BellSouth 2005 Analyst Briefing

Transcription

1 BellSouth 2005 Analyst Briefing December 6, 2005

2 BellSouth 2005 Analyst Briefing Nancy Davis Vice President, Investor Relations December 6, 2005

3 Safe harbor In addition to historical information, this document may contain forward-looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in markets where we operate or have material investments which would affect demand for our services; (ii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iii) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (iv) unfavorable regulatory actions; and (v) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and, BellSouth assumes no duty to update this information. This document may also contain certain non-gaap financial measures. The most directly comparable GAAP financial measures, and a full reconciliation of non- GAAP to GAAP financial information, are attached hereto and provided on the Company's investor relations web site,

4 Agenda Duane Ackerman Chairman & CEO Mark Feidler President & COO Break minutes Stan Sigman President & CEO Cingular Wireless Pat Shannon Senior Vice President Finance Business Overview Wireline Overview Wireless Overview Financial Review and Outlook

5 BellSouth 2005 Analyst Briefing Duane Ackerman Chairman and Chief Executive Officer December 6, 2005

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7 BellSouth 2005 Analyst Briefing Mark Feidler President & Chief Operating Officer December 6, 2005

8 Agenda Meeting customer needs in a changing market place Investing in competitive broadband network, systems, and IP applications Maximizing margins and return

9 Well-Positioned in Our Markets Market YTD 2005 Revenue YTD Growth Small Business $1.8B 6.1% Consumer $6.1B 2.3% Large Business $2.3B -2.9% Wholesale $3.2B -0.5%

10 SBS Small Business Continues to Grow Small Business Net Access Line Change (000 s) Q05YTD Small Business Revenue Growth (yoy) 6.1% 3.9% $79 ARPU 2.2% $77 $ Q05YTD

11 SBS Small Business Hitting On All Cylinders We Have the Products Full bundles (DSL/LD/Local/Wireless) Differentiate DSL with speed, features and service Complex voice and data for multi-locations We Have the Channels 35%+ revenue from alternate or variable cost channels Inbound channels handle >6M calls annually Reacquisition efforts: direct mail and telemarketing We Have the Pricing/Promotions Retention contracts/offers Reinvest contract savings in additional services Targeted offers Differentiate on service and features

12 CONSUMER LD and DSL Supporting Consumer Revenue Retail Residential Access Lines (Millions) Secondary Primary 2003 YE 2004 YE 3Q05 Long Distance/DSL Revenue as % of Consumer Revenue 19% 24% 12% Q05YTD

13 CONSUMER Packages & Pricing Increase Penetration A Powerful Package Penetration Metrics 3Q 04 3Q 05 LD Penetration 43% 55% DSL Penetration 12% 18% Answers 34% 42% Consumer ARPU $59, up 6% yoy YTD 2005

14 CONSUMER Delivering Through Alternate Channels BellSouth Community Technologies 25% of access lines further growth opportunity New sales-focused organization Products specific to this market Signing major contracts with developers Triple play with video solution through DIRECTV Space in Cingular Stores In 183 stores at end of 3Q05 Third party sellers focus on strategic products Customer demographics: higher propensity to buy, higher tenure Door to Door Launched in January 2005, third party agents 200 reps deployed 76% of customers buying bundles

15 LARGE BUSINESS Delivering Full Range of Services Voice Services Business lines Centrex IP/PBX Conferencing services: on demand and Web Network-hosted VoIP (EVON) (in 2006) Internet Services Dedicated Internet Access (DIA) Business DSL Turn-key Telecommute Large Business Customers Transport Services Frame Relay Metro Ethernet SONET Network Services Managed VPN Robust MPLS network National capabilities

16 WHOLESALE Growing Wireless and Signing Contracts Wholesale Revenue Mix 3Q05YTD Core Wholesale 57% Wireless 15% Local Wholesale 28% Wireless Transport growth >10% 3Q05YTD Local Wholesale (UNE-P) declining >70% under commercial agreement Reducing cost to serve

17 Agenda Meeting customer needs in a changing market place Investing in competitive broadband network, systems, and IP applications Maximizing margins and return

18 COMPETITIVE BROADBAND Industry-Leading Broadband Coverage DSL coverage of households >80% Customers using DSL 43% yoy growth at 3Q05 Homes passed by FTTC growing at ,000 annually Fiber miles 12% yoy growth at 3QYTD MPLS network 2.7M 1.2M >5.6M 50 PoPs

19 COMPETITIVE BROADBAND Increasing Speed of Our Network Market Coverage for 12 mbps (% of Households Covered) >75% >50% Cost = ~$150 per household through 2007 Top 30 market coverage >70% YE07 Trial to 24 mbps throughput

20 COMPETITIVE BROADBAND Rate and Reach Exceeded Expectations Max Attainable Downstream Speed (Mbps) DSL 2+ Trial % of Customers by Speed and Distance 24% 1% 12 Mbps 70% 5% 85% exceed 15 Mbps 5% over 5,000 feet 2,000 5,000 8,000 Measured Loop Length

21 COMPETITIVE BROADBAND Steps to Achieve Broadband Leadership Increase speed and coverage Improve customer service Reduce churn Price/value proposition Developing Higher Speed Products Coverage ~60% by late K 1.5 Mbps 3 Mbps 6 Mbps

22 IP APPLICATIONS Responding to VoIP competition Now Aggressively market bundles Business IP/PBX Next Months Targeted consumer offers in selected markets BellSouth hosted VoIP for consumer and business Wireless/Wireline integration Long-Term Full VoIP rollout IP network efficiencies

23 IP APPLICATIONS Advancing Our Video Initiatives DIRECTV Agency agreement successful with 460,000 customers at 3Q05 Renewing existing agreement IPTV Engaged in technology evolution Conducting market trial summer of 2006 Evaluating business opportunity

24 IP APPLICATIONS Successful Wireless/Wireline Integration Trial First wireline/wireless commercial trial with darkgrey Advertising Gained valuable feedback seamless mobility working as promised understand user needs and preferences Planning consumer trial in 2006 Combine wireless/wireline capacity

25 Agenda Meeting customer needs in a changing market place Investing in competitive broadband network, systems, and IP applications Maximizing margins and return

26 Wireline Focus on Return Prudent pricing Efficient capital deployment Customer service

27 Continued Cost Focus Communications Group Cost Structure 3Q05YTD Labor Work elimination Automation Best sourcing Labor ~50% of Costs Productivity

28 IN SUMMARY BellSouth is Well-positioned in our markets Investing in leading broadband network Executing in the marketplace Maximizing our margins and returns

29 BellSouth 2005 Analyst Briefing Mark Feidler President & Chief Operating Officer December 6, 2005

30 Meeting Break Will resume shortly BellSouth 2005 Analyst Briefing December 6, 2005

31 BellSouth 2005 Analyst Briefing Stan Sigman President and Chief Executive Officer Cingular Wireless December 6, 2005

32 Cingular Time To Leadership Time elapsed since acquisition 13 months Full integration 26 months Industry leading metrics 38 months

33 Cingular Success In Execution The First Year Subscriber base grown by more than 5 million Dramatic improvement in churn Improving revenue growth Improving margins Merger integration activities on or ahead of schedule

34 Four Strategic Imperatives 1. Build the best network 2. Provide great customer service 3. Create unmatched distribution 4. Develop compelling products/services

35 1. B U I L D T H E B E S T N E T W O R K Broadest Spectrum and Coverage Cellular/PCS Spectrum Depth (MHz) Cingular Verizon Sprint Nextel 48 Top 100 Markets Cell Sites (K) T-Mobile 24 Spectrum depth drives network performance, operating efficiency and new product development Cingular has the most POPs covered by cellular spectrum Cell site leadership allows for better coverage strength and quality Cingular cell sites will be integrated and common technology An additional 4-5K cell sites will be added by YE 2006 for coverage and quality Integration will eliminate 7,600 additional sites by YE 2006 Cingular Sprint Nextel T-Mobile Verizon Source: Raymond James Equity Research

36 Build the Best Network Network Integration will Improve Service while Reducing Costs Before Integration 5 Cell Sites for Blue and Orange High Signal Strength Lo w Average Before Integration Customers experience either the Orange OR Blue Network

37 Build the Best Network Network Integration will Improve Service while Reducing Costs After Integration 8 Total Cell Sites Signal Strength High Lo w Customers experience the combined Network Improved Experience at a Lower Cost Average After Integration Average Before Integration

38 1. B U I L D T H E B E S T N E T W O R K Integrated Network Improvement Blocked Calls Dropped Calls Voice Bit Errors Down 20% Down 30% Down 20% Before After Before After Before After Based on results of cell clusters integrated to date

39 1. B U I L D T H E B E S T N E T W O R K Building the Fastest Network Data Throughput Comparison (in kbps) 3,600 2,400 Burst Speed Higher speed creates opportunities for new products and services Average Speed Range Increased data ARPU opportunity EDGE UMTS HSDPA EV-DO

40 1. B U I L D T H E B E S T N E T W O R K And Lower Cost Network Fully Loaded Network Cost 2G (GSM) 3G (UMTS) 60% 2G (EDGE) 3G (HSDPA) 45-70% Improved cost efficiency on both voice and data platform Simultaneous voice and high speed data applications unique to Cingular Voice Data

41 1. B U I L D T H E B E S T N E T W O R K UMTS Launch: 16 Markets Seattle WA Tacoma WA Portland OR Boston MA San Francisco CA Salt Lake City UT Chicago IL Baltimore MD San Jose CA Washington DC Las Vegas NV San Diego CA Phoenix AZ Houston TX Dallas TX Austin TX

42 Four Strategic Imperatives 1. Build the best network 2. Provide great customer service 3. Create unmatched distribution 4. Develop compelling products/services

43 2. GREAT CUSTOMER SERVICE Reduction in Calling Rates % of January Calling Rate 100% 91% 82% 78% Implemented Common Service Experience to create a consistent experience 22% reduction in calling rates Handling more customers with fewer reps and fewer calls Jan '05 Q1 '05 Q2 '05 Q3 '05

44 Four Strategic Imperatives 1. Build the best network 2. Provide great customer service 3. Create unmatched distribution 4. Develop compelling products/services

45 3. CREATE UNMATCHED DISTRIBUTION Improve Performance in Current Distribution Channels Company stores/kiosks (2,100) Agents (15,000) E-Channels (cingular.com) Expand National / Regional Distribution Best Buy Wal-Mart MusicLand RadioShack

46 3. CREATE UNMATCHED DISTRIBUTION Case Study: RadioShack Effective January 1, 2006 Over 5,000 locations nationwide Loyal customer base Technical sales force Volume, mix and churn commitments Over 5 million phones sold last year

47 Four Strategic Imperatives 1. Build the best network 2. Provide great customer service 3. Create unmatched distribution 4. Develop compelling products/services

48 4. COMPELLING PRODUCTS / SERVICES Develop Differentiated Position Exclusive devices provide a competitive advantage Handsets PDAs Laptops Unique reasons for customers to choose Cingular Exclusive content/applications Integrated products Bundles with BellSouth/AT&T Maximize strengths in enterprise market Top ranked by research firms

49 4. COMPELLING PRODUCTS / SERVICES Growth Opportunities with Prepaid US Prepaid subscribers as a percent of base 9% 11% 13% 14% 15% Growth opportunity with prepaid and hybrid plans as wireless penetration increases Target youth, cash-based and credit challenged segments Two GoPhone products: Cash: Pay As You Go Credit: Pick Your Plan Over 60,000 replenishment locations (E) 2006(E) 2007(E) 2008(E) Source: Goldman Sachs Equity Research

50 4. COMPELLING PRODUCTS / SERVICES Innovative Product Features Cingular Nextel Sprint Verizon Availability Info Quick Group Calling Convert to Cellular Voice Message Call Me Alert - Call Waiting Largest coverage area with over 270M Pops Fastest voice thru speed Most innovative, friendly features

51 4. COMPELLING PRODUCTS / SERVICES Our Enterprise Strength The overall front-runner 2.5G and 3G Business Services December 2004 value proposition for enterprises is compelling Anatomy of a Successful Wireless B2B Strategy May 2005 opportunity to be best all-around 2005 US Wireless Service Providers Magic Quadrant June 2005 Low Ability to Gain Share High Best Positioned in Marketplace T-Mobile Nextel Sprint Cingular Verizon Low Opportunity Alignment High IDC Leadership Grid: US Wireless Service Provider Market, August 2005

52 Cingular Success In Execution Drives Leadership Execution Execute to significantly improve the customer experience Drives Leadership (by end of 2007) Growth compared to the industry # 1 Execute to improve financial performance Execute to drive value to BellSouth and AT&T Profitability compared to the industry Reputation with customers # 1 # 1

53 BellSouth 2005 Analyst Briefing Stan Sigman President and Chief Executive Officer Cingular Wireless December 6, 2005

54 BellSouth 2005 Analyst Briefing Pat Shannon Senior Vice President - Finance December 6, 2005

55 Agenda Year-to-date highlights Well-positioned portfolio Looking ahead

56 Y E A R T O D A T E 3 Q 0 5 Highlights: Our Strategy is Working Increasing contribution from wireless 3.2 million customer adds Improving margins Network evolution Leveraging our wireline customer base Added over 580,000 DSL customers Nearly 1 million new long distance customers Returning cash to shareholders Competitive dividend $2 billion share repurchase program

57 Y E A R T O D A T E 3 Q % of Revenue from Segments with YTD Growth Normalized Revenues Revenue Mix 1 3Q05 YTD Revenues (% YoY) ICS 13% 5.6% 2 6.1% Large Bus 9% Small Bus 7% Cingular 40% 2.7% 2.3% Consumer 24% -0.5% A&P 6% -2.9% 1 Pie chart does not include Other revenue of 1% YTD Comparison to pro forma prior year amounts Cingular A&P Consumer Small Bus. Large Bus. ICS

58 Y E A R T O D A T E 3 Q 0 5 Cingular: Continues to Grow Cingular Subscribers (M) 100% Cingular M Subs Added Cingular customer growth continues Unparallelled distribution Churn reduction Improving service 4Q04 1Q05 2Q05 3Q05 Cingular Revenue ($B) 100% Cingular Revenue growth 3Q05YTD 5.6% pro forma (YoY) Data revenue growth $8.2 $8.6 $8.7 $7.1* Equipment Revenue Service Revenue 4Q04 1Q05 2Q05 3Q05 * Includes AWE results from October 25, 2004 purchase date to end of quarter

59 Y E A R T O D A T E 3 Q 0 5 Cingular: Continues to Grow Cingular OIBDA Service Margin 31.6% 28.9% 23.4% 25.5% 4Q04 1Q05 2Q05 3Q05 Up 820 bps Cingular margin improvement Merger synergies Churn reduction Distribution rationalization Headcount reductions Improved purchasing power Cingular Impact on BellSouth EPS $.08 Net income Growing contribution to earnings per share $.04 $.12 Swing ($.02) ($.04) 4Q04 1Q05 2Q05 3Q05

60 Y E A R T O D A T E 3 Q 0 5 Broadband s Strong Results Continue DSL Customers (Millions) DSL Revenue ($ Millions) $ K Subs Added $710 Up 25% ARPU $40/mo 2004 YTD 2005 YTD EOY Q05 2Q05 3Q05

61 Y E A R T O D A T E 3 Q 0 5 Long Distance: Strong Operating Margin Contribution Long Distance Customers (Millions) Long Distance Revenue* ($ Millions) $900 $1,248 Up 39% ARPU $17/mo 2004 YTD 2005 YTD EOY Q05 2Q05 3Q05 * Represents Retail Interlata Revenue Strong operating margin contribution

62 Y E A R T O D A T E 3 Q 0 5 Access Line Trends Residential Net Line Change (000s) YTD 597 (1,101) 213 (948) (445) (415) Net Change (504) (735) (860) Business Net Line Change (000s) YTD Residential Line Loss changing contribution mix retail lines twice as profitable as wholesale lines substitution impacts Business access lines steady improvement (270) (171) 49 (96) Net Change (203) (122) (47) Retail Access Lines * Line counts exclude Other Lines Wholesale Access Lines

63 Y E A R T O D A T E 3 Q 0 5 Network Data Revenue: Growth Driven by DSL Comm Group Network Data Revenue (Billions) $4.4 $4.5 17% 22% 36% 34% 25% 33% DSL $3.5B 4.2% Growth YTD 2005 Core Retail 47% 44% 42% Wholesale FY2003 FY2004 YTD 2005

64 Y E A R T O D A T E 3 Q 0 5 A&P Results: Industry-Leading Growth Advertising & Publishing Revenue Growth (Year over Year Growth) 3.9% 3.6% A&P 6% of normalized revenues at operating margin >45% 1.1% 1.9% 2.2% 4Q04 1Q05 2Q05 3Q05 Revenue Growth Adjusted for Hurricane Katrina WWW

65 Focused On Driving Shareholder Value BellSouth has Executed on its Priorities for Uses of Cash 1 Reinvest 2 Maintain 3 Maintain 4 Repurchase in the business a strong balance sheet a competitive dividend shares Broadband investment in wireline Cingular acquisition of AWE and 3G deployment Paid off $3B, or half, of $6B borrowed to finance AWE purchase Return to pre-awe credit metrics Quarterly dividend of $0.29 represents a 38% increase over 1Q03 $2 billion program announced in 3 rd Quarter

66 Agenda Year-to-date highlights Well-positioned portfolio Looking ahead

67 Improving Portfolio Mix Normalized Revenue International 8% 2003 YTD 2005 Retail Consumer 28% Cingular 22% A&P 7% Retail Consumer 24% Cingular 40% ICS 13% ICS 15% Large Business 11% Small Business 7% Large Business 9% Small Business 7% A&P 6% Wireless share up, Retail Consumer down * Charts do not include Other revenue of 2% in 2003 and 1% YTD 2005

68 Cingular: Provides Exposure to Wireless Growth Share of BellSouth Normalized Revenue YTD 3Q05 Industry-leading spectrum depth Unmatched distribution Robust product portfolio Cingular 40% Improving financial metrics Well-positioned for revenue and margin growth

69 Consumer: Managing through Market Changes Share of BellSouth Normalized Revenue YTD 3Q05 Consumer Consumer 24% 24% Consumer Revenue ($ Billions) $5.9 $6.1 19% Decline in Access Lines 2002 YTD 2005 YTD Increasing the value of each customer

70 Balancing the Portfolio YTD 3Q05 (000 s of Lines) 1, ~$50 ARPU ~$40 ARPU 2 Additional Revenue Gaining back revenues with Wireless growth Wireless Adds (Proportional) Residential Access Line Losses Incremental Connections 1 Represents both Retail and Wholesale Residential Switched Access Line Losses 2 Represents a blend of both Retail and Wholesale Residential Access Line ARPUs

71 Sizing Cable VoIP Exposure in our Footprint Households in BellSouth Footprint 100% 16.3M 80% 12.7M 60% 7.7M 40% 20% 0% Total Passed by Major Cable MSO* Subscribe to CATV from Major MSO 2.6M Subscribe to Cable Modem from Major MSO? Subscribe to VoIP from Major MSO * Major Cable MSOs include Comcast, Charter, Time Warner Cable, Cox, and Bright House Comcast and Time Warner pro forma for Adelphia transaction.

72 Rational Market Pricing A Few Examples Estimated Cable Overlap with HHs in BellSouth Footprint Voice, Data and Entertainment Triple Play Price Comparison* BellSouth Cable Provider Comcast 29%* Atlanta $145 $145 1 Charter 14% Time Warner 13%* Select Market Pricing Greenville Charlotte $150 $143 2 $145 $154 Cox 8% New Orleans $146 $148 *The overlap percentages of Comcast and Time Warner will change somewhat after the completion of the Adelphia transaction. * Excludes promotional rates good for less than 1 year. Prices include estimated taxes and fees. 1 Comcast Digital Voice service 2 $10 in taxes and fees based on call center estimate

73 Business and Wholesale: Stable Market Position Share of BellSouth Normalized Revenue YTD 3Q05 Business & Wholesale 29% Robust Southeastern voice and data network Strong brand and service heritage Strong position in small business sector Economical and capable out-of-region solutions Minimal exposure to high-end enterprise market

74 Advertising & Publishing: Positioned for Growth Share of BellSouth Normalized Revenue YTD 3Q05 Industry-leading revenue growth Strong operating margins of 46% A&P 6% WWW

75 Continuing to Invest in the Right Assets Total Capex Remains Stable (As % of Revenues) Excluding Wireless But Shifting Distribution to Broadband 17.4% 14.5% 15.9% 16.3% Traditional Investment Broadband Investment ~30% ~40% Q05 YTD Q05 YTD

76 We Remain Focused on Maximizing ROIC Wireline Only Wireline ROIC has Remained Steady And Consistently Ahead of Our Peers (3Q05 YTD ROIC) 12.9% 12.4% 12.1% 12.1% <7.0% Q05 YTD BellSouth Peer Average Estimated Note: Return on Invested Capital is defined as After-tax Operating Income divided by net PP&E (less cash/st debt), plus net working capital, plus intangibles

77 Agenda Year-to-date highlights Well-positioned portfolio Looking ahead

78 2006 Guidance Summary 2006 Guidance Total Revenue Growth (normalized) Low Single Digit Growth Comm Group Revenue Growth Flat to Slightly Down DSL Customers >3.5 million

79 2006 Guidance Summary 2006 Guidance BellSouth Reported Capital Investment* (excluding Cingular) Similar Level to 2005 BellSouth Reported Operating Free Cash Flow* (excluding Cingular) Cingular Reported Capital Investment (100% Cingular) Cingular Reported Operating Free Cash Flow (100% Cingular) $3B range $ B $2B range * Excludes capital for Katrina recovery efforts

80 Our Strategy is Working We are delivering strong financial results Improving Cingular performance Driving DSL and Long Distance penetration Well-positioned portfolio Increasing contribution from Cingular Leveraging our wireline base Making the right investments Focus on shareholder value Competitive dividend $2 billion share repurchase program

81 BellSouth 2005 Analyst Briefing Pat Shannon Senior Vice President - Finance December 6, 2005

82