AT&T Wireless 2008 Annual Report Download - page 32

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share amounts
30
| AT&T Annual Report 2008
2008, driven by an increase in management services, and
decreased $274 in 2007 primarily due to less emphasis on
the sale of lower-margin equipment. Governmental
professional services revenue increased $100 in 2008
driven by growth across various contracts. Revenue also
decreased by $70 in 2007 due to the recognition of
intellectual property license fees in 2006 that did not recur
in 2007. More than offsetting these declines in 2007 was
incremental revenue from our acquisition of BellSouth.
Cost of sales expenses increased $911, or 2.9%, in 2008
and $3,630, or 13.3%, in 2007. Cost of sales consists of costs
we incur in order to provide our products and services,
including costs of operating and maintaining our networks
and personnel costs, such as salary, wage and bonus
accruals. Costs in this category include our repair technicians
and repair services, certain network planning and engineering
expenses, operator services, IT and property taxes related to
elements of our network. Pension and postretirement costs,
net of amounts capitalized as part of construction labor, are
also included to the extent that they are associated with
these employees.
Cost of sales in 2008 increased due to the following:
 • Highernonemployee-relatedexpenses,suchascontract
services, agent commissions and materials and supplies
costs, of $1,056.
 • Salaryandwagemeritincreases,otherbonusaccruals
and higher employee levels, which increased
compensation expenses by $423 and increased
medical and other benefits by $239.
 • Highercostofequipmentsalesandrelatednetwork
integration services of $60 in 2008 primarily due to
increased U-verse customers partially offset by
reductions due to less emphasis on sales of lower-
margin equipment.
Partially offsetting these increases, cost of sales in
2008 decreased due to:
 • Lowertrafficcompensationexpenses(foraccessto
another carrier’s network) of $633 primarily due to
reduced portal fees from renegotiation of our agreement
with Yahoo!, continued 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 6.00%
to 6.50% (a decrease to expense) and favorable prior-year
investment returns on plan assets resulting in a decrease
in the recognition of net losses from prior years.
In addition to the impact of the BellSouth acquisition, cost
of sales in 2007 increased due to the following:
 • Highernonemployee-relatedexpenses,suchascontract
services, agent commissions and materials and supplies
costs, of $605.
 • Higherexpensesof$225in2007duetoa2006change
in our policy regarding the timing for earning vacation
days, which reduced expense in 2006.
 • Salaryandwagemeritincreasesandotherbonus
accruals of $165.
Partially offsetting these increases, cost of sales in 2007
decreased due to:
 • Lowertrafficcompensationexpenses(foraccessto
another carrier’s network) of $831 primarily due to
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$398,
primarily due to changes in our actuarial assumptions,
including the increase of our discount rate from 5.75%
to 6.00% (a decrease to expense) and favorable
investment returns on plan assets resulting in a decrease
in the recognition of net losses from prior years.
 • Lowercostofequipmentsalesandrelatednetwork
integration services of $300, primarily due to less
emphasis on sales of lower-margin equipment.
Costs associated with equipment for large-business
customers typically are greater than costs associated
with services that are provided over multiple years.
 •Lowerexpensesof$163in2007duetothe
discontinuance of DSL Universal Service Fund fees
in the third quarter of 2006.
Selling, general and administrative expenses decreased
$1,535, or 10.1%, in 2008 and increased $2,954, or 24.2%, in
2007. Selling, general and administrative expenses consist
of our provision for uncollectible accounts; advertising costs;
sales and marketing functions, including our retail and
wholesale customer service centers; centrally managed real
estate costs, including maintenance and utilities on all owned
and leased buildings; credit and collection functions; and
corporate overhead costs, such as finance, legal, human
resources and external affairs. Pension and postretirement
costs are also included to the extent that they relate to
those employees.
Selling, general and administrative expenses in 2008
decreased due to the following:
 • Lowerotherwirelinesupportcostsof$616primarily
due to higher advertising costs incurred in 2007 for
brand advertising and re-branding related to the
BellSouth acquisition.
 • Lowernetpensionandpostretirementcostof$231,
primarily due to changes in our actuarial assumptions,
including the increase of our discount rate from 6.00%
to 6.50% (a decrease to expense) and favorable
prior-year investment returns on plan assets resulting
in a decrease in the recognition of net losses from
prior years.
 • Lowercompensationexpensesprimarilyreflectingshifts
of force levels to cost of sales functions of $420 with
related declines in medical and other benefits by $210.
Partially offsetting these decreases, selling, general and
administrative expenses in 2008 increased due to:
 • Highernonemployee-relatedexpenses,suchascontract
services, agent commissions and materials and supplies
costs, of $79.
 • Higherprovisionforuncollectibleaccountsprimarily
related to our business and wholesale customers of $35.