AT&T Wireless 2008 Annual Report Download - page 25

AT&T Annual Report 2008
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For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document and the names of the
particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose
subsidiaries and affiliates operate in the communications services industry both in the United States and internationally providing
wireless and wireline telecommunications services and equipment as well as directory advertising and publishing services.
You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference
to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this
section, percentage increases and decreases that equal or exceed 100% are not considered meaningful and are denoted with a dash.
RESU LTS OF OPERAT I ONS
Consolidated Results Our financial results are summarized in the table below. We then discuss factors affecting our overall
results for the past three years. These factors are discussed in more detail in our “Segment Results” section. We also discuss our
expected revenue and expense trends for 2009 in the “Operating Environment and Trends of the Business” section.
We completed our acquisition of BellSouth Corporation (BellSouth) on December 29, 2006. We thereby acquired BellSouth’s
40% economic interest in AT&T Mobility LLC (AT&T Mobility), formerly Cingular Wireless LLC (Cingular), resulting in 100% ownership
of AT&T Mobility. Our consolidated results in 2006 include BellSouth’s and AT&T Mobility’s operational results for the final
two days of the year. Prior to the acquisition, we reported the income from our 60% share of AT&T Mobility as equity in net
income. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from BellSouth and
AT&T Mobility prior to their respective acquisition dates are excluded.
Percent Change
2008 vs. 2007 vs.
2008 2007 2006 2007 2006
Operating revenues $124,028 $118,928 $63,055 4.3% 88.6%
Operating expenses 100,965 98,524 52,767 2.5 86.7
Operating income 23,063 20,404 10,288 13.0 98.3
Income before income taxes 19,903 18,204 10,881 9.3 67.3
Net income 12,867 11,951 7,356 7.7 62.5
Diluted earnings per share 2.16 1.94 1.89 11.3 2.6
Overview
Operating income As noted above, 2007 revenues and
expenses reflect the addition of BellSouth’s and AT&T Mobility’s
results while our 2006 results only include two days of their
results. Accordingly, the following discussion of changes in our
revenues and expenses is affected by these acquisitions.
Our operating income increased $2,659, or 13.0%, in 2008
and $10,116, or 98.3%, in 2007. Our operating income margin
increased from 16.3% in 2006 to 17.2% in 2007 and to 18.6%
in 2008. Operating income in 2008 increased primarily due
to continued growth in wireless service and data revenues
along with a decrease in the amortization of merger-related
intangibles and increased in 2007 primarily due to the
acquisition of BellSouth. Reported results in 2008 include
directory revenue and expenses from directories published by
BellSouth subsidiaries. In accordance with GAAP, our reported
results in 2007 did not include deferred revenue of $964 and
expenses of $308 from BellSouth directories published during
the 12-month period ending with the December 29, 2006 date
we acquired BellSouth. Had our 2007 directory results included
this deferred revenue and expenses, operating income would
have increased $2,003 for 2008, as compared to 2007.
Operating revenues increased $5,100, or 4.3%, in 2008
and $55,873, or 88.6%, in 2007. Revenues in 2008 reflect an
increase in wireless subscribers and data revenues, primarily
related to Internet Protocol (IP) data, partially offset by the
continued decline in voice revenues. Increases in 2007 were
primarily due to our acquisitions and to continuing growth in
wireless subscribers. As discussed above, purchase accounting
treatment for directories published 12 months prior to the
BellSouth acquisition also increased revenues in 2008 when
compared to 2007.
Our operating revenues also reflect the continued decline
of our retail access lines due to the dramatically declining
overall economy and increased competition, as customers
continued to disconnect both primary and additional 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 expenses increased $2,441, or 2.5%, in 2008
and $45,757, or 86.7%, in 2007. The increase in 2008 was
primarily due to higher equipment costs related to the
successful launch of the Apple iPhone 3G and increased
sales of PDA devices, while the increase in 2007 was primarily
due to merger integration costs and amortization expense
on intangible assets identified at the time of acquisition.
Also increasing 2008 expenses were higher commissions and
residuals from the growth in wireless, severance associated
with announced workforce reductions as well as hurricane-
related expenses affecting both the wireless and wireline
segments. Partially offsetting these increases were merger
integration costs recognized in 2007 and not in 2008, and
lower amortization expense on intangible assets in 2008.
Interest expense decreased $117, or 3.3%, in 2008 and
increased $1,664, or 90.3%, in 2007. Interest expense remained
relatively unchanged during 2008 with a decrease in our
weighted average interest rate and increases in interest
charged during construction, offset by an increase in our
average debt balances. Future interest expense will continue
to reflect increased interest during construction related to
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts