DEFA14A 1 schedule14ajuly24.txt SOLICITING MATERIALS PURSUANT TO RULE 14A-12 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 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 Rule 14a-12 AT&T Corp. -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) N/A -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the 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: -------------------------------------------------------------------------------- On July 24, 2001, AT&T Corp. made a presentation via teleconference of the following. In addition a copy of these slides was made available on the Company's web site. [AT&T logo] AT&T BROADBAND July 2001 INVESTOR PRESENTATION Safe Harbor -------------------------------------------------------------------------------- The following are "forward-looking statements" which are based on management's beliefs as well as on a number of assumptions concerning future events made by and information currently available to management. The audiences are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside AT&T's control, that could cause actual results to differ materially from such statements. For a more detailed description of the factors that could cause such a difference, please see AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results of AT&T. In connection with these transactions, AT&T will be filing proxy statements, tender offer statements and other materials with the Securities and Exchange Commission. Security holders are urged to read these materials when they becomes available because they will contain important information. Investors and security holders may obtain a free copy of these materials when they become available as well as other materials filed with the Securities and Exchange Commission concerning AT&T at the Securities and Exchange Commission's website at http://www.sec.gov. In addition, these materials and other documents may be obtained for free from AT&T by directing a request to AT&T at 295 North Maple Drive, Basking Ridge, NJ 07920; Attn: Investor Relations. AT&T and its officers and directors may be deemed to be participants in the solicitation of proxies from AT&T's shareholders with respect to these transactions. Information regarding such officers and directors is included in AT&T's proxy statement for its 2001 annual meeting of stockholders filed with the Securities and Exchange Commission on March 30, 2001. This document is available free of charge at the SEC's internet site or from AT&T as described above. 1 --------------------------------------------------- [AT&T logo] AT&T Broadband Management Representatives -------------------------------------------------------------------------------- TITLE POSITION DISCUSSION TOPICS ----- -------- ----------------- Mike Armstrong Chairman and CEO AT&T Broadband Vision AT&T Corp. Dan Somers President and CEO Operations AT&T Broadband Greg Braden EVP Broadband Technology and Services and CTO Telephony AT&T Broadband Mike Huseby EVP and CFO Financial AT&T Broadband 2 --------------------------------------------------- [AT&T logo] AT&T Broadband [cordless telephone graphic] [computer graphic] [television graphic] THE AT&T BROADBAND VISION MIKE ARMSTRONG CHAIRMAN AND CEO, AT&T AT&T Broadband Vision -------------------------------------------------------------------------------- Be the leading U.S. provider of integrated residential broadband including: video, voice, and data services - MARKET OPPORTUNITY for all broadband services is large and expanding - Superior FACILITIES-BASED broadband access to the home - Large, well-clustered MAJOR MARKET FOCUS - Enhance CUSTOMER RELATIONSHIPS through superior service - Maximize the POWERFUL AT&T BRAND ------------------------------------------------------------------ Deliver superior returns for investors ------------------------------------------------------------------ 4 --------------------------------------------------- [AT&T logo] AT&T Broadband Best Industry Footprint -------------------------------------------------------------------------------- [map graphic of the United States] Atlanta 0.6 Bay Area 1.8 Boston/Hartford 2.0 Chicago 1.7 Dallas 0.6 Denver 0.6 Los Angeles 0.5 Miami 0.7 Pittsburgh 0.6 Portland 0.5 Sacramento 0.6 Seattle 1.0 Operations Snapshot (in mm) (1) -------------------------------------------------------------------------------- Leadership Market Share % of Subs in Homes in Top of Top 25 Clusters Company Subs Passed 25 DMAs DMAs >500K -------------------------------------------------------------------------------- AT&T Broadband (2) 13.8 24.2 12 37% 83% Time Warner 12.6 21.1 4 16% 31% Comcast 8.4 13.8 4 16% 66% Charter 6.9 10.5 1 7% 14% Cox 6.3 9.9 2 6% 26% Adelphia 5.5 9.1 1 8% 47% Cablevision 3.0 4.4 1 9% 100% (1) Wall Street 2001 estimates. (2) Pro forma for all announced transactions. ------------------------------------------------------------------ Leadership in top 25 DMAs ------------------------------------------------------------------ 5 --------------------------------------------------- [AT&T logo] AT&T Broadband Driving EBITDA Margins to Industry Benchmarks -------------------------------------------------------------------------------- - Improved EBITDA margin(1) from 18.3% in 1Q01 to 23.4% in 2Q01 - Expect to deliver $500 million in annualized margin improvement by year-end 2001 - Intensified focus on basic video penetration - Break-even in High Speed Data today - Break-even in Telephony in nine months - Deliver positive unlevered free cash flow by year-end 2003 - On target to meet 2001 financial objectives (1) Normalized EBITDA excluding other income and restructuring charges. 6 --------------------------------------------------- [AT&T logo] AT&T Broadband [cordless telephone graphic] [computer graphic] [television graphic] OPERATIONAL OVERVIEW DAN SOMERS PRESIDENT AND CEO AT&T BROADBAND What Have We Done to Achieve the Vision -------------------------------------------------------------------------------- - Successful integration of MediaOne with TCI assets - Re-configured subscriber base focused on major markets - 4.1 million subscribers sold - 1.4 million subscribers acquired / swapped - 127,000 plant miles and infrastructure rebuilt to support "triple play" - Scaling of new and advanced broadband services from 2.2 million customers at the beginning of 2000 to 5.3 million customers today - Rationalized cost structure - Headends reduced from 200 to 40, serving 11 million customers - Call centers reduced from 200 to 30 - Employees reduced from 53,000 to 43,000 - Reorganization of management structure - Overhead reduced to $250 million annually, including AT&T allocations 8 --------------------------------------------------- [AT&T logo] AT&T Broadband What Is the Impact -------------------------------------------------------------------------------- - Approximately $150 million of margin improvement realized to date - Total of $500 million of margin improvement expected to be realized on a run-rate basis by year-end 2001 - Completed reorganization of corporate and field structure to rightsize organization Decision to Action Implement Impact Beginning ------ ----------- ---------------- -------------------------------------------------------------------------------- End of Telephony promotion August 2000 Feb 2001 First round of headcount reductions December 2000 Feb 2001 Video price increase October 2000 Feb 2001 Second round of headcount reductions March 2001 May 2001 Core video growth initiatives April 2001 May 2001 High speed data price increase April 2001 June 2001 Video equipment rate increase April 2001 July 2001 -------------------------------------------------------------------------------- 9 --------------------------------------------------- [AT&T logo] AT&T Broadband Sustained Growth In Advanced Services -------------------------------------------------------------------------------- 2000-2001 ADVANCED SERVICE NET ADDITIONS (in thousands) ---------------------------------------------------------------------- 3,000- FULL YEAR - - 2,575 (1)(2) 2,500- ------ - ------ - 2,060 ------ 2,000- ------ ------ - 1st HALF ------ ------ - ------ ------ 1,500- 1,233 ------ ------ - ------ ------ ------ - ------ ------ ------ 1,000- 760 ------ ------ ------ - ------ ------ ------ ------ - ------ ------ ------ ------ 500- ------ ------ ------ ------ - ------ ------ ------ ------ - ------ ------ ------ ------ 0-------------------------------------------------------------- 2000 2001 2000 2001E DIGITAL HSD TELEPHONY 1st HALF 2000 387 227 146 1st HALF 2001 598 334 301 FULL YEAR 2000 954 631 475 FULL YEAR 2001E (1)(2) ---------------------------------------------------------------------- (1) Guidance assumes 2000 base will be further adjusted for impact of any transactions closed after 2Q01. (2) Growth based on current guidance of 25% year-over-year growth. 10 -------------------------------------------------- [AT&T logo] AT&T Broadband Leading Provider of Advanced Services -------------------------------------------------------------------------------- Digital Data Telephony Penetration(1) Penetration Penetration ----------- ----------- ----------- -------------------------------------------------------------------------------- [bar graph] [bar graph] [bar graph] CVC.............. 0.0% ADLAC............ 3.3% AT&T BROADBAND CMCSK (2)........ 15.5% CHTR............. 6.0% 1Q............. 12.8% COX CMCSK............ 6.9% 2Q............. 14.0% 1Q............. 15.5% COX COX 2Q............. 17.4% 1Q............. 7.6% 1Q............. 11.1% AT&T BROADBAND 2Q............. 8.0% 2Q............. 12.2% 1Q............. 19.7% AT&T BROADBAND 2Q............. 21.6% 1Q............. 8.3% CHTR............. 21.2% 2Q............. 9.6% ADLAC............ 21.8% CVC.............. 13.2% -------------------------------------------------------------------------------- Note: All peer comparisons are as of 1Q01 unless otherwise noted. Source: Wall Street research and company reports as of 1Q01 and 2Q01. (1) Digital penetration of basic subscribers. (2) For comparability purposes, adjusts reported number of Digital boxes deployed by 1.3 boxes per home, based on Wall Street estimates 11 -------------------------------------------------- [AT&T logo] AT&T Broadband Bundling Reduces Video Churn -------------------------------------------------------------------------------- VIDEO CHURN IS REDUCED BY 10% - 22% FOR MULTI-PRODUCT CUSTOMERS MULTI-PRODUCT VS. BASIC CUSTOMER CHURN - Lower churn results in cost -------------------------------------- savings of approximately $145 [bar graph] per saved video customer Monthly Churn - Lower churn results in: Churn % Impact % ---------- ---------- - Fewer customer DALLAS.......................(22)% acquisitions to hit Basic 2.53 targets Multi-Product 1.97 BOSTON.......................(21)% - Savings on marketing & Basic 2.30 sales costs and Multi-Product 1.80 installation SEATTLE......................(10)% Basic 1.91 - Elimination of truck-rolls Multi-Product 1.72 to disconnect customer and BAY AREA.....................(13)% cost to refurbish set-top Basic 1.65 box Multi-Product 1.43 ------------------------------------- 12 -------------------------------------------------- [AT&T logo] AT&T Broadband Leading Revenue Per Subscriber -------------------------------------------------------------------------------- TOTAL REVENUE PER BASIC CABLE CUSTOMER ------------------------------------------------------------------------- $60 [bar graph] $55.34 $55.95 $55 ---- ---- $52.04 ---- ---- ---- $51.56 ---- ---- $50 $48.38 $49.12 $49.21 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- $45.87 ---- ---- ---- ---- ---- ---- ---- $45 $43.10 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- $40 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -1Q- -2Q- -1Q- -2Q- ---- $35 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- $30 ------------------------------------------------------------------------ Adelphia Charter Time Comcast Cox AT&T Cablevision Warner Broadband ------------------------------------------------------------------------- ------------------------------------------------------------------------- Advanced services drive ARPU well above industry average ------------------------------------------------------------------------- Note: All peer comparisons are as of 1Q01 unless otherwise noted. 13 -------------------------------------------------- [AT&T logo] AT&T Broadband New Services in Progress -------------------------------------------------------------------------------- ----Video-on-Demand [video graphic] (2002) ----Interactive TV [television graphic] (2002) [fiber optics cable graphic] ----PVR Capabilities [video recorder (2002) graphic] ----T-Commerce [television graphic] (2003) 14 -------------------------------------------------- [AT&T logo] AT&T Broadband Best Industry Footprint -------------------------------------------------------------------------------- [map graphic of the United States] Atlanta 0.6 Bay Area 1.8 Boston/Hartford 2.0 Chicago 1.7 Dallas 0.6 Denver 0.6 Los Angeles 0.5 Miami 0.7 Pittsburgh 0.6 Portland 0.5 Sacramento 0.6 Seattle 1.0 83% of Customers are in the Top 25 DMAs 15 -------------------------------------------------- [AT&T logo] AT&T Broadband Market Review: Boston ------------------------------------------------------- [Boston skyline graphic] 2.9 million homes passed, 5th largest DMA MARKET CHARACTERISTICS ACTIONS YTD RESULTS ------------------------------------------------------------------------------- -Very arractive -Integrating Cablevision -13% revenue growth demographics with acquisition average income of $69,000 -69% basic penetration -Reduced call centers -Leader in bundling from 8 to 1 -16% digital penetration: +5 p.p. -Plant upgrades nearly -Launched Digital in complete, able to offer 2000 -14% data penetration: complete bundle +3 p.p. -More powerful product -Operating as one offering relative to -11% telephony penetration integrated system with competition +4 p.p. one virtual call center -- >100K customers -Competitive market -Below average DBS penetration ------------------------------------------------------------------------------- --------------------------------------------------------------------- Boston is our strongest performing market and will continue to grow as advanced services penetration increases --------------------------------------------------------------------- 16 -------------------------------------------------- [AT&T logo] AT&T Broadband Market Review: Chicago ------------------------------------------------------ [Chicago skyline graphic] 3.5 million homes passed, 3rd largest DMA MARKET CHARACTERISTICS ACTIONS YTD RESULTS ------------------------------------------------------------------------------- -Attratctive demographics -Integrated operations -14% revenue growth with average income of of 7 MSOs $58,000 -50% basic penetration -Headends reduced -Footprint covering from 64 to 2 -22% digital penetration: nearly the entire DMA +6 p.p. -Call centers reduced -Strong telephony roll-out from 16 to 3 -10% data penetration: +3 p.p. -Backbone and headend -Dispatch locations segments of rebuilds reduced from 19 to 9 -18% telephony nearly complete penetration: +8 p.p. -20% workforce and --Some suburbs have -Under-penetrated in contractor reduction 40% penetration Basic: primarily downtown areas ------------------------------------------------------------------------------- ----------------------------------------------------------------- Chicago is in the final stages of its integration effort. We are now beginning to realize the operational and financial benefits. ----------------------------------------------------------------- 17 -------------------------------------------------- [AT&T logo] AT&T Broadband Market Review: Bay Area ----------------------------------------------------- [Bay Area skyline graphic] 2.7 million homes passed, 6th largest DMA MARKET CHARACTERISTICS ACTIONS YTD RESULTS ------------------------------------------------------------------------------- -Very attractive demo- -Plant continues to -Almost 16% revenue graphics with average require significant growth income of $78,000 investment --Regional economic -63% basic penetration issues -Focus on basic video growth -23% digital penetration: -Footprint covers most of +2 p.p. the metro area -Streamlined fulfillment areas from 9 to 5 -15% data penetration: -Above average +3 p.p. penetration in all of -Reduced number of the advanced services customer care centers -19% telephony from 12 to 1 penetration: +5 p.p. -Competitive market --Many communities in -One care center with a high 20s -Backbone and headend single toll free number segments of rebuild nearly complete -17% headcount reduction -------------------------------------------------------------------------------- ------------------------------------------------------------------ The Bay Area is showing strong product growth, penetration and financial trends. Significant momentum is in place. ------------------------------------------------------------------ 18 -------------------------------------------------- [AT&T logo] AT&T Broadband Significant Upside in Video Penetration -------------------------------------------------------------------------------- Video penetration of 56% vs. 63% for the industry ACTIONS CURRENTLY UNDER WAY: --------------------------- - National Marketing Campaign - Sales Force Financial Incentives - Enhanced Programming - Signal Theft Audit - Retention Initiatives - Increasing Network Quality -------------------------------------------------------------------- Every 1.3 p.p. increase in video penetration is expected to increase our EBITDA margin by 1 percentage point. -------------------------------------------------------------------- 19 -------------------------------------------------- [AT&T logo] AT&T Broadband Simplified Management Structure -------------------------------------------------------------------------------- MARKETS CORPORATE ------- --------- ------------------------ --------------------------------------------- East Operations - Technology & Advanced Service Operations | - Upgrades & rebuilds | - Technology & labs V - Centralized operations 6 Market Leaders - Corporate Marketing | - National promotions & template | - Support field effort V - Brand management ~10 VPs each managing - Finance functional areas - Target setting & measurement ------------------------ - Capital allocation ------------------------ - IT/Systems West Operations - Ad Sales | - Programming | - Other functions (M&A, HR, PR, Legal, V Regulatory) 9 Market Leaders --------------------------------------------- | | V ~10 VPs each managing functional areas ------------------------ 20 -------------------------------------------------- [AT&T logo] AT&T Broadband Experienced Local Management Team in Place -------------------------------------------------------------------------------- DATE LEADER MARKET IN PLACE EXPERIENCE RELATED EXPERIENCE -------------------------------------------------------------------------------- Denver 6/96 TCI 16 Pittsburgh 4/97 TCI 18 Salt Lake City 1/99 TCI 22 Atlanta 4/00 TCI 5 Boston 5/00 Financial Services 1 Dallas 6/00 TCI 8 Miami 6/00 TCI 17 Portland 6/00 MediaOne 13 San Francisco 7/00 MediaOne 20 Los Angeles 7/00 MediaOne 14 Seattle 7/00 Wireless 21 Sacramento 8/00 MediaOne 12 Chicago 9/00 Wireless 20 -------------------------------------------------------------------------------- 21 -------------------------------------------------- [AT&T logo] AT&T Broadband Steps to Attain Industry Margins -------------------------------------------------------------------------------- ------------------ -------------------------- ------------------ RECENT MARGINS(1) MARGIN INITIATIVES MARGIN GOALS ------------------ -------------------------- ------------------ Actions Already Taken --------------------- - Market integration - Facility consolidation 1Q01 2Q01 - Headcount reduction --------- ---- --> ---- --> - Outsourcing opportunities ----> 38 - 40% 18.3% 23.4% - Pricing actions --------- - Advanced services unit cost reduction Actions Underway ---------------- - Basic video initiatives - Back-office and IT systems integration - Data and telephony: Scaling and profitability (1) Excludes other income and restructuring charges in both quarters 22 -------------------------------------------------- [AT&T logo] AT&T Broadband Positioned For Continued Growth -------------------------------------------------------------------------------- - Foundation is established - Demand for advanced services remains strong - Operational execution is driving financial results ------------------------------------------------------------------------- Actions already underway result in tangible second quarter progress and position us for future financial returns ------------------------------------------------------------------------- 23 -------------------------------------------------- [AT&T logo] AT&T Broadband [cordless telephone graphic] [computer graphic] [television graphic] TECHNOLOGY AND TELEPHONY GREG BRADEN EVP BROADBAND SERVICES AND CTO Full Service Broadband Network Architecture -------------------------------------------------------------------------------- [graphic depicting network architecture] 25 -------------------------------------------------- [AT&T logo] AT&T Broadband Capacity: Full Service Capable Homes -------------------------------------------------------------------------------- ---------------------------------------------------------------------------- [bar graphs] PLANT STATUS 100%- ----------- ------------ - | Digital | [pie graph] - | Video | <550 MHz 29% - | 100% | 550-750 MHz 15% 80%- | | 750+ MHz 56% - | | - | | - | | 60%- | | - | | ------------ - | | | Digital | - | | |Video/Data| 40%- | | | 57% | - | | | | - | | | | ------------- - | | | | | Digital | - | | | | |Video/Data/| 20%- | | | | | Voice | - | | | | | 29% | - | | | | | | - | | | | | | 0%------------------------------------------------ ---------------------------------------------------------------------------- Note: All data as of 2Q01. 26 -------------------------------------------------- [AT&T logo] AT&T Broadband Transformation: Master Headends In Major Markets (Past) -------------------------------------------------------------------------------- Our network originally had more than 200 highly fragmented delivery systems. . . [graphic depicting geographical dispersion of more than 200 master headends] ------------------------------------------------------------------------ . . .resulting in 55,000 subscribers per headend ------------------------------------------------------------------------ 27 -------------------------------------------------- [AT&T logo] AT&T Broadband Transformation: Master Headends In Major Markets (Present) -------------------------------------------------------------------------------- Today, our network is designed to have approximately 40 headends serving over 11 million customers. . . [graphic depicting geographical dispersion of approximately 40 master headends] ------------------------------------------------------------------------ . . .resulting in 275,000 subscribers per headend ------------------------------------------------------------------------ 28 -------------------------------------------------- [AT&T logo] AT&T Broadband Transformation: Greater Chicago Network (Past) -------------------------------------------------------------------------------- [graphic depicting absence of links between headends] 29 -------------------------------------------------- [AT&T logo] AT&T Broadband Transformation: Greater Chicago Network (Present) -------------------------------------------------------------------------------- [graphic depicting links between headends] 30 -------------------------------------------------- [AT&T logo] AT&T Broadband Transformation: Systems and Operations -------------------------------------------------------------------------------- Ordering, Billing and Provisioning ---------------------------------- - Reducing from 24 systems to single, integrated desktop - From manual process to automation Network Surveillance and Management ----------------------------------- - Deploying network surveillance, capacity management, analysis and trouble resolution tools - Established tiered network management structure Key Operations Consolidation ---------------------------- - Telephony provisioning work centers reducing from 16 to 2 --> 30% headcount reduction - Accelerating use of E-care for all services -------------------------------------------------------------------------------- Improved systems, streamlined processes, optimal balance between centralized operations and localized control -------------------------------------------------------------------------------- 31 -------------------------------------------------- [AT&T logo] AT&T Broadband Operational Performance -------------------------------------------------------------------------------- CUSTOMER GROWTH --------------- SINCE 2000 ---------- -------------------------------------------------------------------------------- Voice Customer [arrow pointing down] Reported Troubles (CRT) 77% [arrow pointing up] (2000-2001 YTD) 775,000 Telephony or Voice Average Field [arrow pointing down] 1,077% Install Time 42% (2000-2001 YTD) Data Defects per Million [arrow pointing down] (DPM) 99% [arrow pointing up] (2001 YTD) 964,000 Data or Data Average Field [arrow pointing down] 230% Install Time 16% (2001 YTD) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AT&T Broadband exceeds RBOC performance in 11 technical testing categories, equals it in the 12th -------------------------------------------------------------------------------- 32 -------------------------------------------------- [AT&T logo] AT&T Broadband Voice Services: Questions an MSO Must Ask -------------------------------------------------------------------------------- - Should an MSO offer voice services? - If the MSO offers voice, what is the scope -- Full-service primary line or limited second-line only service? - How should the MSO offer voice services -- What is the timing? What is the technology? 33 -------------------------------------------------- [AT&T logo] AT&T Broadband Voice Services: Smart Play for Cable Operators -------------------------------------------------------------------------------- - Significant revenue and margin opportunity - Market size in excess of $100 billion annually - Market almost entirely served by the RBOCs - Significant contribution to financial growth - Optimizes core broadband network - Improves performance of all broadband products - Voice customers pull through other broadband products - 56% own 2 products - 24% own 3 products - Product bundles including voice reduce video churn between 10% and 22% - Positions us strategically to compete against the RBOCs 34 -------------------------------------------------- [AT&T logo] AT&T Broadband Voice Services: Primary Line vs. Second Line Telephony -------------------------------------------------------------------------------- - Primary Line play creates maximum market opportunity - 5 - 10x greater voice revenue per customer - 7 - 8x greater cash flow per customer - Less than 10% additional upgrade and rebuild capital required - Provides foundation for long-term competitive position - Counters RBOC data and full service voice DSL play - Operationally no more difficult than second line service 35 -------------------------------------------------- [AT&T logo] AT&T Broadband Voice Services: Circuit Switched Today is Better Than Waiting -------------------------------------------------------------------------------- - Ability to obtain market share is greater today, before RBOCs bundle their voice and DSL products - Voice over IP requires the same operational expertise as circuit switched - Both require significant learning curve - starting early is critical - Voice over IP synergy with Data operations expected to yield 5+% savings in operating expense - Flexible migration to Voice over IP minimizes stranded capital risk -------------------------------------------------------------------------------- Voice over IP expected to be available in 2003, and AT&T Broadband has easy migration path to adopt when readily scaleable -------------------------------------------------------------------------------- 36 -------------------------------------------------- [AT&T logo] AT&T Broadband Voice Services: Circuit Switched Today is Better Than Waiting -------------------------------------------------------------------------------- Primary line Voice over IP capital costs estimated to be 10-20% less than circuit switched CUSTOMER CAPITAL COST EQUIPMENT HEADEND OTHER TOTAL ------------ --------- ------- ----- ----- -------------------------------------------------------------------------------- Circuit - Switch Switched(1)(2) Cost/Sub $300 $125 - Transport $675 $250 -------------------------------------------------------------------------------- Primary Line - Call Agent VoIP Cost/Sub $300-$350 $40-$60 - Media GW $530-$620 Forecast - Transport $190-$210 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Sharing customer equipment between voice and data services yields higher savings -------------------------------------------------------------------------------- (1) Excludes approximately $125 of capitalized labor for installations (2) Circuit switched capital costs are based on current pricing. 37 -------------------------------------------------- [AT&T logo] AT&T Broadband Telephony Ahead of Plan -------------------------------------------------------------------------------- |-----------------| Original | Today | Future Cox Services (5 yr Plan)(1) |(2 yrs into Plan)| (3 yrs from today) Today -------- -------------- |-----------------| ------------------ ----- -----------------------------| |-------------------------------- Break Even/ 4Q02 | In 9 Months | 35% + Mid-20% Margin | | | | Penetration 30% | 14% at 2Q01 | 30% + 12% | | ARPU ~$50 | $50 at 2Q01 | $65 $50 | | Capex per $750 | $675 | $530-$620 $700 Customer | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- With 850,000 telephony subscribers and achieving break-even ahead of plan, we are positioned to realize the significant financial returns -------------------------------------------------------------------------------- (1) Announced as of June 1998, at the time of the TCI merger announcement. The starting point for the original plan projections were the first telephony trials, which started in late 1999. 38 -------------------------------------------------- [AT&T logo] AT&T Broadband [cordless telephone graphic] [computer graphic] [television graphic] FINANCIAL REVIEW MIKE HUSEBY EVP & CFO Financial Trends are Improving -------------------------------------------------------------------------------- - Strong advanced services growth continues to drive year-over-year revenue Revenue Growth -------------- Q101 - 10.9% (11.7% excluding advertising sales) Q201 - 13.7% (15.0% excluding advertising sales) - Strong cost management and scaling of new products drove margin improvement EBITDA Margin (1) ------------- Q101 - 18.3% Q201 - 23.4% - EBITDA was up 33% sequentially over Q101 (26.7% including restructuring) restructuring and other income - Year-to-date capital spending of $1.7 billion - Divestitures of non-strategic cable systems on track and essentially completed -------------------------------------------------------------------------------- Strong momentum is in place for the second half -------------------------------------------------------------------------------- (1) Normalized EBITDA excluding restructuring charges and other income. Including restructuring and other income, EBITDA margin was 16.0% and 19.5% for Q101 and Q201, respectively. 40 -------------------------------------------------- [AT&T logo] AT&T Broadband Revenue Growth Trend -------------------------------------------------------------------------------- - Quarter-over-quarter same store revenue growth remains strong - Q101 impacted by seasonality of advertising - Current trends and forecast on track to hit street guidance by year-end NORMALIZED ANNUAL REVENUE GROWTH (1) -------------------------------------------------------------------------------- 14%- 13.7% - ----- 12%- 11.8% ----- - ----- 10.9% ----- 10%- 10.8% ----- ----- ----- - 10.5% ----- ----- ----- ----- 8% - ----- ----- ----- ----- ----- - 8.2% ----- ----- ----- ----- ----- 6% - ---- ----- ----- ----- ----- ----- - ---- ----- ----- ----- ----- ----- 4% - ---- ----- ----- ----- ----- ----- - ---- ----- ----- ----- ----- ----- 2% - ---- ----- ----- ----- ----- ----- - ---- ----- ----- ----- ----- ----- 0% - ---- ----- ----- ----- ----- ----- -------------------------------------------------------------------------------- Q100 Q200 Q300 Q400 Q101 Q201 -------------------------------------------------------------------------------- (1) Normalized year-over-year for 2001 basis. 41 -------------------------------------------------- [AT&T logo] AT&T Broadband EBITDA Margin Trend -------------------------------------------------------------------------------- EBITDA margin improvement driven by: - Integration of major markets = operational efficiencies - Scaling of advanced services - Cost management controls including headcount reductions - Pricing management NORMALIZED EBITDA MARGIN (1) -------------------------------------------------------------------------------- DECISION/EXECUTION EXECUTION/REALIZATION ------------------ --------------------- | | | | 30%- V V - 25%- [down arrow - 23.5% on diagonal] [up arrow 20%- ----- on diagonal] 23.4% - ----- 21.4% ----- - ----- ----- 19.0% ----- 15%- ----- ----- ----- 18.3% ----- - ----- ----- ----- 17.1% ----- ----- 10%- ----- ----- ----- ----- ----- ----- - ----- ----- ----- ----- ----- ----- 5% - ----- ----- ----- ----- ----- ----- - ----- ----- ----- ----- ----- ----- 0% - ----- ----- ----- ----- ----- ----- -------------------------------------------------------------------------------- Q100 Q200 Q300 Q400 Q101 Q201 -------------------------------------------------------------------------------- (1) Excludes restructuring charges and other income. 42 -------------------------------------------------- [AT&T logo] AT&T Broadband Tangible Margin Improvement - 2nd Quarter 2001 -------------------------------------------------------------------------------- % Prior to Restructuring(1) ------------- ----------------------------------------------------- 1Q01 EBITDA Margin 18.3% Headcount Reductions 1.0% Advanced Services Growth 2.2% Video Price Increases 1.3% Ad Sales 1.2% Property Divestitures/Other (0.6)% ----------------------------------------------------- 2Q01 EBITDA Margin 23.4% ----------------------------------------------------- -------------------------------------------------------------------------------- Margins increased 5.1 percentage points. Actions already taken will continue to have future impact. -------------------------------------------------------------------------------- (1) Excludes other income and restructuring charges from both quarters. Q1 and Q2 margins were 16% and 19.5% respectively including restructuring. 43 -------------------------------------------------- [AT&T logo] AT&T Broadband Path to Industry Margins -------------------------------------------------------------------------------- Cost 40%- Management & - Efficiencies 38-40% - Basic ------------ ------- - Data Growth & ------------ ------- - Growth/ Pricing ------------ ------- - Telephony ------- -------- EBITDA - Growth/ ------- Margin - Scaling ------- Goals - 23.4% -------- ------- 20%- -------- -------- ------- - Q201 ------- - EBITDA ------- - Margin(1) ------- - --------- ------- - --------- ------- - --------- ------- - --------- ------- - --------- ------- 0%------------------------------------------------------------------------------ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Achievement of margin goals is due to actions that are both completed and underway. -------------------------------------------------------------------------------- (1) Excludes other income and restructuring charges. 44 -------------------------------------------------- [AT&T logo] AT&T Broadband Actions to Achieve Margin Goals --------------------------------------------------------------------------------------------------------------
Actions Taken Future Actions ------------- -------------- Telephony/ - RGU growth - Bundling Growth/Scaling - Reduced promotions - Cross-product synergies - IT system conversions - Long distance in former MediaOne properties Data - RGU growth - Tiered pricing Growth/Scaling - $6 price increase effective June 2001 - Multiple ISP (open access) - Customer care efficiencies - Bundling - Cross-product expense synergies Video - Price increase: Feb. 15 - Pricing to market Growth & Pricing - Equipment rate increase: July 1 - Digital (pricing/packaging) - Nationwide campaign launched July 7 - Video on Demand trials - Best practices formalized - Ad sales - major markets - Incentive sales compensation - Signal theft program Cost Management/ - Headcount reductions - Field tech/dispatch Efficiencies - Market integration benefits - Cross-product synergies - Call center consolidation & - IT systems enhancements rate reductions --------------------------------------------------------------------------------------------------------------
45 -------------------------------------------------- [AT&T logo] AT&T Broadband Data Financial Performance -------------------------------------------------------------------------------- - Subscriber net additions of 738,000 over the last 12 months - EBITDA positive in Q3 - Monthly revenue per subscriber has increased 12% since Q400 - Recent $6 price increase will begin to impact results in Q301 - Monthly expense per subscriber has decreased 33% since Q100 2001 MONTHLY REVENUE/SUBSCRIBER ($) -------------------------------------------------------------------------------- 45- - - - - *41 40- *40 --- - --- --- *39 *39 - --- --- --- --- - --- --- --- *37 --- - --- --- --- --- --- 35- --- --- --- *35 --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- 30- --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- 25------------------------------------------------------------------------------ Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 -------------------------------------------------------------------------------- 2001 MONTHLY EXPENSE/SUBSCRIBER ($) -------------------------------------------------------------------------------- 65- - - *63 60- --- *60 *59 - --- --- --- - --- --- --- 55- --- --- --- - --- --- --- - --- --- --- *52 50- --- --- --- --- - --- --- --- --- - --- --- --- --- 45- --- --- --- --- *45 - --- --- --- --- --- - --- --- --- --- --- *42 40- --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- 35- --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- 30------------------------------------------------------------------------------ Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 -------------------------------------------------------------------------------- 46 -------------------------------------------------- [AT&T logo] AT&T Broadband Voice Financial Performance -------------------------------------------------------------------------------- - Subscriber net additions of 630,000 over the last 12 months - Monthly revenue per subscriber has increased 21% since Q400 - Pricing promotions roll-off resulting in higher revenue per subscriber - Monthly expense per subscriber has decreased 71% since Q100 - Projected to turn EBITDA positive in 9 months 2001 MONTHLY REVENUE/SUBSCRIBER ($) -------------------------------------------------------------------------------- 80- - - - - 60- *60 - *58(1) --- - --- --- - --- --- *48 *50 - --- --- --- *42 *45 --- 40- --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- 20- --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- - --- --- --- --- --- --- 0------------------------------------------------------------------------------ Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 -------------------------------------------------------------------------------- 2001 MONTHLY EXPENSE/SUBSCRIBER ($) -------------------------------------------------------------------------------- 350- - - *329 300- ---- - ---- - ---- 250- ---- - ---- *247 - ---- ---- 200- ---- ---- - ---- ---- *188 - ---- ---- ---- *156 150- ---- ---- ---- ---- - ---- ---- ---- ---- - ---- ---- ---- ---- *123 100- ---- ---- ---- ---- ---- - ---- ---- ---- ---- ---- *94 - ---- ---- ---- ---- ---- --- 50------------------------------------------------------------------------------ Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 -------------------------------------------------------------------------------- (1) Adjusted for one-time access revenue allocation. 47 -------------------------------------------------- [AT&T logo] AT&T Broadband Capital Spending -------------------------------------------------------------------------------- - 1H01 capital spending of $1.7 billion - Full year 2001 capital spending estimate of $3.6 billion - Approximately 2/3 of spend is demand-based - Variable capital cost per net add is declining - Expect unlevered free cash flow positive by year-end 2003 -------------------------------------------------------------------------------- | | | Capital management to optimize returns | -------------------------------------------------------------------------------- 48 -------------------------------------------------- [AT&T logo] AT&T Broadband A Sustainable Growth Story -------------------------------------------------------------------------------- - Results support strategy and transformation actions - Revenue growth - Cash flow growth - Advanced services growth - Margin improvement expected to continue - Telephony strategy benefits - Significant capital investment already made - Cash flow break-even in 9 months - Revenue and EBITDA per subscriber and per home passed expected to lead industry in 2003 49 -------------------------------------------------- [AT&T logo] AT&T Broadband What We Plan to Deliver -------------------------------------------------------------------------------- - Aggressively serving the most attractive markets with the most comprehensive and valuable service offerings - Leading in fulfillment of accelerating customer demand for advanced services - Driving EBITDA margins to industry benchmarks -------------------------------------------------------------------------------- | AT&T Broadband is best positioned to deliver | | the highest value for its shareholders | -------------------------------------------------------------------------------- 50 -------------------------------------------------- [AT&T logo] AT&T Broadband [AT&T logo] AT&T BROADBAND July 2001 INVESTOR PRESENTATION APPENDIX Network Architecture (with Circuit Switched Telephone) -------------------------------------------------------------------------------- [graphic depicting connections and network architecture between headends, hubs and end-users with circuit switched telephone] 53 -------------------------------------------------- [AT&T logo] AT&T Broadband Network Architecture (with Voice Over IP) -------------------------------------------------------------------------------- [graphic depicting connections and network architecture between headends, hubs and end-users with voice over IP] 54 -------------------------------------------------- [AT&T logo] AT&T Broadband [AT&T logo] AT&T BROADBAND July 2001 INVESTOR PRESENTATION