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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
    ... 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. As a result, we ended 2008 as we began it - financially strong, with world-class operations and clear market leadership. In...

  • Page 4
    AT&T Annual Report 2008 2 Delivering more of what customers want Around the world, businesses and consumers are looking for more mobility, connectivity and speed. They are hungry for expanded access to Internet applications and content and for seamless integration of devices, networks and services...

  • Page 5
    ...according to the J.D. Power and Associates 2008 Residential Television Service Satisfaction StudySM.1 We've built 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...

  • Page 6
    ... to grow rapidly, with more than 1.8 billion local searches across the YELLOWPAGES.COM network in 2008. AT&T also continues to lead in print local search with AT&T Real Yellow Pages. IP network bandwidth To stay ahead of customer demand for mobility and speed, we expanded our fastest-in-the-U.S. 3G...

  • Page 7
    ... leadership: Adding mobility to meet our customers' growing need to connect and access content and applications anytime and from more places. Delivering more bandwidth to support the exploding volume of traffic that travels over our networks. Expanding our scale to provide connectivity to more...

  • 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
    ... Annual Report 2008 Consumer Services The need to stay connected - with people, events, information - is integral to the way we live our lives. From the moment we get out of bed to the second our head hits the pillow, we use a variety of devices to check e-mail, text friends, share photos, download...

  • Page 10
    ... additional capabilities to their wireless handsets. By the end of last year, our customers had access to more than 90,000 pieces of mobile content - ranging from mobile banking and social networking services to local search with YELLOWPAGES.COM Mobile and international mapping and directions...

  • Page 11
    ... game, so she uses her phone to program my home DVR. With Urbanspoon on iPhone 3G. AT&T U-verse users can program their DVR from a wireless device. 10:30 p.m. I kick back to watch the Mavericks - my girlfriend watches "Jon & Kate Plus 8" in the other room. Wow, close game! I hit pause and, when...

  • Page 12
    ... connectivity. That's why we continue to invest in our wireless and wired networks to deliver the speed, affordability and range of services our customers need. Combining wired and wireless, AT&T has more broadband subscribers than any other U.S. provider. In addition to wireless broadband access...

  • Page 13
    ...the go Business isn't always done in the office. Increasingly, it happens wherever companies' customers, suppliers and employees are - across the U.S. or around the world. As a result, today's workforce is more mobile than ever. And those workers on the move need high speed access to their corporate...

  • Page 14
    ... and services. Last year, we introduced a broad range of networking products and solutions designed to help businesses increase...updated sales report. I'm on it, thanks to wireless access from my laptop. We're up 7 percent year over year. Could be too much of a good thing ...but our Web site can ...

  • Page 15
    AT&T Annual Report 2008 High Definition, lifelike video conferencing. And AT&T ConnectSM, our unified communications service, enables workers to collaborate virtually through their computers. These solutions help our customers improve productivity and reduce travel costs - while reducing greenhouse...

  • Page 16
    ... in mobile communications enables us to deliver those solutions. Our portfolio of innovative solutions extends to local search with YELLOWPAGES.COM and AT&T Real Yellow Pages that connect these businesses with customers who are ready to buy. Great support and useful business tools help businesses of...

  • 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
    AT&T Annual Report 2008 YELLOWPAGES.COM and the AT&T Real Yellow Pages deliver more than 5 billion consumer searches a year for local business information and provide approximately 1 million advertisers with valuable sales leads that help their businesses grow. a leading Internet Yellow Pages, with...

  • Page 20
    AT&T Annual Report 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 ...

  • Page 21
    ... technologies and new applications that will help AT&T meet customers' connectivity needs for years to come. Integrating services We're also deploying advanced technologies to integrate our wireless and wired networks, enabling more seamless sharing of information across networks and devices. For...

  • Page 22
    ... always been committed to building connections that better people's lives and strengthen our 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...

  • 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
    ... and in 13 states prior to that acquisition). Beginning in 2006, the number includes BellSouth lines in service. 7 Broadband connections include in-region DSL lines, in-region U-verse high-speed Internet access, satellite broadband and 3G LaptopConnect cards. 22 | AT&T Annual Report 2008

  • Page 25
    ... 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...

  • Page 26
    ... mass-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...

  • Page 27
    ... 47% of our 2008 total segment 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...

  • Page 28
    ... all the periods presented, the wireless segment reflects 100% of the results reported by AT&T Mobility based on the management of the business. Dobson Acquisition In November 2007, we acquired Dobson Communications Corporation (Dobson). Dobson marketed wireless services under the Cellular One brand...

  • Page 29
    ... number of wireless customers of approximately 12%, partially offset by a decline in voice ARPU of 4.1%. Included in voice revenues for both periods were increases in long-distance and net roaming revenue due to increased international usage. Equipment revenues increased $919, or 22.9%, in 2008...

  • Page 30
    ...in billing expenses, lower information technology (IT) and customer service expenses. • Increases in upgrade commission and residual expenses of $195 due to increased prepaid plan costs and higher handset upgrade activity. Depreciation and amortization decreased $1,309, or 18.5%, in 2008 and...

  • Page 31
    ... in 2008 was primarily due to a net decrease in demand for long-distance service, due to expected declines in the number of ATTC's mass-market customers, which decreased revenues $677 and decreased demand from global and consumer customers, which decreased revenues $532. • Local wholesale...

  • Page 32
    ... 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...

  • Page 33
    ... local exchange carriers (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...

  • Page 34
    ... operating results consist primarily of Sterling, customer information services (primarily operator services and payphone), corporate and other operations. Sterling provides business-integration software and services. Operating revenues decreased $186, or 8.3%, in 2008 and increased $346, or 18...

  • Page 35
    ...-end, these negative trends had been offset by continued growth in our wireless business. Our wireless growth reflects both an increased demand for advanced services, as evidenced by our successful launch of the iPhone 3G and other advanced devices, and increased sales of other AT&T Annual Report...

  • Page 36
    ... and services, including exclusive devices such as the Apple iPhone 3G and free mobile-to-mobile calling among our wireless customers. Minimizing customer churn is critical to our ability to maximize revenue growth and to maintain and improve our operating margins. 34 | AT&T Annual Report 2008

  • Page 37
    ... labor in addition to our employees as installers; our rate of expansion will be slowed if we cannot hire and train an adequate number of qualified contractors and technicians to keep pace with customer demand or if we cannot obtain all required local building permits in a timely fashion. We also...

  • Page 38
    ...-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 and other smaller telecommunications companies for both long-distance...

  • Page 39
    ... rewards customers who consolidate their services (e.g., local and long-distance telephone, DSL, wireless and...ended December 31, 2008. In setting the long-term assumed rate of return, management considers capital markets future expectations and the asset mix of the plans' investments. The actual long...

  • Page 40
    ... plan assets, which can have the effect of accelerating ...changes have occurred in the three years ended December 31, 2008. However, if all other factors were to remain unchanged, we expect that a one-year increase in the useful lives of the largest categories of our plant in service (which accounts...

  • Page 41
    ... 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 Investment Accounting Considerations." EITF 08-6 provides guidance on the application of the...

  • Page 42
    ... In November 2008, we agreed to acquire Centennial Communications, Corp., a regional provider of wireless and wired communications services with 1.1 million customers, for $944 plus net debt of approximately $2,000. The acquisition is subject to regulatory approval and is expected to close by mid...

  • Page 43
    ... support systems for our communications services. Capital spending (excluding interest during construction) in our wireless segment increased 42.1% in 2008, primarily for network capacity expansion, integration and upgrades to our Universal Mobile Telecommunications System/High-Speed Packet Access...

  • Page 44
    ...down $19,020 primarily due to the decrease in retirement plan funded status discussed above. The primary factor contributing to the increase ...payment is unknown and could not be reliably estimated since past trends were not deemed to be an indicator of future payment. 42 | AT&T Annual Report 2008

  • Page 45
    ...payments, if any, at this time. See Note 10 for additional information. 3 We have contractual obligations to utilize network facilities from local... changes in the strategies used to manage interest rate risk, foreign currency rate risk or equity price risk in the near future. AT&T Annual Report 2008...

  • Page 46
    ... financial instruments resulting from a hypothetical 10% change in market prices was not significant as of December 31, 2008. QUALITATIVE INFORMATION ABOUT MARKET RISK Foreign Exchange Risk From time to time, we make investments in businesses in foreign countries, receive dividends and proceeds...

  • Page 47
    ... Be Purchased Under the Plans or Programs Purchase Period Total Number of Shares Purchased Average Price Paid per Share1 January 30, 2008 - January 31, 2008 February 1, 2008 - February 29, 2008 March 3, 2008 - March 31, 2008 May 6, 2008 - May 30, 2008 June 2, 2008 - June 30, 2008 Total 1 10,000...

  • Page 48
    ... customers, who tend to be heavy users of our data and wireless services, may be forced to delay, reduce or be unable to finance, purchases of our products and services and may delay payment or default on outstanding bills to us. In addition, we contract with large financial institutions to support...

  • Page 49
    ... breaches of network or IT security that affect our wireline and wireless networks, including telephone switching offices, microwave links, third-party owned local and long-distance networks on which we rely, our cell sites or other equipment, could have a material adverse effect on our operations...

  • Page 50
    ...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 and dispositions, to respond...

  • Page 51
    ... 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... 9,907 52,767 10,288 (1,843) 2,043 393 593 10,881 3,525 $ 7,356 $ $ 1.89 1.89 AT&T Annual Report 2008 | 49

  • Page 52
    ... - Net Goodwill Licenses Customer Lists and Relationships - Net Other Intangible Assets - Net Investments in...Accounts payable and accrued liabilities Advanced billing and customer deposits Accrued taxes Dividends payable Total current liabilities Long... 115,367 $275,644 50 | AT&T Annual Report 2008

  • Page 53
    ...Changes in operating assets and liabilities: Accounts receivable Other current assets Accounts payable and accrued liabilities Share-based payment tax benefit Other - net Total adjustments Net Cash Provided...(4,242) (2,678) 589 (5,153) 18 198 (6,128) 1,194 1,224 $ 2,418 AT&T Annual Report 2008 | 51

  • Page 54
    ...Balance at beginning of year Issuance of shares Share-based payment Balance at end of year Retained Earnings Balance at beginning of year Net income ($2.16, $1.94 and $1.89 per share) ...380) - - 2 41 (4,999) $ (5,314) $ 7,356 10 41 $ 7,407 $ 11,951 - 4,934 $ 16,885 52 | AT&T Annual Report 2008

  • Page 55
    ... 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 Investment Accounting Considerations." EITF 08-6 provides guidance on the application of the...

  • Page 56
    ... in Connection with a Purchase Business Combination" (EITF 95-3). The liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of AT&T Corp., BellSouth Corporation (BellSouth) and Dobson Communications Corporation. Following...

  • 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
    ... No. 02-7, "Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets," we test FCC licenses for impairment on an aggregate basis, consistent with the management of the business on a national scope. During the fourth quarter of 2008, we completed the annual impairment tests for...

  • Page 59
    ... provider in the southeastern 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...

  • Page 60
    ... 2008, we sold to Local Insight Regatta Holdings, Inc., the parent company of Local Insight Yellow Pages, 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...

  • 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
    ... ended December 31, 2006 Wireless Wireline Other Revenues from external customers Intersegment revenues Total segment operating revenues Operations and support expenses Depreciation and amortization expenses Total segment operating expenses Segment operating income Interest expense Equity in net...

  • 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
    ... of $47,267 and $37,948 at December 31, 2008 and 2007, respectively, that provide us with the exclusive right to utilize certain radio frequency spectrum to provide wireless communications services. While FCC licenses are issued for a fixed time, renewals of FCC licenses have occurred routinely and...

  • Page 65
    ... 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 for general corporate purposes and...

  • Page 66
    ... risk to both interest rate and currency movements. In April 2008, we entered into fixed-to-fixed cross-currency swaps on Euro-denominated debt instruments with a U.S. dollar notional value of $1,975 to hedge our exposure to changes in foreign currency exchange rates. 64 | AT&T Annual Report 2008

  • Page 67
    ...$22,895 $24,939 (2,044) $22,895 2008 2007 2006 2005 $ 750 1,800 750 500 $ 500 1,800 600 500 $(5) (8) 4 (2) $(3) (5) 3 (1) Foreign Currency Forward Contracts We enter into foreign currency forward contracts to manage our exposure to changes in currency exchange rates related to foreign currency...

  • Page 68
    ...2008 2007 2006 Federal: Current Deferred - net Amortization of investment tax credits State, local and foreign: Current Deferred - net Total $1,174 5,163 (14) 6,323 (13) 726 713 $7,036 $5,903 (413) (31) 5,459 621 173 794 $6,253 $3,344 (139) (28) 3,177 295 53 348 $3,525 66 | AT&T Annual Report...

  • Page 69
    ... taxes, income from discontinued operations, extraordinary items and cumulative effect of accounting changes is as follows: 2008 2007 2006 Taxes computed at federal statutory rate $6,966 Increases (decreases) in income taxes resulting from: State and local income taxes - net of federal income tax...

  • Page 70
    ... except per share amounts The following table presents the change in the value of plan assets for the years ended December 31 and the plans' funded status at December 31: Pension Benefits 2008 2007 Postretirement Benefits 2008 2007 Fair value of plan assets at beginning of year Actual return on...

  • Page 71
    ... return on plan assets of 8.50% for 2009 and 2008 reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In setting the long-term assumed rate of return, management considers capital markets...

  • Page 72
    ... a better than expected claims experience. The following table provides our assumed average health care cost trend based on the demographics of plan participants. 2009 2008 For the majority of our labor contracts that contain an annual dollar value cap for the purpose of determining contributions...

  • Page 73
    ... with nonqualified, unfunded supplemental retirement and savings plans. While these plans are unfunded, we have assets in a designated nonbankruptcy remote trust that are independently managed and used to provide for these benefits. At the end of 2008, we concluded the severity of decline in...

  • Page 74
    ... participating employees' accounts and was $664, $633 and $412 for the years ended December 31, 2008, 2007 and 2006. Benefit obligations at end of year Fair value of plan assets (Unfunded) benefit obligation $(786) 793 $ 7 $(1,016) 1,064 $ 48 The following table provides information for certain...

  • Page 75
    ... related to nonvested share-based payment arrangements granted. That cost is expected to be recognized over a weighted-average period of 1.62 years. The total fair value of shares vested during the years ended December 31, 2008, 2007 and 2006 was $554, $345 and $246. AT&T Annual Report 2008 | 73

  • Page 76
    ...466 in 2006 for services sold to AT&T Mobility. These revenues were primarily 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 2008 2007 2006 Advertising expense...

  • Page 77
    ... FINANCIAL INFORMATION (UNAUDITED) The following 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 2008 First Second Third Fourth Annual 2007...

  • Page 78
    ... concluded by year-end, are the responsibility of management, as is all other information included in the Annual Report, unless otherwise indicated. The financial statements of AT&T Inc. (AT&T) have been audited by Ernst & Young LLP, Independent Registered Public Accounting Firm. Management has made...

  • Page 79
    ... in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December...

  • Page 80
    ...of Management. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and...

  • Page 81
    ...2008 Background: Telecommunications S. K. and Angela Chan Professor of Global Management Walter A. Haas School of Business...Background: Public accounting William F. ...Corporation Director 1994-2006 BellSouth Telecommunications Director 1988-1994 Background: Financial services...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
    ... P.O. Box 43078 Providence, RI 02940-3078 You may also reach the transfer agent for AT&T Inc. at [email protected] or visit the Web site at www.computershare.com/att. Information on the Internet Information about AT&T Inc. is available on the Internet at www.att.com. Corporate Offices AT...

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