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AT&T Reports 2 Million Wireless Net Adds, Record-Low Third-Quarter Postpaid Churn and Solid U-verse Subscriber Gains in Third-Quarter Results

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AT&T Inc. (NYSE:T) today reported solid third-quarter results with continued revenue growth driven by gains in the companys key growth drivers mobile and IP data, U-verse and strategic business services.

Our strategy is on track and our investments in giving customers best-in-class service to access content everywhere and on any screen continue to pay off, said Randall Stephenson, AT&T chairman and CEO. We had strong subscriber growth in wireless and U-verse, and our strategic business services revenues continued to post double-digit growth.

Third-Quarter Financial Results

For the quarter ended September 30, 2014, AT&T’s consolidated revenues totaled $33.0 billion, up 2.5 percent versus the year-earlier period. Compared with results for the third quarter of 2013, operating expenses were $27.6 billion versus $26.0 billion; operating income was $5.4 billion versus $6.2 billion; and operating income margin was 16.4 percent versus 19.2 percent. When adjusted for Leap and Alltel integration expenses and DIRECTV merger costs, operating margin was 17.2 percent in the third quarter 2014.

Third-quarter 2014 net income attributable to AT&T totaled $3.0 billion, or $0.58 per diluted share, compared to $3.8 billion, or $0.72, in the year-ago quarter. Adjusting for $0.03 of the previously mentioned merger and integration-related expenses and $0.02 of costs for early debt redemption, earnings per share was $0.63 compared to an adjusted $0.66 in the year-ago quarter.

Cash from operating activities totaled $8.7 billion in the third quarter and $25.6 billion year to date; and capital expenditures totaled $5.2 billion in the third quarter and $17.0 billion year to date. Free cash flow cash from operating activities minus capital expenditures totaled $3.5 billion for the quarter and $8.6 billion year to date. The company continues to repurchase shares opportunistically. During the quarter, the company repurchased 6 million of its shares for $221 million.

The company continues to rationalize its business portfolio. This includes:

  • Completing the sale of the Am’erica M’ovil equity investment;
  • Closing Connecticut wireline property transaction two months earlier than expected; and,
  • Exiting select low-margin wireline wholesale businesses.

With this rationalization, the company now expects full-year consolidated revenue growth in the 3 to 4 percent range, which also includes the impact of fewer than expected AT&T Next gross adds and upgrades and greater than expected number of BYOD (bring your own device) gross adds.

WIRELESS OPERATIONAL HIGHLIGHTS

Repositioning the companys wireless business model with no-device subsidy AT&T Next and Mobile Share Value plans resulted in solid revenue growth, strong subscriber gains and best-ever third-quarter postpaid churn. Highlights included:

Wireless Revenues Grow Nearly 5 Percent. Total wireless revenues, which include equipment sales, were up 4.9 percent year over year to $18.3 billion. Wireless service revenues were essentially flat in the third quarter at $15.4 billion, and wireless equipment revenues increased 44.3 percent to $2.9 billion as more customers chose equipment installment plans versus subsidized devices. Third-quarter wireless operating expenses totaled $13.8 billion, up 7.5 percent versus the year-earlier quarter due to higher equipment costs, network systems expenses and marketing costs, largely attributable to the companys acquisition of Leap Wireless, and wireless operating income was $4.5 billion, down 2.3 percent year over year. Third-quarter 2014 revenue comparisons included impacts from strong customer adoption of Mobile Share Value plans and promotional activities, partially offset by increased revenues from Leap.

Postpaid ARPU Grows Sequentially. The continued adoption of AT&T Next and Mobile Share Value plans is reflected in a year-over-year reduction in postpaid service ARPU (average revenues per user); however, ARPU improved when compared to the second quarter of 2014. Phone-only postpaid ARPU decreased 8.0 percent versus the year-earlier quarter but increased 0.3 percent versus the second quarter of 2014. Phone-only postpaid ARPU with AT&T Next monthly billings decreased 3.4 percent year over year but increased 2.0 percent sequentially. The strong adoption of Mobile Share Value plans without device upgrades on AT&T Next also is impacting service revenues. As customers upgrade on AT&T Next, phone-only ARPU with AT&T Next monthly billings is expected to increase. At the same time, better customer satisfaction is driving lower postpaid churn.

More than 2 Million Subscribers Added. AT&T posted a third-quarter net increase in total wireless subscribers of 2 million, led by gains in postpaid and connected devices. The company added 785,000 postpaid subscribers, more than twice as many as in the year-ago third quarter. Connected device net adds were 1,275,000 including more than 500,000 connected cars. Prepaid lost 140,000 subscribers primarily due to declines in session-based tablets and an expected reduction in Cricket subscribers as the company transitions the customer base. The company also had a net gain of 87,000 reseller subscribers, its first gain in seven quarters.

Postpaid net adds include 466,000 smartphones. Total branded smartphone net adds (both postpaid and prepaid) were 530,000, including expected declines in legacy Cricket smartphone subscribers. Total branded tablet net adds were 342,000. The company had 434,000 postpaid tablet net adds.

Best-Ever Third-Quarter Postpaid Churn. Postpaid churn was the best ever for a third quarter at 0.99 percent. This compares to 1.07 percent in the year-ago quarter. Total churn of 1.36 percent was up versus 1.31 percent in the year-ago quarter due to expected pressure in prepaid from the acquisition of Leap Wireless. More than 90 percent of AT&Ts total postpaid base is on AT&T Family Talk(R), Mobile Share or business plans. Churn levels for these plans are significantly lower than for other postpaid subscribers.

Postpaid Smartphone Base Continues to Grow. AT&T added nearly 1.2 million postpaid smartphones in the third quarter. At the end of the quarter, 81 percent, or 55.8 million, of AT&T’s postpaid phone subscribers had smartphones, up from 75 percent, or 50.6 million, a year earlier. Smartphones accounted for 91 percent of postpaid phone gross adds and upgrades in the quarter. AT&Ts ARPU for smartphones is about twice that of non-smartphone subscribers. At the end of the third quarter, 67 percent of AT&Ts postpaid smartphone customers had an LTE-capable device.

Mobile Share Value Plans Continue to Gain. AT&T continues to reposition the customer experience with attractive Mobile Share Value pricing for customers who choose to transition from the traditional device subsidy model. In the third quarter, an increasing number of subscribers chose Mobile Share Value plans. Mobile Share plans, including Mobile Share Value, now represent nearly 47 million connections, or about 62 percent of postpaid subscribers.

The number of Mobile Share accounts more than tripled year over year to reach 16.7 million with an average of about three devices per account. At the end of the third quarter, 51 percent of Mobile Share accounts had 10 gigabyte or larger data plans, up from 30 percent in the year-ago quarter. That helped drive a nearly 24 percent year-over-year increase in wireless data billings. In total, about 82 percent of postpaid smartphone subscribers are on usage-based data plans (tiered data and Mobile Share plans). This compares to 72 percent a year ago.

Record Third-Quarter Smartphone Gross Adds and Upgrades. The company had a third-quarter record 6.8 million postpaid smartphone gross adds and upgrades. The company also had a record number of customers who brought their own devices onto AT&Ts network more than 460,000 of postpaid smartphone gross adds. Sales on AT&T Next also increased during the quarter. About half, or 3.4 million, of all postpaid smartphone gross adds and upgrades chose AT&T Next.

Adjusted Service Margins Expand. As expected, wireless margins were impacted by strong adoption of Mobile Share Value plans, solid customer growth, promotional activities and continued investment in new services. AT&Ts reported third-quarter wireless operating income margin was 24.6 percent versus 26.4 percent in the year-earlier quarter. Wireless EBITDA margin was 35.3 percent, compared to 37.2 percent in the third quarter of 2013. (EBITDA margin is operating income before depreciation and amortization, divided by total wireless revenues.) Wireless service EBITDA margin was 42.0 percent, the same as in the year-ago quarter. (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)

When adjusting for integration costs, AT&Ts wireless EBITDA margin was 36.3 percent compared to 37.2 percent in the third quarter of 2013. Wireless EBITDA service margin was 43.1 percent compared to 42.0 percent in the year-ago quarter.

WIRELINE OPERATIONAL HIGHLIGHTS

Continued strong wireline consumer and strategic business services revenue growth with solid U-verse gains led AT&Ts wireline results as the company continues its wireline transformation. Highlights included:

Wireline Revenues Stable Sequentially. Total third-quarter wireline revenues were $14.6 billion, down 0.4 percent versus the year-earlier quarter and down slightly versus the second quarter of 2014. Total U-verse revenues grew 23.8 percent year over year. Third-quarter wireline operating expenses were $13.3 billion, up 1.6 percent versus the third quarter of 2013. AT&Ts wireline operating income totaled $1.3 billion, down 17.2 percent versus the third quarter of 2013. Third-quarter wireline operating income margin was 8.8 percent versus 10.6 percent in the year-earlier quarter, primarily due to U-verse content cost increases, declines in legacy services, success-based growth costs and expenses incurred as part of Project VIP.

U-verse Drives Solid Consumer Revenue Growth. Revenues from residential customers totaled $5.7 billion, an increase of 3.0 percent versus the third quarter a year ago. Continued strong growth in consumer IP data services in the third quarter more than offset lower revenues from legacy voice and data products. U-verse, which includes high speed Internet, TV and Voice over IP, now represents 64 percent of wireline consumer revenues, up from 54 percent in the year-earlier quarter. Consumer U-verse revenues grew 23.2 percent year over year.

U-verse Broadband Reaches More Than 12 Million Subscribers. U-verse high speed Internet had a third-quarter net gain of 601,000 subscribers, to reach a total of 12.1 million. Overall, total wireline broadband subscribers increased by 38,000 in the quarter. Total wireline broadband ARPU was up more than 6 percent year over year. Total U-verse high speed Internet subscribers now represent 73 percent of all wireline broadband subscribers, compared with 59 percent in the year-earlier quarter.

U-verse TV added 216,000 subscribers in the third quarter to reach nearly 6.1 million in service. More than 97 percent of AT&Ts video customers subscribe to bundled services. Nearly two-thirds of U-verse TV subscribers take three or four services from AT&T. ARPU for U-verse triple-play customers continues to be more than $170. At the end of the quarter, U-verse TV penetration was almost 22 percent and U-verse broadband penetration was 21 percent.

Continued Gains in Strategic Business Services. Total revenues from business customers were $8.7 billion, down 2.0 percent versus the year-earlier quarter but stable sequentially. Business services revenues declined 2.0 percent year over year. Overall, declines in legacy products were partially offset by continued double-digit growth in strategic business services. Revenues from these services, the next-generation capabilities that lead AT&T’s most advanced business solutions including VPNs, Ethernet, cloud, hosting, IP conferencing, VoIP, MIS over Ethernet, U-verse and security services grew 14.3 percent versus the year-earlier quarter. These services represent an annualized revenue stream of nearly $10 billion and are more than 28 percent of wireline business revenues in the third quarter. During the third quarter, the company also added 44,000 U-verse high speed broadband business subscribers.

AT&T products and services are provided or offered by subsidiaries and affiliates of AT&T Inc. under the AT&T brand and not by AT&T Inc.

About AT&T

AT&T Inc. (NYSE:T) is a premier communications holding company and one of the most honored companies in the world. Its subsidiaries and affiliates AT&T operating companies are the providers of AT&T services in the United States and internationally. With a powerful array of network resources that includes the nations most reliable 4G LTE network, AT&T is a leading provider of wireless, Wi-Fi, high speed Internet, voice and cloud-based services. A leader in mobile Internet, AT&T also offers the best global wireless coverage, based on offering roaming in more countries than any other U.S. based carrier, and offers the most wireless phones that work in the most countries. It also offers advanced TV service with the AT&T U-verse(R) brand. The companys suite of IP-based business communications services is one of the most advanced in the world.

Additional information about AT&T Inc. and the products and services provided by AT&T subsidiaries and affiliates is available at http://www.att.com/aboutus or follow our news on Twitter at @ATT, on Facebook at http://www.facebook.com/att and YouTube at http://www.youtube.com/att.

(c) 2014 AT&T Intellectual Property. All rights reserved. AT&T, the AT&T logo and all other marks contained herein are trademarks of AT&T Intellectual Property and/or AT&T affiliated companies. All other marks contained herein are the property of their respective owners.

Reliability claim based on data transfer completion rates on nationwide 4G LTE networks. 4G LTE availability varies.

Cautionary Language Concerning Forward-Looking Statements

Information set forth in this presentation contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results might differ materially. A discussion of factors that may affect future results is contained in AT&Ts filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update and 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 available on the companys website at www.att.com/investor.relations.

The ‘quiet period’ for FCC Spectrum Auction 97 (also known as the AWS-3 Auction) is now in effect. During the quiet period, auction applicants are required to avoid discussions of bids, bidding strategy, and post auction market structure with other auction applicants.

NOTE: EBITDA is defined as operating income before depreciation and amortization. EBITDA differs from Segment Operating Income (loss), as calculated in accordance with U.S. generally accepted accounting principles (GAAP), in that it excludes depreciation and amortization. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with GAAP. Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.

NOTE: Free cash flow is defined as cash from operations minus capital expenditures. We believe this metric provides useful information to our investors because management regularly reviews free cash flow as an important indicator of how much cash is generated by normal business operations, including capital expenditures, and makes decisions based on it. Management also views it as a measure of cash available to pay debt and return cash to shareowners.

NOTE: Adjusted Operating Income, Adjusted Operating Expenses, Adjusted Operating Revenues, Adjusted Operating Income Margin and Adjusted diluted EPS are non-GAAP financial measures calculated by excluding from operating revenues, operating expenses and equity in net income of affiliates certain significant items that are non-operational or non-recurring in nature, including dispositions. Management believes that these measures provide relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends. Adjusted Operating Income, Adjusted Operating Expenses, Adjusted Operating Revenues, Adjusted Operating Income Margin and Adjusted diluted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculations of Adjusted Operating Income and Adjusted diluted EPS, as presented, may differ from similarly titled measures reported by other companies.

Financial Data
AT&T Inc.
Consolidated Statements of Income
Dollars in millions except per share amounts
Unaudited Three Months Ended Nine Months Ended
9/30/2014 9/30/2013 % Chg 9/30/2014 9/30/2013 % Chg
Operating Revenues $ 32,957 $ 32,158 2.5 % $ 98,008 $ 95,589 2.5 %
Operating Expenses

Cost of services and sales (exclusive of depreciation and amortization shown separately below)

14,541 13,403 8.5 % 42,074 39,227 7.3 %
Selling, general and administrative 8,475 7,952 6.6 % 24,932 24,406 2.2 %
Depreciation and amortization 4,539 4,615 -1.6 % 13,706 13,715 -0.1 %
Total Operating Expenses 27,555 25,970 6.1 % 80,712 77,348 4.3 %
Operating Income 5,402 6,188 -12.7 % 17,296 18,241 -5.2 %
Interest Expense 1,016 829 22.6 % 2,757 2,481 11.1 %
Equity in Net Income (Loss) of Affiliates (2 ) 91 188 494 -61.9 %
Other Income (Expense) – Net 42 50 -16.0 % 1,456 370
Income Before Income Taxes 4,426 5,500 -19.5 % 16,183 16,624 -2.7 %
Income Tax Expense 1,367 1,595 -14.3 % 5,769 5,066 13.9 %
Net Income 3,059 3,905 -21.7 % 10,414 11,558 -9.9 %
Less: Net Income Attributable to Noncontrolling Interest (57 ) (91 ) 37.4 % (213 ) (222 ) 4.1 %
Net Income Attributable to AT&T $ 3,002 $ 3,814 -21.3 % $ 10,201 $ 11,336 -10.0 %
Basic Earnings Per Share Attributable to AT&T $ 0.58 $ 0.72 -19.4 % $ 1.96 $ 2.10 -6.7 %

Weighted Average Common Shares Outstanding (000,000)

5,198 5,315 -2.2 % 5,208 5,402 -3.6 %

Diluted Earnings Per Share Attributable to AT&T

$ 0.58 $ 0.72 -19.4 % $ 1.95 $ 2.09 -6.7 %

Weighted Average Common Shares Outstanding with Dilution (000,000)

5,214 5,331 -2.2 % 5,224 5,419 -3.6 %
Financial Data
AT&T Inc.
Statements of Segment Income
Dollars in millions
Unaudited
Three Months Ended Nine Months Ended
Wireless 9/30/2014 9/30/2013 % Chg 9/30/2014 9/30/2013 % Chg
Segment Operating Revenues
Service $ 15,423 $ 15,460 -0.2 % $ 45,958 $ 45,892 0.1 %
Equipment 2,914 2,020 44.3 % 8,175 5,570 46.8 %
Total Segment Operating Revenues 18,337 17,480 4.9 % 54,133 51,462 5.2 %
Segment Operating Expenses
Operations and support 11,855 10,982 7.9 % 34,305 31,932 7.4 %
Depreciation and amortization 1,965 1,875 4.8 % 5,931 5,553 6.8 %
Total Segment Operating Expenses 13,820 12,857 7.5 % 40,236 37,485 7.3 %
Segment Operating Income 4,517 4,623 -2.3 % 13,897 13,977 -0.6 %
Equity in Net Income (Loss) of Affiliates (26 ) (18 ) -44.4 % (75) (55 ) -36.4 %
Segment Income $ 4,491 $ 4,605 -2.5 % $ 13,822 $ 13,922 -0.7 %
Segment Operating Income Margin 24.6

%

26.4

%

25.7

%

27.2 %
Wireline
Segment Operating Revenues
Service $ 14,368 $ 14,403 -0.2 % $ 43,165 $ 43,266 -0.2 %
Equipment 247 267 -7.5 % 688 832 -17.3 %
Total Segment Operating Revenues 14,615 14,670 -0.4 % 43,853 44,098 -0.6 %
Segment Operating Expenses
Operations and support 10,761 10,385 3.6 % 31,918 31,137 2.5 %
Depreciation and amortization 2,571 2,736 -6.0 % 7,769 8,146 -4.6 %
Total Segment Operating Expenses 13,332 13,121 1.6 % 39,687 39,283 1.0 %
Segment Operating Income 1,283 1,549 -17.2 % 4,166 4,815 -13.5 %
Equity in Net Income of Affiliates 1 2 1
Segment Income $ 1,284 $ 1,549 -17.1 % $ 4,168 $ 4,816 -13.5 %
Segment Operating Income Margin 8.8

%

10.6

%

9.5

%

10.9 %
Financial Data
AT&T Inc.
Consolidated Balance Sheets
Dollars in millions
9/30/14 12/31/13
Unaudited
Assets
Current Assets
Cash and cash equivalents $ 2,458 $ 3,339
Accounts receivable – net of allowances for doubtful accounts of $482 and $483 13,445 12,918
Prepaid expenses 869 960
Deferred income taxes 1,030 1,199
Other current assets 8,033 4,780
Total current assets 25,835 23,196
Property, Plant and Equipment – Net 115,134 110,968
Goodwill 70,131 69,273
Licenses 60,784 56,433
Other Intangible Assets – Net 6,252 5,779
Investments in and Advances to Equity Affiliates 166 3,860
Other Assets 9,637 8,278
Total Assets $ 287,939 $ 277,787
Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year $ 5,109 $ 5,498
Accounts payable and accrued liabilities 24,119 21,107
Advanced billing and customer deposits 4,038 4,212
Accrued taxes 4,328 1,774
Dividends payable 2,385 2,404
Total current liabilities 39,979 34,995
Long-Term Debt 70,516 69,290
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 37,393 36,308
Postemployment benefit obligation 29,918 29,946
Other noncurrent liabilities 17,014 15,766
Total deferred credits and other noncurrent liabilities 84,325 82,020
Stockholders’ Equity
Common stock 6,495 6,495
Additional paid-in capital 91,064 91,091
Retained earnings 34,165 31,141
Treasury stock (47,037 ) (45,619 )
Accumulated other comprehensive income 7,926 7,880
Noncontrolling interest 506 494
Total stockholders’ equity 93,119 91,482
Total Liabilities and Stockholders’ Equity $ 287,939 $ 277,787
Financial Data
AT&T Inc.
Consolidated Statements of Cash Flows
Dollars in millions
Unaudited Nine Months Ended September 30,
2014 2013
Operating Activities
Net income $ 10,414 $ 11,558

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 13,706 13,715
Undistributed earnings from investments in equity affiliates (45 ) (232 )
Provision for uncollectible accounts 692 653
Deferred income tax expense 1,304 2,505
Net gain from sale of investments, net of impairments (1,374 ) (272 )
Changes in operating assets and liabilities:
Accounts receivable (1,269 ) (440 )
Other current assets (813 ) 520
Accounts payable and accrued liabilities 4,763 (420 )
Retirement benefit funding (420 ) (175 )
Other – net (1,365 ) (533 )
Total adjustments 15,179 15,321
Net Cash Provided by Operating Activities 25,593 26,879
Investing Activities
Construction and capital expenditures:
Capital expenditures (16,829 ) (15,565 )
Interest during construction (178 ) (213 )
Acquisitions, net of cash acquired (2,053 ) (4,025 )
Dispositions 6,074 846
Purchases of securities, net (1,996 )
Return of advances to and investments in equity affiliates 3 301
Other (1 ) (4 )
Net Cash Used in Investing Activities (14,980 ) (18,660 )
Financing Activities

Net change in short-term borrowings with original maturities of three months or less

(16 ) 1,851
Issuance of other short-term borrowings - 1,476
Repayment of other short-term borrowings - (1,476 )
Issuance of long-term debt 8,564 6,416
Repayment of long-term debt (10,376 ) (2,131 )
Purchase of treasury stock (1,617 ) (11,134 )
Issuance of treasury stock 34 108
Dividends paid (7,170 ) (7,325 )
Other (913 ) 499
Net Cash Used in Financing Activities (11,494 ) (11,716 )
Net decrease in cash and cash equivalents (881 ) (3,497 )
Cash and cash equivalents beginning of year 3,339 4,868
Cash and Cash Equivalents End of Period $ 2,458 $ 1,371
Financial Data
AT&T Inc.
Supplementary Operating and Financial Data
Dollars in millions except per share amounts, subscribers and connections in (000s)
Unaudited Three Months Ended Nine Months Ended
9/30/2014 9/30/2013 % Chg 9/30/2014 9/30/2013 % Chg
Wireless
Subscribers and Connections
Total 118,650 109,460 8.4 %
Postpaid 75,105 72,032 4.3 %
Prepaid 11,179 7,425 50.6 %
Reseller 13,884 14,089 -1.5 %
Connected Devices 18,482 15,914 16.1 %
Wireless Net Adds
Total 2,007 989 3,703 1,912 93.7 %
Postpaid 785 363 2,436 1,210
Prepaid (140 ) 192 (595 ) 19
Reseller 87 (285 ) (281 ) (951 ) 70.5 %
Connected Devices 1,275 719 77.3 % 2,143 1,634 31.2 %
M&A Activity, Partitioned Customers and Other Adjs. 9 587 -98.5 % 4,571 591
Wireless Churn
Postpaid Churn 0.99 % 1.07 % -8 BP 0.97 % 1.04 % -7 BP
Total Churn 1.36 % 1.31 % 5 BP 1.41 % 1.35 % 6 BP
Other
Licensed POPs (000,000) 321 317 1.3 %
Wireline
Voice
Total Wireline Voice Connections 26,220 29,296 -10.5 %
Net Change (738 ) (932 ) 20.8 % (2,269 ) (2,888 ) 21.4 %
Broadband
Total Wireline Broadband Connections 16,486 16,427 0.4 %
Net Change 38 (26 ) 61 37 64.9 %
Video
Total U-verse Video Connections 6,067 5,266 15.2 %
Net Change 216 265 -18.5 % 607 730 -16.8 %
Consumer Revenue Connections
Broadband1 14,844 14,665 1.2 %
U-verse Video Connections 6,045 5,249 15.2 %
Voice2 14,880 16,749 -11.2 %

Total Consumer Revenue Connections1

35,769 36,663 -2.4 %
Net Change (156 ) (345 ) 54.8 % (621 ) (1,004 ) 38.1 %
AT&T Inc.
Construction and capital expenditures:
Capital expenditures $ 5,180 $ 5,900 -12.2 % $ 16,829 $ 15,565 8.1 %
Interest during construction $ 60 $ 73 -17.8 % $ 178 $ 213 -16.4 %
Dividends Declared per Share $ 0.46 $ 0.45 2.2 % $ 1.38 $ 1.35 2.2 %
End of Period Common Shares Outstanding (000,000) 5,185 5,280 -1.8 %

Debt Ratio3

44.8 % 46.9 %

-210 BP

Total Employees 247,700 246,740 0.4 %

1

Consumer wireline broadband connections include DSL lines, U-verse high speed Internet access and satellite broadband.

2

Includes consumer U-verse Voice over Internet Protocol connections of 4,698 as of September 30, 2014.

3

Total long-term debt plus debt maturing within one year divided by total debt plus total stockholders’ equity.

Note: For the end of 3Q14, total switched access lines were 21,464; retail business switched access lines totaled 9,509; and wholesale, national mass markets and coin switched access lines totaled 1,773. Restated switched access lines do not include ISDN lines.

Financial Data
AT&T Inc.
Non-GAAP Wireless Reconciliation
Wireless Segment EBITDA
Dollars in millions
Unaudited
Three Months Ended
9/30/13 12/31/13 3/31/14 6/30/14 9/30/14
Segment Operating Revenues
Service $ 15,460 $ 15,660 $ 15,387 $ 15,148 $ 15,423
Equipment 2,020 2,777 2,479 2,782 2,914
Total Segment Operating Revenues $ 17,480 $ 18,437 $ 17,866 $ 17,930 $ 18,337
Segment Operating Expenses
Operations and support 10,982 12,576 10,882 11,568 11,855
Depreciation and amortization 1,875 1,915 1,931 2,035 1,965
Total Segment Operating Expenses 12,857 14,491 12,813 13,603 13,820
Segment Operating Income 4,623 3,946 5,053 4,327 4,517
Segment Operating Income Margin 26.4 % 21.4 % 28.3 % 24.1 % 24.6 %
Plus: Depreciation and amortization 1,875 1,915 1,931 2,035 1,965
EBITDA1 $ 6,498 $ 5,861 $ 6,984 $ 6,362 $ 6,482

EBITDA as a % of Service Revenues2

42.0 % 37.4 % 45.4 % 42.0 % 42.0 %

1EBITDA is defined as Operating Income Before Depreciation and Amortization.

2Service revenues include Wireless data, voice, text and other service revenues.

Financial Data
AT&T Inc.
Non-GAAP Wireless Reconciliation
Wireless Segment Adjusted EBITDA
Dollars in millions
Unaudited
Three Months Ended
9/30/13 9/30/14
Segment Operating Revenues
Service $ 15,460 $ 15,423
Equipment 2,020 2,914
Total Segment Operating Revenues $ 17,480 $ 18,337
Segment Operating Income 4,623 4,517
Segment Operating Income Margin 26.4 % 24.6 %
Plus: Depreciation and amortization 1,875 1,965
EBITDA1 $ 6,498 $ 6,482
Total EBITDA Margin 37.2 % 35.3 %
EBITDA as a % of Service Revenues2 42.0 % 42.0 %
Adjustments:
Wireless integration expense3 171
Adjusted EBITDA1 $ 6,498 $ 6,653
Total Adjusted EBITDA Margin 37.2 % 36.3 %
Adjusted EBITDA as a % of Service Revenues2 42.0 % 43.1 %

1EBITDA is defined as Operating Income Before Depreciation and Amortization.

2Service revenues include Wireless data, voice, text and other service revenues.

3Operations and Support expenses for Leap and Alltel wireless integration costs.

Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Free Cash Flow
Dollars in millions
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2013 2014 2013 2014
Net cash provided by operating activities $ 9,168 $ 8,724 $ 26,879 $ 25,593
Less: Construction and capital expenditures (5,973 ) (5,240 ) (15,778 ) (17,007 )
Free Cash Flow $ 3,195 $ 3,484 $ 11,101 $ 8,586
Free Cash Flow after Dividends
Dollars in millions
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2013 2014 2013 2014
Net cash provided by operating activities $ 9,168 $ 8,724 $ 26,879 $ 25,593
Less: Construction and capital expenditures (5,973 ) (5,240 ) (15,778 ) (17,007 )
Free Cash Flow 3,195 3,484 11,101 8,586
Less: Dividends paid (2,395 ) (2,386 ) (7,325 ) (7,170 )
Free Cash Flow after Dividends $ 800 $ 1,098 $ 3,776 $ 1,416
Free cash flow includes reimbursements of certain postretirement benefits paid.

Free cash flow is defined as cash from operations minus construction and capital expenditures. Free cash flow after dividends is defined as cash from operations minus construction, capital expenditures and dividends. We believe these metrics provide useful information to our investors because management regularly reviews free cash flow as an important indicator of how much cash is generated by normal business operations, including capital expenditures, and makes decisions based on it. Management also views free cash flow as a measure of cash available to pay debt and return cash to shareowners.

Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Annualized Net-Debt-to-Adjusted-EBITDA Ratio
Dollars in millions
Unaudited

Three Months Ended

3/31/14 6/30/14 9/30/14 2014 YTD
Operating Revenues $ 32,476 $ 32,575 $ 32,957 $ 98,008
Operating Expenses 26,198 26,959 27,555 80,712
Total Operating Income 6,278 5,616 5,402 17,296
Add back Depreciation and Amortization 4,617 4,550 4,539 13,706
Consolidated Reported EBITDA 10,895 10,166 9,941 31,002
Add Back:
Merger and wireless integration costs1 81 97 213 391
Total Consolidated Adjusted EBITDA 10,976 10,263 10,154 31,393
Annualized Consolidated Adjusted EBITDA $ 41,857
End-of-period current debt 5,109
End-of-period long-term debt 70,516
Total End-of-Period Debt 75,625
Less Cash and Cash Equivalents 2,458
Less Bank Securities – Certificates of Deposit & Time Deposits2 1,890
Net Debt Balance $ 71,277
Annualized Net-Debt-to-Adjusted-EBITDA Ratio 1.70

1Adjustments include Operations and Support expenses for Leap and Alltel wireless integration costs and DIRECTV merger costs.

2Bank Securities are included in “Other current assets” on the Consolidated Balance Sheets.

Net-Debt-to-EBITDA ratios are non-GAAP financial measures frequently used by investors and credit rating agencies. Management believes these measures provide relevant and useful information to investors and other users of our financial data. Net debt is calculated by subtracting cash and cash equivalents from the sum of debt maturing within one year and long-term debt. The Net-Debt-to-EBITDA ratio is calculated by dividing the Net Debt by annualized EBITDA. Annualized EBITDA is calculated by annualizing the year-to-date EBITDA.

Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.

Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Adjusted Operating Income Margin
Dollars in millions
Unaudited
Three Months Ended
September 30,
2013 2014
Reported Operating Income $ 6,188 $ 5,402
Reported Operating Income Margin 19.2 % 16.4 %
Adjustments:

Merger and integration costs1

(255 )
Spectrum transfer 229 -
Adjusted Operating Income $ 5,959 $ 5,657
Adjusted Operating Income Margin 18.5 % 17.2 %

1Includes Leap and Alltel wireless integration costs and DIRECTV merger costs.

Adjusted Operating Income and Adjusted Operating Income Margin are non-GAAP financial measures calculated by excluding from operating revenues and operating expenses certain significant items that are non-operational or non-recurring in nature, including dispositions. Management believes that these measures provide relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends.

Adjusted Operating Income and Adjusted Operating Income Margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculations of Adjusted Operating Revenues may differ from similarly titled measures reported by other companies.

Financial Data
AT&T Inc.
Non-GAAP Consolidated Reconciliation
Adjusted Diluted EPS
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2013 2014 2013 2014
Reported Diluted EPS $ 0.72 $ 0.58 $ 2.09 $ 1.95
Adjustments:

Merger and integration costs1

0.03 0.07
Early debt redemption costs 0.02 0.02
Tax and spectrum transfer (0.06 ) - (0.08 ) -
Am’erica M’ovil – Gain on AMX shares sale - (0.04 ) (0.08 )
Adjusted Diluted EPS $ 0.66 $ 0.63 $ 1.97 $ 1.96
Year-over-year growth – Adjusted -4.5 % -0.5 %

Weighted Average Common Shares Outstanding with Dilution (000,000)

5,331 5,214 5,419 5,224

1Includes Leap and Alltel wireless integration costs and DIRECTV merger costs.

Adjusted Diluted EPS is a non-GAAP financial measure calculated by excluding from operating revenues, operating expenses and equity in net income of affiliates certain significant items that are non-operational or non-recurring in nature, including dispositions. Management believes that this measure provides relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends.

Adjusted Diluted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculation of Adjusted Diluted EPS, as presented, may differ from similarly titled measures reported by other companies.

EBITDA DISCUSSION

For AT&T, EBITDA is defined as operating income before depreciation and amortization. EBITDA service margin is calculated as EBITDA divided by service revenues. EBITDA differs from Segment Operating Income (Loss), as calculated in accordance with U.S. generally accepted accounting principles (GAAP), in that it excludes depreciation and amortization. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with GAAP. Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies.

We believe these measures are relevant and useful information to our investors as they are part of AT&Ts internal management reporting and planning processes and are important metrics that management uses to evaluate the operating performance of its wireless operations. These measures are used by management as a gauge of our success in acquiring, retaining and servicing wireless subscribers because we believe these measures reflect AT&Ts ability to generate and grow subscriber revenues while providing a high level of customer service in a cost-effective manner. Management also uses these measures as a method of comparing our Wireless segments performance with that of many of its competitors. The financial and operating metrics which affect EBITDA include the key revenue and expense drivers for which AT&T Mobilitys operating managers are responsible and upon which we evaluate their performance.

EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA excludes other income (expense) net, net income attributable to noncontrolling interest and equity in net income (loss) of affiliates, as these do not reflect the operating results of our wireless subscriber base and national footprint that we utilize to obtain and service our customers. Equity in net income (loss) of affiliates represents AT&T Mobilitys proportionate share of the net income (loss) of affiliates in which it exercises significant influence, but does not control. As AT&T Mobility does not control these entities, our management excludes these results when evaluating the performance of our primary operations. EBITDA excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with its capitalization and tax structures. Finally, EBITDA excludes depreciation and amortization, in order to eliminate the impact of capital investments.

We believe EBITDA as a percentage of service revenues to be a more relevant measure of our Wireless segment operating margin than EBITDA as a percentage of total revenue. We generally subsidize a portion of our wireless handset sales, all of which are recognized in the period in which we sell the handset. Management views this equipment subsidy as a cost to acquire or retain a subscriber, which is recovered through the ongoing service revenue that is generated by the subscriber. We also use wireless service revenues to calculate margin to facilitate comparison, both internally and externally with our wireless competitors, as they calculate their margins using wireless service revenues as well.

There are material limitations to using these non-GAAP financial measures. EBITDA and EBITDA service margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies. Furthermore, these performance measures do not take into account certain significant items, including depreciation and amortization, interest expense, tax expense and equity in net income (loss) of affiliates, which directly affect our Wireless segment income. Management compensates for these limitations by carefully analyzing how its competitors present performance measures that are similar in nature to EBITDA as we present it, and considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net income as calculated in accordance with GAAP. EBITDA and EBITDA service margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

FREE CASH FLOW DISCUSSION

Free cash flow is defined as cash from operations minus construction and capital expenditures. Free cash flow after dividends is defined as cash from operations minus construction, capital expenditures and dividends. Free cash flow yield is defined as cash from continuing operations less construction and capital expenditures as a percentage of market capitalization computed on the last trading day of the quarter. Market capitalization is computed by multiplying the end of period stock price by the end of period shares outstanding. We believe these metrics provide useful information to our investors because management reviews free cash flow as an important indicator of how much cash is generated by normal business operations, including capital expenditures, and makes decisions based on it. Management also views it as a measure of cash available to pay debt and return cash to shareowners.

NET DEBT TO EBITDA DISCUSSION

Net Debt to EBITDA ratios are non-GAAP financial measures frequently used by investors and credit rating agencies and management believes these measures provide relevant and useful information to investors and other users of our financial data. The Net Debt to EBITDA ratio is calculated by dividing the Net Debt by annualized EBITDA. Net Debt is calculated by subtracting cash and cash equivalents and certificates of deposit and time deposits that are greater than 90 days, from the sum of debt maturing within one year and long-term debt. Annualized EBITDA is calculated by annualizing the year-to-date EBITDA.

Adjusted EBITDA excludes costs which are non-recurring in nature. Adjusted EBITDA also excludes net actuarial gains or losses associated with our pension and postemployment benefit plans, which we immediately recognize in the income statement, pursuant to our accounting policy for the recognition of actuarial gains/losses. As a result, the Adjusted EBITDA reflects an expected return on plan assets rather than the actual return on plan assets, as included in the GAAP measure of income. This measure is consistent with metrics under our existing credit agreements.

ADJUSTING ITEMS DISCUSSION

Adjusted Operating Revenues, Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA and Adjusted diluted EPS are non-GAAP financial measures calculated by excluding from operating revenues, operating expenses and income tax expense certain significant items that are non-operational or non-recurring in nature, including dispositions. Management believes that these measures provide relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends.

Adjusted Operating Revenues, Adjusted Operating Income, Adjusted Operating Income Margin Adjusted EBITDA and Adjusted diluted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. Our calculations of Adjusted diluted EPS, as presented, may differ from similarly titled measures reported by other companies.

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