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connect
AT&T INC. 2007 ANNUAL REPORT

Table of contents

  • Page 1
    connect AT&T INC. 2007 ANNUAL REPORT

  • Page 2
    Our Vision Connect people with their world, everywhere they live and work, and do it better than anyone else.

  • Page 3
    ... we do. That's how we deliver for customers, drive growth and create value for stockholders. We connect people with people, information and entertainment. We connect businesses to customers, data and other businesses. We make communications simple, mobile and seamless. Our industry is in the early...

  • Page 4
    ...-AT&T Mobility. A Strong 2007 A clear focus on our opportunities, combined with strong execution, helped make 2007 a terrific year for our company. Wireless growth accelerated as we added more than 9 million subscribers. Our enterprise business executed a major turnaround, with enterprise service...

  • Page 5
    ... of our operations and the confidence we have in the future of our business. AT&T 2007 PRO FORMA CUSTOMER REVENUE MIX ...operates the nation's largest wireless digital voice and data network, with more than 70 million subscribers and the broadest international reach. 2007 AT&T Annual Report...

  • Page 6
    ... is becoming the primary connection for linking consumers and businesses to entertainment and information. We lead the industry with more than 14 million broadband subscribers, and through the broadest U.S. Wi-Fi footprint, we're making high speed Internet access mobile. And by the end of 2008, our...

  • Page 7
    ... a premium on having an outstanding employee team. AT&T is led by proven executives with broad, diverse operational experience. They are the industry's best, and together we are honored Randall Stephenson Chairman, Chief Executive Officer and President February 8, 2008 2007 AT&T Annual Report | 5

  • Page 8
    The Desire to Connect 6 | AT&T Annual Report 62007 AT&T Annual Report | 2007

  • Page 9
    ... in the past two years. We are deploying the world's largest next-generation network, which carries traffic at four times the speed of previous connections. Continued growth of this network will give us the capacity to meet customer expectations for years to come. 2007 AT&T Annual Report | 7

  • Page 10
    ...'s total revenue. Customers use mobile devices to surf the Internet, monitor business operations while on the road and access video through a wireless Internet connection. In all of these ways and more, we give customers the freedom to choose when, where and how they communicate. To that end, we are...

  • Page 11
    WIRELESS DATA TRAFFIC Wireless data traffic is growing exponentially, with usage quadrupling every year. 2007 AT&T Annual Report | 9

  • Page 12
    ... lineup now includes a growing number of AT&T ExperienceSM stores. They bring the concept of mobility to life, giving people the chance to learn firsthand how our products-wired and wireless-work together to connect customers to their world. 10 10 AT&T AT&T Annual Annual Report Report | 2007 | 2007

  • Page 13
    ... advanced mobile phone, he wanted to be a part of history. Like many others, he instinctively knew that the iPhone was going to help change his life. First, Brian switched his carrier to AT&T because the company was the only U.S. provider of the iPhone. He asked his boss for four days off at the end...

  • Page 14
    ... our satellite-based broadband service to provide a better alternative to dial-up access. A growing number of customers are using AT&T high speed services on their mobile devices in addition to their PCs-as we deliver a fresh, integrated approach to communications and entertainment. BROADBAND...

  • Page 15
    ... UNITS PASSED Like mobile phones in the 1980s and broadband in the 1990s, video now represents a once-in-a-decade opportunity to build our next billion-dollar business. Our U-verse network deployment is expected to pass 30 million living units by the end of 2010. 2007 AT&T Annual Report | 13

  • Page 16
    ... Definition (HD) channels in nearly every market we serve. Delivered through our fiber-rich IP network, U-verse service offers television, broadband and voice over a single connection, along with unique features and unmatched flexibility. 14 14 AT&T AT&T Annual Annual Report Report | 2007 | 2007

  • Page 17
    ...local business information from their TV. More integrated features are on the way in 2008. Customers clearly like what they see: As 2007 drew to a close, we had 231,000 AT&T U-verse video subscribers in service. And we expect to top 1 million U-verse subscribers by the end of 2008. 2007 AT&T Annual...

  • Page 18
    ... global IP-based network capabilities that are widely regarded as unsurpassed in the marketplace and that support a broad array of communications devices, including the mobile handsets that enable our customers to connect on the move. 16 16 AT&T AT&T Annual Annual Report Report | 2007 | 2007

  • Page 19
    RECURRING AT&T ENTERPRISE SERVICE REVENUE GROWTH RATES Recurring enterprise service revenues returned to growth a year ahead of schedule. 2007 AT&T Annual Report | 17

  • Page 20
    ..., through our affiliate in India, AT&T became the first foreign telecom company to offer service in the Indian market. We also launched a new business in Vietnam in 2007 to support the growing number of multinational customers based there. 18 18 AT&T AT&T Annual Annual Report Report | 2007 | 2007

  • Page 21
    ... small and midsize businesses look to us for integrated communications solutions that deliver high quality, security and continuous innovation. For instance, in 2007, we introduced our Complete Office Solution bundle-unlimited local and nationwide calling, wireless service, high speed Internet, AT...

  • Page 22
    ...-anytime, anywhere-than AT&T. People searched the AT&T Real Yellow Pages for a local business about 4 billion times in 2007, consulting the 175 million books we print in 22 states. AT&T's YELLOWPAGES.COM online local search site connected buyers to sellers on mobile devices, PCs and U-verse TV...

  • Page 23
    .... To capture the unique atmosphere, he included a video with his YELLOWPAGES.COM listing. These days, business at Chez Ben/Fahrenheit is cooking. AT&T YELLOWPAGES.COM SEARCHES Local searches on AT&T's YELLOWPAGES.COM network have increased 150 percent since 2004. 2007 AT&T Annual Report | 21

  • Page 24
    ... connections spurs growth and creates new opportunities to help the world communicate. From our Board of Directors to our front-line employees, ours is a company where corporate citizenship and sustainability are everybody's business. 22 22 AT&T AT&T Annual Annual Report Report | 2007 | 2007

  • Page 25
    ... of the environment-that includes efficiently connecting people and businesses worldwide with innovative communications. Our products help reduce the need for carbon emission-intensive travel by facilitating video conferencing, telecommuting and online local search, among others. We work hard to...

  • Page 26
    ... night to keep the CO operating until help arrived. Thanks to their efforts, the people of Greensburg stayed connected-to the voices of concerned friends and loved ones, to emergency services, to the Internet. By daybreak, AT&T was providing vital communications support to emergency responders. For...

  • Page 27
    ...Review 2007 Selected Financial and Operating Data Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements Notes to Consolidated Financial Statements Report of Management Report of Independent Registered Public Accounting Firm Report of...

  • Page 28
    ... since the BellSouth acquisition and in 13 states prior to that acquisition). Beginning in 2006 the number includes BellSouth lines in service. 9 Broadband connections include in-region DSL lines, in-region U-verse high-speed Internet access and satellite broadband. 26 | 2007 AT&T Annual Report

  • Page 29
    ... 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...

  • Page 30
    ...-market customers, which represent consumer and small business. Pro forma data growth was led by an increase in Internet Protocol (IP) data revenues of 13.3% in 2007 and 14.1% in 2006, with strength in high-speed Internet, managed Internet, Virtual Private Network (VPN) and hosting services. Data...

  • Page 31
    ... 55% of our 2007 total segment income as compared to 47% in 2006. 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 32
    ... 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 and had provided roaming services to AT&T subsidiaries...

  • Page 33
    ... in data ARPU and increased long-distance revenue per customer. In 2006, local service revenue per customer declined primarily due to the two reasons discussed above as well as free mobile-to-mobile plans that allow our wireless customers to call other AT&T Mobility customers at no charge and, to...

  • Page 34
    ... expense of $338 and other support costs of $234, partially offset by a decline of $191 in billing expenses, lower information technology (IT) costs and customer service expenses. • Increases in upgrade commission and residual expenses of $195 due to increased prepaid plan costs and higher handset...

  • Page 35
    ... our local voice revenue to continue to be negatively affected by increased competition, including customers shifting to competitors' alternative technologies and the disconnection of additional lines for DSL service and other reasons. • Long-distance revenues increased $761, or 5.3%, in 2007...

  • Page 36
    .... Costs associated with equipment for large-business customers (as well as DSL) 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...

  • Page 37
    ... reported. Revenue from these lines is reported in the Other segment. 5 Broadband connections include DSL, U-verse high-speed Internet access and satellite broadband. 6 Satellite service includes connections under our agency and resale agreements with EchoStar and DIRECTV. 2007 AT&T Annual Report...

  • Page 38
    ... Acquisition In December 2007, we acquired Ingenio®, a provider of Pay Per Call® technology. Ingenio will be integrated with YPC and will allow us to better serve business directory and local search customers across our entire advertising and publishing portfolio. Accounting Impacts From the...

  • Page 39
    ... Our other segment operating results consist primarily of Sterling, customer information services, corporate and other operations. Sterling provides business-integration software and services. In late 2007, we announced our intention to cease our retail payphone operations by the end of 2008, which...

  • Page 40
    ...iPhone and free mobile-to-mobile calling among our wireless customers. The effective management of customer churn is critical to our ability to maximize revenue growth and to maintain and improve our operating margins. U-verse Services We are continuing to expand our deployment of U-verse high-speed...

  • Page 41
    ..., we agreed to a voluntary cap on our receipt of federal universal service high-cost support. The cap will be set at the amount of wireless universal service support we received as of June 30, 2007, which was approximately $225. Additionally, the FCC is considering an 2007 AT&T Annual Report | 39

  • Page 42
    ... to inform new local telephone service customers of the availability of long-distance service from other carriers and to read a list of such carriers to the customer upon request. State Regulation A summary of significant 2007 state regulatory developments follows. Video Service Legislation A number...

  • Page 43
    ... services, including wireless and video, large-business data services, broadband and long-distance service. 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...

  • Page 44
    ... changes in income tax law or results from the final review of our tax returns by federal, state or foreign tax authorities. We have considered these potential changes and, for years prior to 2007, have provided amounts within our deferred tax assets and liabilities 42 | 2007 AT&T Annual Report

  • Page 45
    ... to Clearwire Corporation (Clearwire), a national provider of wireless broadband Internet access, education broadband service spectrum and broadband radio service spectrum valued at $300. The transaction received the necessary regulatory approvals and closed in May 2007. Sale of this spectrum was...

  • Page 46
    ... consisted of: • $17,717 in construction and capital expenditures. • $2,200, net of cash acquired, related to the acquisition of Dobson, a provider of rural and suburban wireless communications services. • $579 for investments in debt and equity securities. | 2007 AT&T Annual Report

  • Page 47
    ...-integration projects and support systems for our long-distance service. Because of opportunities made available by the continued changing regulatory environment and our acquisitions of ATTC and BellSouth, we expect that our capital expenditures for 2008, which include wireless network expansion and...

  • Page 48
    ... issuances of $1,500, partially offset by long-term debt repayments of $4,242 during 2006. Stockholders' equity also increased due to our net income and was partially offset by dividend payments and our repurchases of common shares through our stock repurchase program. | 2007 AT&T Annual Report

  • Page 49
    ... timing of such payments, if any, is uncertain. 5 Other long-term obligations include commitments with local exchange carriers for dedicated leased lines. MARKET RISK We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. In managing exposure to...

  • Page 50
    ...change in market prices was not significant as of December 31, 2007. QUALITATIVE INFORMATION ABOUT MARKET RISK Foreign Exchange Risk From time to time, we make investments in businesses... exchange contracts. The contracts are used to provide currency at a fixed rate. Our policy is to measure the ...

  • Page 51
    ... of Shares that May Yet Be Purchased Under the Plans or Programs2 Purchase Period Total Number of Shares Purchased Average Price Paid per Share1 October 1, 2007 - October 31, 2007 November 1, 2007 - November 30, 2007 December 3, 2007 - December 5, 2007 Total 1 2 11,500,000 23,500,000 2,000,000...

  • Page 52
    ... as exhibits to our Annual Report on Form 10-K for 2007. RISK FACTORS In addition to the other information set forth in this document, including the matters contained under the caption "Cautionary Language Concerning Forward-Looking Statements," you should carefully read the matters described...

  • Page 53
    ...streamline the ownership and operations of AT&T Mobility and to combine the AT&T Mobility, BellSouth and AT&T IP networks into a single IP network; to speed the deployment, and at lower cost, of next-generation IP video and other services; to provide business customers with the benefits of combining...

  • Page 54
    ... and Analysis of Financial Condition and Results of Operations (continued) Dollars in millions except per share amounts CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties...

  • Page 55
    ...except per share amounts 2007 2006 2005 Operating Revenues Voice Data Wireless service Directory Other Total operating revenues Operating Expenses Cost of services and sales (exclusive ... 10,780 7,643 37,596 6,168 (1,456) 609 397 (450) 5,718 932 $ 4,786 $ $ 1.42 1.42 2007 AT&T Annual Report | 53

  • Page 56
    ... and Stockholders' Equity Current Liabilities Debt maturing within one year Accounts payable and accrued liabilities Advanced billing and customer deposits Accrued taxes Dividends payable Total current liabilities Long-Term Debt Deferred Credits and Other Noncurrent Liabilities Deferred income taxes...

  • Page 57
    ...Changes in operating assets and liabilities: Accounts receivable Other current assets Accounts payable and accrued liabilities Stock-based compensation tax benefit Other - net Total adjustments Net Cash Provided by Operating...) 3 (6) (11,226) 774 (310) 464 760 $ 1,224 2007 AT&T Annual Report | 55

  • Page 58
    ... plans (see Note 11): Net actuarial gains and prior service cost arising during period, net of taxes of $3,411 Amortization of net actuarial loss and prior service benefit included in net income, net of taxes of $125 Other Other comprehensive income Adoption of FAS 158, net of tax Balance at end...

  • Page 59
    ... the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry throughout the U.S. and internationally, providing wireless and wireline telecommunications services and equipment as well as directory...

  • Page 60
    ... 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 61
    ... 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 at nominal cost. Moreover, we have determined that there are currently no legal...

  • Page 62
    ... provider in the southeastern U.S., providing wireline communications services, including local exchange, network access, long-distance services and Internet services to substantial portions of the population across nine states. BellSouth also provided long-distance services to enterprise customers...

  • Page 63
    ...Mobility's values. Long-lived assets such as property, plant and equipment reflect a value of replacing the assets, which takes into account changes... and final adjustments made thereto. BellSouth Purchase Price Allocation As of 12/31/06 Adjustments As...016 $1,994 $62,882 2007 AT&T Annual Report | 61

  • Page 64
    ..., offering a variety of global communications services, including large domestic and multinational businesses, small and medium-size businesses and government agencies, and operated one of the leading telecommunications networks in the U.S. ATTC also provided domestic and international long-distance...

  • Page 65
    ... as equity in net income of affiliates. The wireline segment provides both 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...

  • Page 66
    ...the year ended Wireless Wireline Other Wireless Elimination Revenues from external customers Intersegment revenues Total segment operating revenues Operations and support expenses ... - $ (1,727) $ 43,764 - 43,764 29,953 7,643 37,596 6,168 1,456 609 - 397 $ 5,718 64 | 2007 AT&T Annual Report

  • Page 67
    ... & publishing segments. During our allocation period, we completed purchase accounting adjustments to the AT&T Mobility and BellSouth goodwill (see Note 2). Other changes to goodwill include adjustments totaling $42 for the tax effect of stock options exercised. 2007 AT&T Annual Report | 65

  • Page 68
    ... its Mexican yellow pages business to a new holding company, Telmex Internacional. The spin-off was approved by shareholders on December 21, 2007. The proposed spin-off will be subject to compliance with the regulatory requirements in Mexico and other jurisdictions. 66 | 2007 AT&T Annual Report

  • Page 69
    ... of 9.1%. • $904 related to the early repayment of a Dobson long-term credit facility. • $218 related to the early redemption of a convertible note held by Dobson. • $44 related to scheduled principal payments on other debt and repayments of other borrowings. 2007 AT&T Annual Report | 67

  • Page 70
    ... market prices, where available, or on the net present ...customer deposits are recorded at amortized cost, and the carrying amounts approximate fair values. We held other short-term marketable securities of $1 at December 31, 2007 compared to $477 at December 31, 2006. 68 | 2007 AT&T Annual Report

  • Page 71
    ... income tax purposes of $1,289 and $1,207, respectively, expiring through 2026. The federal net operating loss carryforward primarily relates to the acquisitions of AT&T Wireless Services, Inc. in 2004 and Dobson in 2007. Additionally, we had federal and state credit carryforwards of $100 and $242...

  • Page 72
    ...2007 2006 2005 Federal: Current Deferred - net Amortization of investment tax credits State, local and foreign: Current Deferred - net Total $5,903 (413) (31) 5,459 621 173 794 $6,253 $3,344 (139) (28) 3,177 295 53 348 $3,525 $1,385 (681) (21) 683 226 23 249 $ 932 70 | 2007 AT&T Annual Report

  • Page 73
    ... taxes, income from discontinued operations, extraordinary items and cumulative effect of accounting changes is as follows: 2007 2006 2005 Taxes computed at federal statutory rate $6,371 Increases (decreases) in income taxes resulting from: State and local income taxes - net of federal income tax...

  • Page 74
    ... the change in the value of plan assets for the years ended December 31 and the plans' funded status at December 31: Pension Benefits 2007 2006 Postretirement Benefits 2007 2006 Fair value of plan assets at beginning of year Actual return on plan assets Benefits paid1 Contributions Transferred from...

  • Page 75
    ... in several line items above. Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Pension Benefits 2007 2006 20051 Postretirement Benefits 2007 2006 20051 Net loss (gain) Prior service cost (credit) Amortization of net loss (gain) Amortization of prior...

  • Page 76
    ...prescription drugs and certain medical services), we continue to experience better than expected claims experience. The following table provides our assumed average health care cost trend based on the demographics of plan participants. 2008 2007 A one percentage-point change in the assumed combined...

  • Page 77
    ... during 2007. The estimated net loss and prior service cost for our supplemental retirement plan benefits that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $18 and $6, respectively. 2007 AT&T Annual Report | 75

  • Page 78
    ... gains or losses, unrecognized prior service costs and unrecognized net transition obligations. The following table provides the plans' benefit obligations and fair value of assets and a statement of the funded status at December 31. The net amounts recorded as "Postemployment benefit obligation" on...

  • Page 79
    ...Under our various plans, senior and other management and nonmanagement employees and nonemployee directors have received stock options, performance stock units and other nonvested stock units. Stock options issued through December 31, 2007 carry exercise prices equal to the market price of our stock...

  • Page 80
    ...$869 in 2005 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 2007 2006 2005 Advertising expense...

  • Page 81
    ... 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 2007 First Second Third Fourth Annual 2006...

  • Page 82
    ... 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 available to...

  • Page 83
    ... of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 2007 the Company changed its method of accounting for income...

  • Page 84
    ...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 85
    ...Background: Public accounting Lynn M. ...Business Administration and Economics Walter A. Haas School of Business... services...Telephone Director 1980-1983 Background: Brewing, family entertainment, manufacturer of aluminum beverage containers *Retiring effective April 25, 2008. 2007 AT&T Annual Report...

  • Page 86
    ... Strategy and Development Ron Spears, 59 Group President-Global Business Services John Stankey, 45 Group President-Telecom Operations Wayne Watts, 54 Senior Executive Vice President and General Counsel Ray Wilkins Jr., 56 Group President-Diversified Businesses 84 | 2007 AT&T Annual Report

  • Page 87
    ... 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. Ticker symbol: (NYSE:T) Information on the Internet Information about AT&T Inc. is available on the Internet at www.att.com. 100...

  • Page 88
    AT&T Inc. Whitacre Tower 175 E. Houston St. P.O. Box 2933 San Antonio, TX 78299-2933 att.com