Wireless Division Analysis & Recommendations

1. Wireless Division Analysis & Recommendations Matt Dahlquist Clint Gill Jessica Shoemaker Sergio D. Trujillo

2. Presentation Outline • AT&T and Industry Overview • Assessment of Industry Marketing • SWOT Analysis • Recommendations • Financial Analysis

3. AT&T Overview Four Operating Segments: • Wireless • Wireline • Advertising & Publishing • Other

4. Wireless Overview • 77 Million Customers (26% increase in 2 years) • 3G Network Technology • 46% of 2008 total segment income • Wireless data revenues are growing as customers upgrade handsets (iPhone) • Substantial equipment subsidies to initiate or upgrade service • ARPU growth

5. Marketing within Mobile Telecommunications • U.S. carriers spend more than $3.6 billion annually on marketing • AT&T slogan asserts strong network coverage with the “more bars in more places” • Verizon’s executions rely on the “Can you hear me now?” slogan and large network of users

6. SWOT Analysis • Strength: Apple – AT&T relationship • Has activated between 15 -17 million iPhones • Higher ARPU • Weakness:Wireless Network • Congested wireless network = Poor customer satisfaction • Verizon ads criticize AT&T’s network

7. SWOT Analysis • Opportunity: Change the Conversation • Promote itself as a technology company vs. a utility company • Threat: Losing iPhone Exclusivity • Contract expected to end in June 2010

8. AT&T’s current strategic solutions… • Investments in wireless network • Investment declined in 2009 • Provide “incentives” for reduced data usage • Tiered pricing structure for less data use • Launched “Mark the Spot” app on iPhone • Consumers can report lack of coverage, poor voice quality, and data failure

9. Recommendations • Invest more to improve wireless network • Time is of the essence • Drive loyalty through satisfaction • Create customer appreciation program • Communicate subsidy paid for iPhone • Offer plan upgrades as an alternative to overages • Extend the Apple-AT&T Exclusivity Contract • Expected to end in June 2010

10. Accounting within Telecommunications • Asset Valuation and Impairments • Difference between GAAP and IFRS • Revenue Recognition • When service is provided • Subsidies recorded as a loss or reduction made at sale • Physical Inventory Valuation • Service industry typically doesn’t record inventory

11. Financial Recommendations • Capital Expenditures – Increase from $17 billion in 2009 to $20 billion in 2010 • Use plentiful internal funds and limited new borrowing to finance • Cash from operations up $3 billion to $36.3 billion • Cash balance increased $4.5 billion in 2009 • Maintain current capital structure • 40% debt/60% equity, stock is fairly valued • Continue share buybacks and dividend policy

12. Financial Analysis • Dividend Discount Model (DDM) – AT&T is a stable company in mature industry with track record of paying dividends • Relevant period is previous 3 years (2007-09) forecast next 5 years plus terminal value • PV of expected future dividends= $30.24 • Stock price range: $25 - $28

13. Analysis and Assumptions • Revenues and major expenses up 1% in 2010 • Revenues and major expenses up 5% after 2010 and in perpetuity • The company is in mature and/or highly competitive industries and will grow no faster than nominal GDP • Wireline, Adv/Publishing, Business Services • Wireless

14. Expected Return & Required Return • AT&T’s shares expected return is 11% (6% dividend yield + 5% growth/capital gains) • Required return is 11%,CAPM inputs: • Risk free rate of 4%, RPM=7%, Beta = 1.0 • Historical Beta (0.85) vs. Expected Beta • Technology company or “Ma Bell” utility company? • Future capital expenditures will be in growth segments, not declining segments

15. Questions?