UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[X] Soliciting Material Pursuant to ss.240.14a-12.
AT&T Corp.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
--------------------------------------------------------------------------------
FINAL TRANSCRIPT
--------------------------------------------------------------------------------
Thomas StreetEvents
--------------------------------------------------------------------------------
Conference Call Transcript
T - Q1 2005 AT&T Earnings Conference Call
Event Date/Time: Apr. 21. 2005 / 8:15AM, ET
Event Duration: N/A
--------------------------------------------------------------------------------
-------------------- ----------------------- ------------ --------------------
Thomas StreetEvents streetevents@thomson.com 617.603.7900 www.streetevents.com
-------------------- ----------------------- ------------ --------------------
(C) 2005 Thomson Financial. Republished with permission. No part of this
publication may be reproduced or transmitted in any form or by any means
without the prior written consent of Thomson Financial.
--------------------------------------------------------------------------------
FINAL TRANSCRIPT
--------------------------------------------------------------------------------
Apr.21.2005/8:15AM, T-Q1 2005 AT&T Earnings Conference Call
--------------------------------------------------------------------------------
CORPORATE PARTICIPANTS
PETER MILLIGAN
AT&T - VP, Investor Relations
DAVID DORMAN
AT&T - Chairman & CEO
THOMAS HORTON
AT&T - Vice Chairman, EVP, CFO
JOHN POLUMBO
AT&T - President & CEO, AT&T Consumer
WILLIAM HANNIGAN
AT&T - President, COO
CONFERENCE CALL PARTICIPANTS
JOHN HODULIK
UBS - Analyst
DAVID BARDEN
Banc of America Securities - Analyst
MICHAEL MCCORMACK
Bear Stearns - Analyst
JONATHAN CHAPPELL
JP Morgan - Analyst
JEFFREY HALPERN
Sanford C. Bernstein & Co. - Analyst
JASON ARMSTRONG
Goldman Sachs - Analyst
SIMON FLANNERY
Morgan Stanley - Analyst
PRESENTATION
--------------------------------------------------------------------------------
OPERATOR
Ladies and gentlemen, thank you for standing by and welcome to the 2005 earnings
earnings release call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session. Instructions will be given
at that time. If you should require assistance during this call, please press
star then star then zero. As a reminder, this conference is being recorded. I
would now like to turn the conference over to our host, the Vice President of
Investor Relations, Mr. Peter Milligan. Please go ahead, sir.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thank you, Alex. Good morning, this is Peter Milligan of AT&T's investor
relations. I would like to welcome you to our first quarter 2005 earnings call.
Joining me on the call this morning are: our Chairman and CEO, Dave Dorman, and
our Vice Chairman and CFO, Tom Horton. Before I turn things over to Dave, I
would like to caution all participants that our call this morning may contain
forward-looking statements reflecting management's beliefs and assumptions
regarding future events based on currently available information. Listeners are
therefore cautioned not to put undue reliance on forward-looking statements as
they are not a guarantee of future performance and remain subject to a number of
uncertainties and other factors that could cause actual results to differ
materially from forecasts. During the call, we will also be referring to various
non-GAAP financial measures. The legally required comparable GAAP measures and
reconciliations are contained in our earnings release. With that, let me turn
things over to Dave Dorman.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
Thanks, Peter, and good morning, everyone. Thanks for joining us. AT&T's first
quarter results remain basically on trend with what we have seen in the last few
quarters and largely in line with our expectations. We are making good progress
in reducing costs and improving our capital structure. And based on comparable
2004 results we continue to outpace our closest peers on such key metrics as
revenue generation, cash flow, employee productivity, and capital investment.
At AT&T business services, we continue to expand our product portfolio,
strengthening our best-in-class capabilities in several key areas, including
security services, virtual private networking, our so-called VPN suite, and
hosting and business VoIP. During the quarter we generated $5.3 billion of
business revenue and a solid $1.2 billion of EBITDA for a margin of 22.3%. We
also continue to drive strong contract win rates, particularly in the government
sector, and at the high end of the enterprise market. In fact, an intense -- in
an intense pricing environment, more than a third of our largest customers have
increased their spending with us on a year-over-year basis.
Within our consumer segment, we have -- we are executing a financially optimized
exit from the traditional residential services market, and our results in the
quarter reflect that discipline. Our ability to quickly ratchet back sales,
marketing and related customer care expenses contributed to a first quarter
operating income of $575 million and a 34.1 percent operating margin in
consumer.
Despite the challenges we faced, AT&T continues to make significant advances and
we look forward to the opportunities ahead as a part of the combined AT&T/ SBC.
Our success in transforming AT&T's business model in recent years and the
underlying strength of our global IP network, product suite, and customer base
all played a clear role in SBC's decision to join forces with us to create a
communications company for the 21st century. Together, we'll continue to make
significant investments in the future of networking and communications, offering
a broad range of applications and services for businesses and consumers alike.
We're already making significant progress in moving the merger forward. We have
now filed our revised proxy statement with the SEC, and we'll mail final proxies
out to all share owners in advance of the anticipated June annual meeting and
shareholder vote. We've also received regulatory consent from a number of
required states and foreign governments, with many more approvals expected in
the weeks ahead.
Moving forward, we'll continue to work closely with the appropriate regulatory
bodies, including the SEC and the DOJ, to address their questions and concerns
so we can gain all the necessary approvals as quickly as possible. With
appropriate share owner and regulatory consent, we're confident that the deal
can close in a timely manner. In fact, we're cautiously optimistic that the
merger may be finalized by the end of 2005. I'm encouraged by the progress we
have made, and excited by our prospects for the future.
Over the next few months, as we prepare for this business combination, we'll
remain focused on meeting our customer needs and further elevating AT&T's
overall operational and financial strength. This will allow us to become an even
stronger and more focused company at the time of the merger than we are today.
With that, let me turn the call over to Tom Horton for a more detailed financial
review. Tom?
--------------------------------------------------------------------------------
THOMAS HORTON - AT&T - VICE CHAIRMAN, EVP, CFO
Thanks and good morning, everyone. As Dave said, we continue to build on AT&T's
strengths and advance of our merger with SBC. From a financial perspective, we
took action late in the first quarter to further strengthen our balance sheet
with a $1.25 billion debt tender offer, which we completed in early April. We
also delivered strong customer win rates in the quarter, while taking steps to
further enhance our cost structure and productivity. AT&T is already the sector
leader in terms of productivity. We generated 25% more revenue, and more than
2.5 times the EBITDA per employee than our closest peer in 2004.
We announced substantial head count reductions last year and will continue to
make targeted reductions in 2005 and our technology investments have allowed us
to drive simultaneous improvements in overall customer service. Many of our key
customer-facing operating metrics showed double digit percentage gains in 2004,
and we're on track to do that again in 2005. We're accomplishing this through
technology which allows us to streamline and simplify our operations. For
example, during the quarter we retired over 60 additional billing and operating
systems under our ongoing concept of one program.
Turning to our financial results for the quarter, on a consolidated basis, AT&T
generated first quarter revenue of $7 billion, down 12.2% versus the prior year
quarter. First quarter EBITDA was $1.7 billion, yielding a consolidated margin
of 24.3%, up from last year's margin of 21.8%, excluding restructuring and asset
impairment charges. Operating income was $1.1 billion for an operating margin of
15.3%. And earnings per share was 66 cents.
On an operating segment basis, AT&T business generated revenue of $5.3 billion,
a 9.4% decline from last year's first quarter, largely driven by ongoing pricing
pressure within LD voice and traditional data products, as well as retail volume
declines. However, business performance continued to reflect solid growth in IP
and enhanced services, which improved by 6.6% on a year-over-year basis. Driven
by enhanced VPN and IP-enabled frame relay services. This growth rate also
reflects the impact of a significant customer contract renewal at current market
rates and one of the more mature product areas within IP and the portfolio. In
fact, roughly half of our sequential decline in the IP&E revenue is attributable
to this contract renewal. And the balances associated with the mix shift, as the
more mature areas of the IP &E portfolio face pricing pressures while the VPN
services continue to see accelerating growth.
As we have previously noted, the enterprise market, which includes government
and global, represents nearly two-thirds off our business revenue. While the top
line trend here has been driven by pricing pressure, the rate of revenue decline
at the high end of the market is slowing, as we continue to leverage our product
and cost advantages to win in the marketplace. About 20% of overall business
revenue is generated from the voice and data wholesale market, where we have
seen ongoing pricing pressure. We expect pricing to continue to negatively
impact both voice and data revenue, despite anticipated volume strength.
Lastly, the small and medium business market represents about 15% of our
business segment revenue. As we have said last quarter, we're becoming much more
selective in our approach to the small business market, which represents roughly
half of small and medium business revenue. We are managing this area of the
business for cash flow and profitability, similar to our consumer strategy.
Accordingly, we expect the rate of revenue decline in this area to accelerate.
AT&T business operating income for the quarter was $588 million, yielding an
operating margin of 11%. EBITDA was $1.2 billion for a margin of 22.3%. This
compares to last year's first quarter EBITDA margin of 23.3%, adjusting for
prior year restructuring charges.
Turning now to AT&T consumer, which generated first quarter revenue of $1.7
billion, down 20% from the prior year quarter, largely driven by ongoing and
anticipated subscriber declines in this area of the business. First quarter
operating income was $575 million, yielding an operating margin of 34.1%.
Consumer operating income continued to benefit from dramatic reductions in sales
and marketing expense and lower access costs as we're optimizing the business
for profitability and cash flow.
In addition, lower bad debt, customer care, and other operational costs were
significant contributors to the margin strength. However, the unfavorable
prepaid card ruling that we received during the quarter will negatively impact
our consumer operations. We're currently evaluating the timing and the size of
any potential rate increases that we'll pass on to the consumers as a result of
the FCC decision. To the extent that we're unable to recover the cost increase,
due either to contractual obligations or market dynamics, we would expect this
ruling to have a negative impact on consumer profitability for the remainder of
the year.
Turning to cash flow, on a consolidated basis, AT&T generated $479 million of
free cash flow in the quarter. Aided in part by our ongoing cost structure
improvements and productivity enhancements. First quarter capital expenditures
were $335 million, primarily directed towards ongoing network enhancement, and
system integration to support AT&T's focus on delivering industry leading global
networking services.
Moving to the balance sheet, we ended the quarter with net debt of $5.6 billion,
roughly a $400 million decrease since the start of the year, and a $2.8 million
reduction year-over-year. And, as I noted earlier, with the completion of our
$1.25 billion debt tender offer earlier in the second quarter, we continue our
deleveraging progress. As a result of this offer, we'll record a pretax loss of
roughly $200 million in the other income expense line in the second quarter.
While the terms of the SBC merger agreement prevent us from repurchasing stock
or increasing our dividend payment, we will continue to evaluate any attractive
opportunities for additional debt repurchases moving forward. With that, I will
turn things back to Peter Milligan for the Q&A portion of the call.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thank you, Tom. In just a minute, I will ask Alex to review the procedures for
asking a question. Joining both Dave and Tom this morning for Q&A are AT&T
President and COO, Bill Hannigan, and AT&T Consumer President and CEO, John
Polumbo. Alex, would you please provide instructions for logging a question?
QUESTION AND ANSWER
--------------------------------------------------------------------------------
OPERATOR
Yes, sir, thank you. Ladies and gentlemen, if you wish to ask a question, please
press star and then one on your touch-tone phone. You will hear a tone
indicating have you been placed in queue. You may remove yourself from queue at
any time by pressing the pound key. If you are using a speaker phone, please
pick up your hand set before pressing the numbers. Once again, if you have a
question, please press star one at this time. One moment for the first question.
And our first question comes from the line of John Hodulik from UBS.
--------------------------------------------------------------------------------
JOHN HODULIK - UBS - ANALYST
Thanks, good morning, guys. Two quick questions. First, in the business segment,
the long distance voice trends, obviously you guys, I guess, are seeing volume
declines for two quarters in a row, I believe, now. Is that due to what you are
seeing in the -- sort of the lower industry volumes or is it a function of lower
market share as a result of your de-emphasis of the SME market, and how do you
expect that to trend throughout the rest of the year? And secondly, just a
housekeeping item. The tax rate moved up a bit. I think it was like 41% this
quarter. Is there anything going on there? I mean, we expected something sort of
in the high 30s. Thanks.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
John, can you repeat the part of your -- the last part of your question?
--------------------------------------------------------------------------------
JOHN HODULIK - UBS - ANALYST
The tax rate. The tax rate, I think the effective tax rate was about 41%. It was
a little bit higher than we expected.
--------------------------------------------------------------------------------
David Dorman - AT&T - CHAIRMAN & CEO
Hannigan will take the first part and Tom will take the second part.
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
On the business volume side, we're seeing some industry volume dampening down
market -- the mass market aspect of small biz and the low end of medium, and
certainly wireless substitution is part of that. The volumes are quite healthy
up market.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
Okay. Obviously the UNEP exit strategy in small business where we're not selling
a bundle, only selling long distance, affects the overall performance there. We
were, as you know, pretty active in the small business market with the UNEP
offer. So I think that's a big part of it.
--------------------------------------------------------------------------------
JOHN HODULIK - UBS - ANALYST
Is this 17% rate a good rate going forward for the year?
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
We continue to see -- like I said the volumes at the high end are healthy. We
continue to see pricing pressure.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
Yeah, I think you -- the mix shift issue is a big one. It's a little more
complex than just those two drivers because you have wholesale volumes still
growing. High end volumes, actually growing as we either take share or there's
some economic recovery. And then the decline in a volume sense from these small
customers is not that huge. I mean, there's -- there are fewer minutes down
market but they are higher priced minutes. So something that, you know, we could
probably spend a lot of time on, and at least in this context, is not just those
two drivers.
--------------------------------------------------------------------------------
JOHN HODULIK - UBS - ANALYST
Okay. And the tax rate?
--------------------------------------------------------------------------------
THOMAS HORTON - AT&T - VICE CHAIRMAN, EVP, CFO
Yeah, John, this is Tom. The tax rate, as you point out did tick up a bit in the
first quarter, and in connection with our merger with SBC, we'll incur certain
deal costs, proxy, legal, investment, banking, that sort of thing. And in total,
we expect those costs to be around a percent of the deal value, with the largest
impact coming in the second quarter, due to the proxy and regulatory
approval-related costs. All of that gets expensed for accounting purposes.
So the deal costs actually had a pretty minimal impact on operating income in
the first quarter. It did affect the first quarter effective tax rate, and
that's because much of the deal costs are expensed for book accounting purposes,
but required to be capitalized for tax purposes, and that has the effect of
pushing up the annual effective tax rate, and as you know, the way this works
for accounting purposes, the increase in the first quarter rate is a function of
the requirement of the tax accounting rules to calculate the full year impact,
based on expected full year deal costs. And then book a quarter of the impact
each quarter.
--------------------------------------------------------------------------------
JOHN HODULIK - UBS - ANALYST
Okay. Thanks.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thanks, John. Alex, we have the next question, please?
--------------------------------------------------------------------------------
OPERATOR
Yes. The next question comes from the line of David Barden from Banc of America
securities. Please go ahead.
--------------------------------------------------------------------------------
DAVID BARDEN - BANC OF AMERICA SECURITIES - ANALYST
Thanks, guys. Good morning. First, I have two questions. The first question
related to the comments you made about the impact of a -- of a contract renewal
at current price points. I was wondering if you could -- since you kind of
singled that event out, I was wondering if you could give us a sense as to what
was the actual rate of repricing percentage decline in that contract? Was it --
was it down 10% after a three-year refresh? Was it down 25% after a five-year
refresh? Some color on that would be very helpful as we have talked about this
contract roll through issue before.
And the second question I would have would be on the UNEP wireline front. You
guys have been raising the minimum fees in LD pretty steadily each quarter for
the last year or so, as you guys have been kind of harvesting the consumer LD
side of this equation. I was wondering if we could look forward to some type of
similar strategy on local now presumably that you are being acquired by a Bell
company. There's not as much benefit in keeping prices low for the sake of
keeping prices low. Is there some expectation that maybe we'll start to harvest
the local business as well, which I guess is still about 3.8 million customers?
Thanks a lot.
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
David, this is Bill Hannigan. I will take the first part of your question. As
far as the contract renewal for our largest IP customer, the price point was
lower.
--------------------------------------------------------------------------------
DAVID BARDEN - BANC OF AMERICA SECURITIES - ANALYST
[LAUGHTER] Thanks, Bill.
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
You're welcome.
--------------------------------------------------------------------------------
DAVID BARDEN - BANC OF AMERICA SECURITIES - ANALYST
Any numbers you can put around that one?
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
No.
--------------------------------------------------------------------------------
DAVID BARDEN - BANC OF AMERICA SECURITIES - ANALYST
Okay.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
I think we said it what a percentage, right of the --
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
We talked about a percentage of the IP.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
Of the decline.
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
Not the price points.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
On the second part, obviously as we look at the portfolio, we said long before
the SBC acquisition was announced, that the strategy around the UNEP base was
going to be dictated by the pricing rules as they came out, what the transition
plan would be, based on the final FCC orders and how they were implemented. So
we have taken state-by-state kinds of actions, and we have negotiated with the
Bell companies individually for different kinds of agreements. In the case of
Qwest, for example, I think we have actually signed a commercial agreement with
them. I think we have other agreements being negotiated both on the
state-by-state and region-wide basis.
So depending on what those price points are, and where we started with that
particular Bell company and that particular state and what our base is, that
will actually dictate the strategy. You know, we have said in the past, that New
York state, for example, has been a significant Uni consumer state for us.
Representing at one point, probably 25% of the Unibase, and that's a base that,
you know, I think can continue on, under some form of commercial agreement. But
we are, obviously, not selling new ones except on a customer selected inbound
basis when they call us up. So I think there's an opportunity for that -- that
tail to be long, based on there being a commercial agreement in place to sustain
that particular product. And also, the customer's own choice about whether they
want to change providers again, they are happy and stable. So I'm not trying to
be evasive. It truly is a multi-state, multi-region answer. With respect to SBC,
we are just going continue to do what we have been doing with respect to our
share owners and post-merger, they will decide how they want to play that.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thank you, David. Alex, can we have the next question, please?
--------------------------------------------------------------------------------
OPERATOR
Absolutely. The next question comes from the line of Michael McCormack from Bear
Stearns. Please go ahead.
--------------------------------------------------------------------------------
MICHAEL MCCORMACK - BEAR STEARNS - ANALYST
Thanks. Good morning, guys. Just a quick update on head count reductions. I know
you have planned about 5100 for '05, if you can give us an update on the
schedule there and whether or not the transaction with SBC has any impact on
that? And then if you can just contrast the decline in business local voice, it
looked a lot more severe than what's happening in consumer. And yet I think they
are both sort of falling under that UNEP blame. So, just trying to get some more
clarity on that.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
The head count question -- Tom, do you want to take that?
--------------------------------------------------------------------------------
THOMAS HORTON - AT&T - VICE CHAIRMAN, EVP, CFO
Yeah, on head count we ended with 44,000 employees. That was about a 7%
reduction year-over-year, and we expect to take further targeted reductions for
the remainder of this year.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
It's largely driven by our own internal plans based on productivity, gains that
we had from technology investments. So those were built -- systems that we were
building last year and implementing this year, as well as some things later in
the year that come from other releases really not related to SBC transaction at
all, at this point, because obviously, we are not in a position, nor are they,
to do anything that would get us ahead of the approval process.
--------------------------------------------------------------------------------
THOMAS HORTON - AT&T - VICE CHAIRMAN, EVP, CFO
As far as local business is concerned, the quarter-over-quarter compare is
skewed by the reciprocal comp that we talked about last quarter, without that
down a few percentage points. But it does go to small biz and the low end of the
medium and the aggressiveness of the RBOCs in that space.
As Dave said, as we move up market our position becomes that much more
formidable and defensible as we have been saying for the last year. Our win
rates continue to be very strong. Dave gave a sample of the top 100 retail
customers, which is a portfolio of several billion dollars, and we actually grew
more than a third of those customers on an absolute basis over the past year.
You can't do that in this pricing environment, in an environment of annual
benchmarking without extending deeper into the enterprise of our largest
customers which is exactly what we are doing with new offerings.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
Just to be clear, we had a reciprocal comp settlement last year, so the
year-over-year compare is skewed by that. That's the big hit single in that.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thank you, Mike. Alex, can we have the next question, please?
--------------------------------------------------------------------------------
OPERATOR
Yes. Our next question comes from the line of Jonathan Chappell from JP Morgan.
Please go ahead.
--------------------------------------------------------------------------------
JONATHAN CHAPPELL - JP MORGAN - ANALYST
Hi, I had two quick questions. On the consumer side, you guys improved margins
very significantly this quarter. I was wondering, if you exclude the impact of
the decision that went against you, how high margins could potentially go in
that business? And then it looks like the rate of line loss has improved,
despite all the cuts you are making in sales and marketing and customer care. Do
you think that the -- you know, as the cuts that you are making on the head
count side, you know, translate through the business, do you think you will see
an acceleration in line loss, or do you think it will continue to plateau going
forward?
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
I will let John Polumbo give you a more detailed answer. But, I think one of the
things that you can characterize about this business, we don't have
marketing-induced activity, where you are bringing on new customers, you have
some infant mortality rate because customers maybe didn't qualify for credit and
you ended up turning them off quickly, they didn't pay their bill. You had --
you know the things that go on in the selling environment. Basically, all of
that activity has now been taken out of the system. We just don't have the
activity base cost that we had before, which has allowed us to not only stop the
direct selling expenses, but the activity derived expenses as well. Secondly, we
still have inbound sales. You know, I can't remember, John, the exact number,
but we still have, you know -- what is it, a couple hundred thousand?
--------------------------------------------------------------------------------
JOHN POLUMBO - AT&T - PRESIDENT & CEO, AT&T CONSUMER
A couple hundred thousand a month.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
A couple hundred thousand a month of people calling in that still want AT&T
service that we didn't do anything proactively to go get. Either they are
moving, you know, whatever the forum might be. So there is, we think, at least,
a customer base, which is reaching a stasis, where they have been with us for
quite a while. The average length of time these customers have been with us is
expanding because we are not adding new short duration customers. So the tail on
this is hard to predict but we certainly like the trends we are seeing and I
expect that those trends can continue. You know let's be realistic, still
declining by 20% in revenue terms, but it's not accelerating at this point, and
we watch it literally week by week.
Now, some of this is self-induced. We raised prices, and we tried to do things
that make sense. So we are not trying, in any case, to be a price leader in this
space. But at this point, we are -- we are managing this week by week, really
customer set by customer set, product set by product set. And we -- we react
when we see things change. If either the rate goes up by something we've done or
we have an opportunity to be, you know, in our view, more prudent about leaving
the prices alone, we'll do that.
--------------------------------------------------------------------------------
JOHN POLUMBO - AT&T - PRESIDENT & CEO, AT&T CONSUMER
On the operating margin question, I would think that the first quarter is going
to be the highest that you will see for the rest of the year and going forward.
So I called this the pinnacle of the operating margin for consumer in the first
quarter of '05. The other factors, I think involved here is the loyalty and the
tenure base, as Dave said is, increasing month over month and the brand question
and another issue there. The customers are selecting us based on the brand and
we're open for business. We continue to deliver great services to our existing
base of customers. We have lost 2 million customers in the first quarter and
that continues to decline the base, but there are customers coming in too. I
think those factors all together allow us to say there's a base here into the
future, but we're not doing anything that drives customers away. We accept
orders every day, thousands, 200,000 approximately per month.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thank you, Jonathan. Alex, can we have the next question?
--------------------------------------------------------------------------------
OPERATOR
Yes. The next question comes from Jeffrey Halpern from Sanford Bernstein.
--------------------------------------------------------------------------------
JEFFREY HALPERN - SANFORD C. BERNSTEIN & CO. - ANALYST
Good morning, guys. A quick question on the networks contract, the networks RFP
that the GSA is expected to issue next month, that just got delayed. I'm
curious, first of all, if you could share with us, roughly speaking, what kind
of revenues you are getting today from the GSA under FTS 2001, and then at what
point, and are there -- are there any issues with your bidding side by side with
Cingular for -- as part of the network's RFP that will be issued? And your rough
size estimate?
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
We are working with SBC and Cingular in a commercial sense as we put together
our various teaming arrangements. The FTS revenues for AT&T are fairly small.
Our government revenues, however are not. Our government revenues, all in, are
about $1.2 billion on an annual basis. Contracts won outside of FTS.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thank you. Alex, can we have the next question, please?
--------------------------------------------------------------------------------
OPERATOR
Absolutely. The next question comes from the line of Jason Armstrong from
Goldman Sachs. Please go ahead.
--------------------------------------------------------------------------------
JASON ARMSTRONG - GOLDMAN SACHS - ANALYST
Thanks, good morning. I just wanted to follow up on a comment from Dave. You
mentioned a third of high-end enterprise customers increased spending in the
last year. And I just wanted to hear you sort of characterize this. Are you
taking share here, or are these customers just spending more and really
spreading it around? And if that's the case, what are they spending on? Why are
they raising budgets? And then on the flip side of that, for the other
two-thirds high-end customers, can you segment for this as well what percentage
decreased their spending with you and what percentage kept it flat
year-over-year.
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
I will let you repeat the second part; I think I got the first part.
--------------------------------------------------------------------------------
JASON ARMSTRONG - GOLDMAN SACHS - ANALYST
The second part was, on the flip side there's two-thirds -- the other two-thirds
of high-end customers -- can you segment that as well? What percentage decreased
their spending with you, versus what percent kept it flat?
--------------------------------------------------------------------------------
DAVID DORMAN - AT&T - CHAIRMAN & CEO
Yes, I think at the macro level, what we're seeing is really all of the above
that you suggested. We're seeing some growth in the customers' business based on
their business expanding. You know, we have some significant retail customers
who have been growing, and we're growing with them. We also have customers where
we're taking share. We're getting a deeper penetration share of wallet from
those customers. Then, thirdly, we're getting new services. As we expand into
other things we're doing around the network, and around the world, we're picking
up global business. We're picking up hosting business. So things that are new
products for us that we -- you know, either didn't participate in with that
customer before.
As far as characterizing the rest of it, the backdrop of this is really about
price decline, and the high end of the market. We believe we're holding share,
and our win rates, in terms of retention of existing base, are very high. Our
increase in business on that base of revenue, the win rate there is quite high.
And we think we're winning a very good share of new business in customers where
we weren't the incumbent. So when you -- when you add up what we're doing there,
against, as Bill Hannigan said, an annual price refresh, a three-year contract
with an annual price refresh which is really become typical, we're -- while we
may not be growing revenue with that other 65% or so, we're not necessarily
losing to competitors. We're losing to price downs. And I think that's the --
particularly in the high end of the market, in enterprise, and signature client.
I would also say that we probably didn't make a strong enough point that both
global revenues and government revenues are growing at double digit rates. Those
are very strong growers for us, and we expect that trend to continue.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thanks, Jason. Alex, we have time for one more question.
--------------------------------------------------------------------------------
OPERATOR
Thank you. And the final question from Simon Flannery of Morgan Stanley. Please
go ahead.
--------------------------------------------------------------------------------
SIMON FLANNERY - MORGAN STANLEY - ANALYST
Thank you. Good morning. Could you talk a little bit about where we are on the
wireless? Have you been able to reach agreement with Cingular in terms of
starting to perhaps starting to sell services before the end of the merger? And
also, could you just touch on the one-time transition -- or termination on the
prepaid network capacity? It looked like about $30 million. Is that the impact
we should be thinking about? Thanks.
--------------------------------------------------------------------------------
THOMAS HORTON - AT&T - VICE CHAIRMAN, EVP, CFO
Yeah, the -- Simon, this is Tom. You are right on. On the terminations, it's
about $30 million.
--------------------------------------------------------------------------------
SIMON FLANNERY - MORGAN STANLEY - ANALYST
Is -- and is there any ongoing revenue loss there of any materiality?
--------------------------------------------------------------------------------
THOMAS HORTON - AT&T - VICE CHAIRMAN, EVP, CFO
No.
--------------------------------------------------------------------------------
SIMON FLANNERY - MORGAN STANLEY - ANALYST
Okay.
--------------------------------------------------------------------------------
WILLIAM HANNIGAN - AT&T - PRESIDENT, COO
This is Bill Hannigan. On the Cingular side, our hope and intent is to have
offerings prior to the close, work-in-progress.
--------------------------------------------------------------------------------
SIMON FLANNERY - MORGAN STANLEY - ANALYST
Okay. Thank you.
--------------------------------------------------------------------------------
PETER MILLIGAN - AT&T - VP, INVESTOR RELATIONS
Thank you, Simon. That concludes the Q&A portion of our call. I want to thank
you all for your participation. Beginning later today, you can access a replay
of of the call on the AT&T investor relations web site, or by dialing the
following numbers, domestic, 800-475-6701, international, 320-365-3844, the
access code for both of those lines is 3 -- I'm sorry, 763283. If you have
additional questions or require further information, feel free to contact AT&T's
investor relations team at 908-532-1680. Thanks, and have a great day.
--------------------------------------------------------------------------------
OPERATOR
Ladies and gentlemen, that does conclude our conference for today. Thank you for
your participation and for using AT&T executive teleconference. You may now
disconnect.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DISCLAIMER
Thomson Financial reserves the right to make changes to documents, content, or
other information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety of
items. Such forward-looking statements are based upon current expectations and
involve risks and uncertainties. Actual results may differ materially from those
stated in any forward-looking statement based on a number of important factors
and risks, which are more specifically identified in the companies' most recent
SEC filings. Although the companies mayindicate and believe that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate or incorrect and, therefore, there can be no assurance
that the results contemplated in the forward-looking statements will be
realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF
THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE
AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR
INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO
WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY OR THE APPLICABLE COMPANY
ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON
THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE
ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE
APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER
DECISIONS.
(C) 2005, Thomson StreetEvents All Rights Reserved.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
IN CONNECTION WITH THE PROPOSED TRANSACTION, ON MARCH 11, 2005, SBC
COMMUNICATIONS INC. ("SBC") FILED A REGISTRATION STATEMENT (FILE NO.:
333-123283), INCLUDING A PRELIMINARY PROXY STATEMENT OF AT&T CORP., WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). INVESTORS AND AT&T SHAREHOLDERS
ARE URGED TO READ THE REGISTRATION STATEMENT, INCLUDING THE PRELIMINARY PROXY
STATEMENT, AND OTHER MATERIALS (INCLUDING THE DEFINITIVE PROXY STATEMENT) WHEN
THEY ARE AVAILABLE BECAUSE THEY CONTAIN IMPORTANT INFORMATION. INVESTORS MAY
OBTAIN FREE COPIES OF THE REGISTRATION STATEMENT AND PROXY STATEMENT, AS WELL AS
OTHER FILINGS CONTAINING INFORMATION ABOUT SBC AND AT&T CORP., WITHOUT CHARGE,
AT THE SEC'S INTERNET SITE (HTTP://WWW.SEC.GOV). THESE DOCUMENTS MAY ALSO BE
OBTAINED FOR FREE FROM SBC'S INVESTOR RELATIONS WEB SITE
(WWW.SBC.COM/INVESTOR_RELATIONS) OR BY DIRECTING A REQUEST TO SBC COMMUNICATIONS
INC., STOCKHOLDER SERVICES, 175 E. HOUSTON, SAN ANTONIO, TEXAS 78205. AT&T
CORP.'S FILINGS MAY BE ACCESSED AND DOWNLOADED FOR FREE AT THE AT&T INVESTOR
RELATIONS WEB SITE (WWW.ATT.COM/IR/SEC) OR BY DIRECTING A REQUEST TO AT&T CORP.,
INVESTOR RELATIONS, ONE AT&T WAY, BEDMINSTER, NEW JERSEY 07921.
SBC, AT&T CORP. AND THEIR RESPECTIVE DIRECTORS AND EXECUTIVE OFFICERS AND OTHER
MEMBERS OF MANAGEMENT AND EMPLOYEES MAY BE DEEMED TO BE PARTICIPANTS IN THE
SOLICITATION OF PROXIES FROM AT&T SHAREHOLDERS IN RESPECT OF THE PROPOSED
TRANSACTION. INFORMATION REGARDING SBC'S DIRECTORS AND EXECUTIVE OFFICERS IS
AVAILABLE IN SBC'S PROXY STATEMENT FOR ITS 2005 ANNUAL MEETING OF STOCKHOLDERS,
DATED MARCH 11, 2005, AND INFORMATION REGARDING AT&T CORP.'S DIRECTORS AND
EXECUTIVE OFFICERS IS AVAILABLE IN AT&T'S PRELIMINARY PROXY STATEMENT INCLUDED
IN THE REGISTRATION STATEMENT. ADDITIONAL INFORMATION REGARDING THE INTERESTS OF
SUCH POTENTIAL PARTICIPANTS WILL BE INCLUDED IN THE REGISTRATION AND PROXY
STATEMENT AND THE OTHER RELEVANT DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME
AVAILABLE.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S.
PRIVATE SECURITIES LITIGATION REFORM ACT. FORWARD-LOOKING STATEMENTS ARE
STATEMENTS THAT ARE NOT HISTORICAL FACTS AND ARE GENERALLY IDENTIFIED BY THE
WORDS "EXPECTS", "ANTICIPATES", "BELIEVES", "INTENDS", "ESTIMATES" AND SIMILAR
EXPRESSIONS. THESE STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, FINANCIAL
PROJECTIONS AND ESTIMATES AND THEIR UNDERLYING ASSUMPTIONS, STATEMENTS REGARDING
THE BENEFITS OF THE BUSINESS COMBINATION TRANSACTION INVOLVING AT&T and SBC,
INCLUDING FUTURE FINANCIAL AND OPERATING RESULTS AND THE PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS OF THE COMBINED. SUCH STATEMENTS ARE BASED UPON THE
CURRENT BELIEFS AND EXPECTATIONS OF THE MANAGEMENTS OF AT&T and SBC AND ARE
SUBJECT TO SIGNIFICANT RISKS AND UNCERTAINTIES (MANY OF WHICH ARE DIFFICULT TO
PREDICT AND ARE GENERALLY BEYOND THE CONTROL OF AT&T and SBC) THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN, OR IMPLIED BY, THE
FORWARD-LOOKING STATEMENTS.
THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS: THE ABILITY
TO OBTAIN GOVERNMENTAL APPROVALS OF THE TRANSACTION ON THE PROPOSED TERMS AND
SCHEDULE; THE FAILURE OF AT&T shareholders to approve the transaction; THE RISK
THAT THE BUSINESSES WILL NOT BE INTEGRATED SUCCESSFULLY; THE RISK THAT THE COST
SAVINGS AND ANY OTHER SYNERGIES FROM THE TRANSACTION MAY NOT BE FULLY REALIZED
OR MAY TAKE LONGER TO REALIZE THAN EXPECTED; DISRUPTION FROM THE TRANSACTION
MAKING IT MORE DIFFICULT TO MAINTAIN RELATIONSHIPS WITH CUSTOMERS, EMPLOYEES OR
SUPPLIERS; COMPETITION AND ITS EFFECT ON PRICING, SPENDING, THIRD-PARTY
RELATIONSHIPS AND REVENUES. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
ARE CONTAINED IN SBC'S AND AT&T's fILINGS WITH SEC, WHICH ARE AVAILABLE AT THE
SEC'S WEB SITE HTTP://WWW.SEC.GOV. OTHER THAN AS REQUIRED BY APPLICABLE LAW,
AT&T DISCLAIMS ANY OBLIGATION TO UPDATE AND REVISE STATEMENTS CONTAINED IN THIS
PRESENTATION BASED ON NEW INFORMATION OR OTHERWISE.
# # #