effect for determining net cost (benefit)1 Long-term rate of return on plan assets Composite rate of compensation increase...

  • Page 72
    ... used to determine our actuarial estimates of pension and postretirement benefit expense. If all other factors were to remain unchanged, we expect that a 1% decrease in the expected long-term rate of return would cause 2009 combined pension and postretirement cost to increase $650 over 2008...

  • Page 73
    ...income: Net Periodic Benefit Cost 2008 2007 2009 2010 2011 2012 2013 Years 2014 - 2018 $ 5,018 4,713 4,655 4,583 4,484 20,777 $ 2,588 2,686 2,769 2,794 2,819 14,180 $ (121) (131) (140) (155) (170) (1,086) Supplemental Retirement Plans We also provide senior- and middle-management employees with...

  • Page 74
    ... 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 $664, $633 and $412 for the years ended December 31, 2008, 2007 and 2006...

  • Page 75
    ... 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, 2008 carry exercise prices equal to the market price of our stock at the date...

  • Page 76
    ... 14. ADDITIONAL FINANCIAL INFORMATION December 31, Balance Sheets 2008 2007 Accounts payable and accrued liabilities: Accounts payable Accrued rents and other Accrued payroll and commissions Deferred directory revenue Accrued interest Compensated future absences Current portion of employee benefit...

  • Page 77
    ...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 2008 First Second Third Fourth Annual 2007 First Second Third Fourth Annual 1 $ 30,744 30,866 31,342...

  • Page 78
    ... and fair presentation of published financial statements. AT&T management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the...

  • Page 79
    ... (United States), the Company's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 12, 2009 expressed...

  • Page 80
    ... States), the consolidated balance sheets of the Company as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008, of the Company and our report dated February 12, 2009...

  • Page 81
    ...Brewing, family entertainment, manufacturer of aluminum beverage containers Joyce M. Roché, 61 (3,7) President and Chief Executive Officer Girls Incorporated Director since October 1998 Southern New England Telecommunications Director 1997-1998 Background: Marketing AT&T Annual Report 2008 | 79

  • Page 82
    ... Chief Executive Officer, AT&T Business Solutions John Stankey, 46 President and Chief Executive Officer, AT&T Operations, Inc. Wayne Watts, 55 Senior Executive Vice President and General Counsel Ray Wilkins Jr., 57 Chief Executive Officer-AT&T Diversified Businesses 80 | AT&T Annual Report 2008

  • Page 83
    ....com. According to the NPD Group, iPhone 3G is the best-selling handset purchased by adult consumers in the U.S. for 4Q 2008. NPD does not track corporate/enterprise handset purchases. ARCchart report: Mobile Data Modules: Powering the Market for Mobile Internet Peripherals and Devices (Sept. 2008...

  • Page 84
    AT&T Inc. 208 S. Akard St. Dallas, TX 75202 att.com