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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
    ... accessible. Customer demand for connectivity has increased dramatically. And it's all playing out on a global scale. Against this backdrop, our industry's growth potential has never been greater. These industry dynamics have driven a major transformation of our company. We've added critical assets...

  • Page 4
    ..., Senior Executive Vice President and General Counsel; Ralph de la Vega, President and Chief Executive Officer-AT&T Mobility. A Strong 2007 A clear focus on our opportunities, combined with strong execution, helped make 2007 a terrific year for our company. Wireless growth accelerated as we added...

  • 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
    ...as an integrated wireless, wired, voice, data and video company that connects our customers to their world, everywhere they live and work. And we'll do that better than anyone else. That's because at every level-local, national, global-we've shaped ourselves around meeting our customers' total needs...

  • Page 7
    ... chairman and chief executive officer for more than 17 years. Ed Whitacre led our company with great integrity, vision and wisdom. As the architect of the new AT&T, he transformed our business and, in the process, an entire industry. On behalf of our Board of Directors and employees, we thank Ed for...

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

  • Page 9
    ... from laptops to televisions to ATM machines, and it helps people and businesses communicate seamlessly, easily and accurately across town or around the world. To deliver on the great promise of IP, we are well under way with the transformation of our wireless and wired networks. We're using IP...

  • 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
    ... 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're...

  • Page 13
    ... Norwood's day-to-day life. It helped AT&T change the game-and the face 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...

  • Page 14
    ... network to deliver a more consistent and reliable broadband experience. 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...

  • Page 15
    ... 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. Our U-verse network deployment is expected to pass 30 million living units by the end of 2010. 2007 AT&T Annual Report...

  • Page 16
    ... locations in 89 countries. And a new multiyear agreement with Yahoo!, announced in January 2008, will deliver an even richer and more innovative online experience for our customers-whether they are at home or on the go. Advanced TV From AT&T We have dramatically ramped our growth in video services...

  • Page 17
    ... Satellite TV service from DISH Network and DIRECTV is available in markets where 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...

  • Page 18
    ... 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 team secured AT&T's contract...

  • 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
    ... tapped AT&T to build its next-generation enterprise network to connect 100,000 employees at more than 1,000 locations. • General Motors selected AT&T for a five-year contract-one of the largest commercial contracts in our history-to provide next-generation global telecommunications capabilities...

  • Page 21
    ... Network (VPN) service that offers a single secure network to connect numerous business locations, such as branch offices, headquarters and remote users. The results for Edward Jones? Increased reliability, faster traffic flow, easier management and the ability to expand quickly. "We worked closely...

  • Page 22
    ... online local search 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...

  • 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
    ... that building 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...

  • Page 25
    ..., to connect with these young citizens in their "own tongue," encouraging them to register to vote and receive news and reminders about the election by sending a text message. They can also download exclusive celebrity ringtones that promote the importance of voting. 2007 AT&T Annual Report | 23

  • Page 26
    ... Should Be Able to Call Home That is the basic principle on which Massachusetts teenagers Brittany and Robbie Bergquist founded Cell Phones for Soldiers (CPFS). The charity they created collects and recycles wireless phones, then uses the proceeds to buy prepaid phone cards to send to U.S. troops...

  • Page 27
    ... Consolidated 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...

  • Page 28
    ... since the BellSouth acquisition and in 13 states prior to that acquisition). Beginning in 2006 the number includes BellSouth lines in service. 9 Broadband connections include in-region DSL lines, in-region U-verse high-speed Internet access and satellite broadband. 26 | 2007 AT&T Annual Report

  • Page 29
    ... 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 alternative provider...

  • Page 30
    ... of customers switching to IP-based services from traditional circuit-based services. Pro forma wireless service growth was driven by subscriber growth and strong increases in data usage, including increased messaging, browsing, downloads, media bundles and laptop and smartphone connectivity. We...

  • Page 31
    ... 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 (U-verse) and satellite television services through our agency...

  • Page 32
    ... iPhone, which were partially offset by a slowing 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...

  • Page 33
    ...average number of wireless customers of 11.5%, partially offset by competitive pricing pressures and the impact of various all-inclusive calling and prepaid plans. Included in voice revenues for both periods were increases in long-distance and net roaming revenue due to increased international usage...

  • Page 34
    ... of $87 due to a decline in the number of outsourced call center professionals and lower billing expenses. • Increases of $147 primarily related to increased prepaid card replenishment costs and higher migration and upgrade transaction costs. • Increases in other expense of $129 due to higher...

  • Page 35
    ... 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...

  • Page 36
    ... access to another carrier's network) of $109 primarily due to increased volume of local traffic (telephone calls) terminating on competitor networks and wireless customers. Partially offsetting these increases, cost of sales in 2006 decreased due to: • A reduction in equipment sales and related...

  • 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
    ...(3.1)% Ingenio Acquisition In December 2007, we acquired Ingenio®, a provider of Pay Per Call® technology. Ingenio will be integrated with YPC and will allow us to better serve business directory and local search customers across our entire advertising and publishing portfolio. Accounting Impacts...

  • Page 39
    ... to be wireless and that all our major customer categories will continue to increase their use of Internet-based broadband/data services. For our enterprise (largest) business customers, we achieved positive growth in recurring service revenues beginning in the third quarter of 2007 and expect total...

  • Page 40
    ...based platform. Our wireless networks also rely on digital transmission technologies known as GSM, General Packet Radio Services and Enhanced Data Rates for GSM Evolution for data communications. As of December 31, 2007, we served more than 70 million customers and are the leading provider of mobile...

  • Page 41
    ... receive the funds for the subsequent calendar year based on federal and applicable state ETC requirements. We are certified for each relevant state for 2008. In May 2007, the Federal-State Joint Board on Universal Service recommended applying a funding cap to the amount of universal service support...

  • Page 42
    ... Public Utilities Commission (CPUC) opened a rulemaking to review the California High Cost Fund B (CHCF-B). The CHCF-B program was established in 1996 and was designed to support universal service goals by ensuring that basic telephone service remains affordable in high-cost areas within the service...

  • 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
    ... 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 (MRVA...

  • Page 45
    ...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 approvals and closed in May 2007. Sale of this spectrum...

  • Page 46
    ...used in investing activities consisted of: • $17,717 in construction and capital expenditures. • $2,200, net of cash acquired, related to the acquisition of Dobson, a provider of rural and suburban wireless communications services. • $579 for investments in debt and equity securities. | 2007...

  • Page 47
    ... Clearwire Corporation, which includes interest. • $156 related to T-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...

  • Page 48
    ... commercial paper borrowings are due within 90 days. We continue to examine our mix of short- and long-term debt in light of interest rate trends. During 2007, we received net proceeds of $11,367 from the issuance of $11,499 in long-term debt. Debt proceeds were used for general corporate purposes...

  • Page 49
    ...in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. Where appropriate, we will take actions to limit the negative effect of interest and foreign exchange rates, liquidity and counterparty risks on stockholder value. 2007 AT&T Annual Report...

  • Page 50
    ... MARKET RISK In order to determine the changes in fair value of our various financial instruments, we use certain financial modeling techniques. We apply rate-sensitivity changes directly to our interest rate swap transactions and forward rate sensitivity to our foreign currency-forward contracts...

  • Page 51
    ...74,708,783 51,208,783 49,208,783 49,208,783 Average Price Paid per Share excludes transaction costs. Replaced by new authorization on December 10, 2007. STOCK PERFORMANCE GRAPH Comparison of Five-Year Cumulative Total Return AT&T Inc., S&P 500 Index and S&P 500 Integrated Telecom Index 200 190 AT...

  • Page 52
    ...which are reflected in our financial statements over several years. Investment returns on these funds depend largely on trends in the U.S. securities markets and the U.S. economy. In calculating the annual costs included on our financial statements of providing benefits under our plans, we have made...

  • Page 53
    ... are newer companies, are deploying this IP-based technology. In order to continue to offer attractive and competitively priced services, we 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...

  • Page 54
    ... relating to interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates, broadband deployment including our U-verse services, performance measurement plans, service standards and traffic compensation. • Enactment of additional state, federal...

  • Page 55
    ...Statements of Income Dollars in millions except per 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, general...

  • Page 56
    ... Affiliates Postemployment Benefit Other 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...

  • Page 57
    ... Stock-based compensation tax benefit Other - net Total adjustments Net Cash Provided by Operating Activities Investing Activities Construction and capital expenditures Net investments in affiliates Dispositions Acquisitions, net of cash acquired Proceeds from sale of marketable securities...

  • Page 58
    ...' Equity Dollars and shares in millions except per share amounts 2007 Shares Amount Shares 2006 Amount Shares 2005 Amount Common Stock Balance at beginning of year Issuance of shares Balance at end of year Capital in Excess of Par Value Balance at beginning of year Issuance of shares Stock-based...

  • Page 59
    ...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 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
    ... and foreign subsidiaries generally report their earnings in their local currencies. We translate our share of their foreign assets and liabilities at exchange rates in effect at the balance sheet dates. We translate our share of their revenues and expenses using average rates during the year. The...

  • Page 62
    ... of acquisition. BellSouth 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...

  • Page 63
    ... normally be recorded in ordinary operations (i.e., customer relationships) were recorded at their acquisition values. Debt instruments and investments were valued in relation to current market conditions and other assets and liabilities were valued based on the acquiring company's estimates. After...

  • Page 64
    ... Acquisitions During 2007, we acquired Interwise®, a global provider of voice, Web and video conferencing services to businesses for $122 and Ingenio®, a provider of Pay Per Call® technology for directory and local search business for $195, net of cash. We recorded $304 of goodwill related to...

  • 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
    ...to Consolidated Financial Statements (continued) Dollars in millions except per share amounts Segment results, including a reconciliation to AT&T consolidated results, for 2007, 2006 and 2005 are as follows: At December 31, 2007 or for the year ended Wireless Wireline Advertising & Publishing Other...

  • Page 67
    ... INTANGIBLE ASSETS Changes in the carrying amounts of goodwill, by segment, for the years ended December 31, 2007 and 2006, are as follows: Wireless Wireline Advertising & Publishing Other Total Balance as of January 1, 2006 Goodwill acquired: BellSouth acquisition Other Goodwill adjustment related...

  • Page 68
    ... the class AA shares of América Móvil stock, representing voting control of the company. Another member of the consortium, Americas Telecom S.A. de C.V., has the right to appoint a majority of the directors of América Móvil. On November 14, 2007, Telmex's board of directors approved a strategic...

  • Page 69
    ... AT&T. BellSouth's and AT&T Mobility's long-term debt included both fixed and floating interest rates with a weighted-average rate of 6.7% (ranging from 4.2% to 8.8%) Financing Activities Debt During 2007, debt repayments totaled $10,183 and consisted of: • $3,871 related to debt repayments with...

  • Page 70
    ... Statements (continued) Dollars in millions except per share amounts During 2007, we received net proceeds of $11,367 from the issuance of $11,499 in long-term debt. Debt proceeds were used for general corporate purposes, and parts of the proceeds were used for repurchases of our common stock. Long...

  • Page 71
    Derivatives We use interest rate swaps, interest rate forward contracts and foreign currency exchange contracts to manage our market risk changes in interest rates and foreign exchange rates. We do not use financial instruments for trading or speculative purposes. Each swap matches the exact ...

  • Page 72
    ... Gross Unrecognized Income Tax Benefits Deferred Federal and 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...

  • Page 73
    ... be paid as an annuity if its value exceeds a stated monthly amount. Management employees of former ATTC, BellSouth and AT&T Mobility participate in cash balance pension plans. Nonmanagement employees' pension benefits are generally calculated using one of two formulas: benefits are based on | 71

  • Page 74
    ... 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 $51,357 at December 31, 2007, and $53,662 at December 31, 2006. 72 | 2007 AT&T Annual Report

  • Page 75
    ... 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 our discount rate by 0.50%, resulting in a decrease in our pension plan benefit obligation...

  • Page 76
    ... 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 on the funds invested, or to be invested, to provide...

  • Page 77
    ... net supplemental retirement pension cost in the table above, we recorded charges of $32 due to accelerated benefit expenses and settlement charges related to retirements during 2007. The estimated net loss and prior service cost for our supplemental retirement plan benefits that will be amortized...

  • 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
    ... 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 at...

  • Page 80
    ... 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 Capitalized interest Total interest expense...

  • Page 81
    ... table 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...

  • Page 82
    ...financial statements included in this Annual Report, has issued an attestation 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...

  • Page 83
    ...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. We also have audited...

  • Page 84
    ... Accounting Firm on Internal Control over Financial Reporting The Board of Directors and Stockholders AT&T Inc. We have audited AT&T Inc.'s (the Company) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued...

  • Page 85
    ... Telephone Director 1974-1983 Background: Electrical 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...

  • Page 86
    ...Global Marketing Officer Ralph de la Vega, 56 President and Chief Executive OfficerAT&T Mobility Rick Lindner, 53 Senior Executive Vice President and Chief Financial Officer Forrest Miller, 55 Group President-Corporate Strategy and Development Ron Spears, 59 Group President-Global Business Services...

  • Page 87
    ...our Web site at www.att.com/investor.relations. Investor Relations Securities analysts and other members of the professional financial community may call the Investor Relations staff as listed on our Web site at Stock Trading Information AT&T Inc. is listed on the New York Stock Exchange. www.att...

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