AT&T Wireless 2007 Annual Report Download - page 29

2007 AT&T Annual Report
| 27
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.
RESULTS OF OPERATIONS
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 2008 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. We completed our acquisition of AT&T Corp. (ATTC) on November 18, 2005 and have included ATTC results during
2006 and for the 43-day period ended December 31, 2005. In accordance with U.S. generally accepted accounting principles
(GAAP), operating results from BellSouth, AT&T Mobility and ATTC prior to their respective acquisition dates are excluded.
Percent Change
2007 vs. 2006 vs.
2007 2006 2005 2006 2005
Operating revenues $118,928 $63,055 $43,764 88.6% 44.1%
Operating expenses 98,524 52,767 37,596 86.7 40.4
Operating income 20,404 10,288 6,168 98.3 66.8
Income before income taxes 18,204 10,881 5,718 67.3 90.3
Net income 11,951 7,356 4,786 62.5 53.7
Diluted earnings per share 1.94 1.89 1.42 2.6 33.1
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. Additionally, 2006 revenues and expenses reflect the
addition of ATTC’s results while our 2005 results include only
43 days. Accordingly, the following discussion of changes
in our revenues and expenses is significantly affected by
these acquisitions.
Our operating income increased $10,116, or 98.3%, in 2007
and $4,120, or 66.8%, in 2006. Our operating income margin
increased from 14.1% in 2005 to 16.3% in 2006 and to 17.2% in
2007. Operating income in 2007 increased primarily due to the
acquisition of BellSouth and increased in 2006 primarily due to
the acquisition of ATTC. The increased operating margins reflect
expense reductions through merger synergies, the addition of
the higher-margined wireline operations at BellSouth in 2007
and operational improvements partially offset by additional
amortization expense on those intangibles identified at the
time of our acquisitions and by non-merger severance. As we
amortize several merger-related intangible assets using the
sum-of-the-months-digits method, amortization expense
decreases as the amount of time we hold the asset increases.
Our operating income was slightly offset by the continued
decline of our retail access lines due to increased competition,
as customers continued to disconnect both primary and
additional 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.
Operating revenues increased $55,873, or 88.6%, in 2007
and $19,291, or 44.1%, in 2006. These increases were primarily
due to our acquisitions and to an increased demand for data
products. The increases were slightly offset by continued
pressure on voice revenues, reflecting access line decreases,
and by decreased demand for local wholesale services.
Operating expenses increased $45,757, or 86.7%, in
2007 and $15,171, or 40.4%, in 2006, primarily due to our
acquisitions. Operating expenses included merger integration
costs of $1,272 in 2007 and $774 in 2006, and amortization
expense on intangible assets identified at the time of
acquisition of $5,921 in 2007 and $943 in 2006. We are
amortizing these intangibles using the sum-of-the-months-
digits method, which means that we will record higher
expenses in earlier periods. Partially offsetting these
increases were merger synergies of approximately $3,000
in 2007 and $1,000 in 2006, reflecting progress with the
integration of BellSouth, AT&T Mobility and ATTC, workforce
reductions and other cost-reduction initiatives.
Interest expense increased $1,664, or 90.3%, in 2007 and
$387, or 26.6%, in 2006. The increase in 2007 was primarily
due to higher average debt balances resulting from the
inclusion of BellSouth and AT&T Mobility outstanding debt
on our consolidated balance sheet. The increase in 2006
was primarily due to recording a full year of interest expense
on ATTC outstanding debt.
Equity in net income of affiliates Investments in partner-
ships, joint ventures and less-than-majority-owned subsidiaries
where we have significant influence are accounted for under
the equity method. Prior to the December 29, 2006 BellSouth
acquisition (see Note 2), we accounted for our 60% economic
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts