AT&T (T)

Q2 2010 Earnings Call

July 22, 2010 10:00 am ET

Executives

Rick Lindner - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Brooks McCorcle - Senior Vice President of Consumer Markets - Dallas

Analysts

John Hodulik - UBS Investment Bank

Michael McCormack - JP Morgan Chase & Co

Timothy Horan - Oppenheimer & Co. Inc.

Phil Cusick - Macquarie Research

Simon Flannery - Morgan Stanley

David Barden

Jason Armstrong - Goldman Sachs Group Inc.

Presentation

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the AT&T Second Quarter Earnings Release 2010 Conference Call. [Operator Instructions] I would now like to turn the call over to Brooks McCorcle, Senior Vice President of Investor Relations for AT&T. Please go ahead.

Brooks McCorcle

Thank you, Perky. Good morning, everyone, and welcome to our Second Quarter Conference Call. It's really great to have you with us this morning. As Perky mentioned, this is Brooks McCorcle, Head of Investor Relations for AT&T, and joining me on the call today is Rick Lindner, AT&T's Chief Financial Officer. Rick will provide an update with perspective on the quarter in a minute, and then we'll take your questions.

First, let me remind you that our release, investor briefing, supplementary information and the presentation slides that accompany this call are all available on the Investor Relations page of the AT&T website. And as a reminder, that's www.att.com/investor.relations.

I also need to cover our Safe Harbor statement, which is on Slide 2. And that says that information set forth in this presentation contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results may differ materially. A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update or revise statements contained in this presentation based on new information or otherwise. This presentation may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are also available on the our website at www.att.com/investor.relations.

Before I turn the call over to Rick, let me quickly cover our consolidated financial summary, which is on Slide 3. Reported EPS for the quarter was $0.68, up about 26% versus the same quarter a year ago. This includes a $0.07 gain from the exchange of Telmex Internacional stock. When excluding that onetime gain, EPS was $0.61, which was up 13% over the second quarter a year ago. This is our second consecutive quarter of double-digit EPS growth, excluding onetime items.

Second quarter consolidated revenues of $30.8 billion were up both year-over-year and sequentially, and that was led by continued double-digit service revenue growth in Wireless, further improvement in consumer wireline trends and continued mid-teens growth in strategic business products. In addition, our consolidated margins improved by 180 basis points year-over-year, with significant margin expansion in Wireless and also improved Wireline operating margins due to solid execution on cost initiatives.

Cash flow also continues to be strong, with cash from operations for the quarter totaling $8.6 billion, which was up 9% year-over-year and free cash flow of $3.7 billion. As a reminder, we have moved Sterling Commerce to discontinued operations and we've restated eight quarters of history. Comparisons we'll be showing you today are based on results from continuing operations.

With that quick overview, I will now turn the call over to AT&T's Chief Financial Officer, Rick Lindner. Rick?

Rick Lindner

Thanks, Brooks, and good morning to everyone joining us on the call. Before we get into detailed results, let me start with a few quick comments on the quarter overall. And the second quarter highlights are on Slide 4.

The main point I'd like to make, starting out, is that we again delivered a very strong set of financial results, as Brooks mentioned. We had our second consecutive quarter of double-digit EPS growth, excluding some onetime items. Consolidated revenues were up both year-over-year and sequentially. Margins expanded and they expanded Wireless, in Wireline and in total, and cash flow was strong. So we're pleased across the board. The team is executing at a high level and the financial results are solid. We continue to have a positive long-term outlook for the business, and the results we put up in the first half clearly add to our visibility and confidence for the second half of this year with an improved full year outlook.

That comes from a number of things. First, we've got terrific momentum in Wireless. Wireless service revenues grew double digits. Postpaid ARPU grew again for the sixth consecutive quarter. We also had our best second quarter ever for organic net adds at 1.6 million. Our churn rates continued to improve and we hit best-ever levels again. And both integrated devices and connected devices continue to be strengths for us. Even with strong iPhone activations in the quarter, we delivered substantial year-over-year Wireless margin expansion.

And second, improving trends point to a return-to-revenue growth in our Consumer Wireline business. U-verse continues to scale, and it's driving growth in consumer IP revenues. And we posted our second consecutive quarter of sequential growth in Consumer Wireline.

Third, we continue to see good traction in our business markets, and revenue trends are steadily moving in the right direction. And finally, we continue to execute well on the cost side, which has helped us deliver strong margins and strong free cash flow. So there's a lot of be positive about in terms of our current results as well as in the look ahead.

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