AT&T’s 2Q12 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: John Hodulik - UBS - Analyst : Thanks. Two quick ones. First, John, just based on your comments on the business market, you turned positive on the enterprise side. Do you expect that to remain positive going forward and is the slight change just some incremental weakness on the sort of low-end SME side? And then on the buyback, obviously, you guys have made a lot of progress there. Do you expect to be substantially complete with the buyback by year-end? Thanks.

Question: John Hodulik - UBS - Analyst : Got you. Thanks.

Question: Simon Flannery - Morgan Stanley - Analyst : Thank you very much. Good morning. John, I wonder if you could update us on the status of the review of the rural lines and also churn was excellent this quarter. You went through some of the factors driving that. How should we think about churn going forward from here? You had a pretty substantial drop. Is there more room in your view for improvements in that or is this as good as you think it can get to? Thanks.

Question: Simon Flannery - Morgan Stanley - Analyst : Okay, because there was some talk of the IPT [slams] and so forth, but that is still an option rather than a choice at this stage, is that right?

Question: Simon Flannery - Morgan Stanley - Analyst : Okay. On the churn? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Simon Flannery - Morgan Stanley - Analyst : Thank you.

Question: Phil Cusick - JPMorgan - Analyst : Hi, guys. Can you hear me?

Question: Phil Cusick - JPMorgan - Analyst : Great, thanks, John. So let's just talk about ARPU for a second. Can you tell us if you expect any change in trajectory given the new pricing environment from the third or fourth quarters? And then also do you anticipate changing your reporting methodology over time as tablets dilute revenue per device? Thanks.

Question: Phil Cusick - JPMorgan - Analyst : Good, thanks, John.

Question: Jonathan Chaplin - Credit Suisse - Analyst : Thanks. A couple of quick ones if I could. So firstly, it looks like your smartphone sales this year are trending well below where they were at this point last year. I am wondering if that means we are on track to do even less than the 25 million smartphone sales that you expected for the year or if you are just expecting a blockbuster fourth quarter with the new iPhone launch? And then I am just wondering if you could sort of give us some context around what to expect for EBITDA margins given that trend. It seems like we should see an even lower upgrade rate next quarter. This is sort of the seasonally up quarter for upgrades and with the iPhone launch it should be even lower next quarter. So I would expect margins to be even higher. And then I'm wondering what they could potentially be in the fourth quarter as well. Thank you.

Question: Jonathan Chaplin - Credit Suisse - Analyst : John, one point of clarification quickly. When you say sticking with guidance on smartphones, you mean still sticking to 25 million smartphone sales for the year? The upgrade rate has to be down year over year, right?

Question: Jonathan Chaplin - Credit Suisse - Analyst : Got it. Thank you so much.

Question: Jason Armstrong - Goldman Sachs - Analyst : Great, thanks, good morning. Maybe just a follow-up. There is obviously I think a lot of questions on sort of the upgrade cycle out there and John, you just gave a lot of good data points. I think people probably still wrestle with is this a result of policy changes versus is this just new handset availability or lack thereof. Maybe another way of attacking this is are you seeing notable changes in the percent of subscribers that are eligible for an upgrade at this point, but are postponing decisions, maybe that would be helpful as sort of a gauge of what to expect over the next couple quarters. And then just second quick question, the union deal you recently signed, just wondering if you can talk us through benefits from that deal and how that may change the cost structure. Thanks.

Question: Jason Armstrong - Goldman Sachs - Analyst : Thanks, John.

Question: David Barden - Bank of America-Merrill Lynch - Analyst : Hey, guys. Thanks for taking the questions. John, maybe just a follow-up on the labor point. I was surprised to see that the headcount was down a little over 4% in the quarter. That is one of the bigger headcount changes we have seen in a few years. And I guess if you could elaborate a little bit about where that was going on and what the game plan behind the headcount is both this past quarter and maybe for the rest of the year. And then just second, we have talked a lot about the (technical difficulty) and the potential to have a benefit down the road for an AT&T. Are you guys able to share any statistics right now about, for instance, what percentage of the base would actually, could actually generate overage either now or in the near future the next year or two? I guess one of the questions everyone has is we hear about the averages being large, but a lot of those people are still on unlimited plans. If your average customer is only using 300, 400 or 500 megabytes a month and that is growing 30%, 40% for the next few years, it could be many, many years before these tiered plans kind of generate profits. Could you help kind of clear that issue up for us? Thanks. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: David Barden - Bank of America-Merrill Lynch - Analyst : Okay, thanks, John. Yes, I think that the change in the employees was going to be the difference in the directory. So that clears it up. I appreciate the help. Thanks, John.

Question: Tim Horan - Oppenheimer & Co. - Analyst : Thanks, good morning, guys. John, I hate to beat a dead horse here, but on the smartphones, the 25 million in sales, maybe a touch more color on the outlook. Do you think you can continue to control that over the next couple of years and at the same type of pace? And I guess related to that, with the upgrade fees and what you have seen here on churn, do you think you can possibly still raise prices there, maybe up to around the $50 price point or so? And then lastly on the handsets, it does seem like the -- are the subsidies coming down I guess for the non-iPhone devices? The average selling prices seem to be coming down for Android devices. I am wondering if you are seeing any benefit from that. Thanks. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Tim Horan - Oppenheimer & Co. - Analyst : Thank you.

Question: Michael Rollins - Citi - Analyst : Hi, good morning. Thanks for taking the question. I was curious if you could talk a bit more about how to think about the first half of free cash flow performance relative to the guidance of $15 billion to $16 billion for the year. And within that context, maybe you could discuss directionally how you are seeing capital spending for wireline and wireless, the implications for cash taxes going into next year. And then last and not least is just pension contributions and given the new law, should we be thinking any differently about the way you're going to be approaching the pension? Thanks.

Question: Michael Rollins - Citi - Analyst : Thanks, John. It's really helpful.

Question: Brett Feldman - Deutsche Bank - Analyst : Thanks for taking the question. I just want to follow up a little bit on CapEx. Since it does seem like we're going to see a step-up in the second half, could you provide a little color around maybe where we are going to see that? It seems it would likely be on the wireless side in light of your LTE buildout plan, but if there is some wireline investments you need to make, that would be helpful color. And then just bigger picture, correct me if I am wrong, but I believe you're doing a fairly dense initial deployment of LTE. Meaning you are hitting quite a few sites or most of your sites with that buildout. How do we think about capital intensity in the wireless business after that initial deployment is complete? Could we see CapEx tick down or are you relatively comfortable with the level of investment in the business and you would redirect those dollars into say capacity deployments?

Question: James Ratcliffe - Barclays Capital - Analyst : Good morning. Thanks for taking the question. If we could just look at wireline for a second and you can help us unpack how much of a role international had in the results this quarter and whether currency was a drag year on year. Thanks.

Question: James Ratcliffe - Barclays Capital - Analyst : Great, thank you.