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AT&T Results Are Upbeat

Light Reading
News Analysis
Light Reading
4/23/2003

AT&T Corp. (NYSE: T) topped Wall Street estimates despite slightly reduced revenues, with an upbeat earnings report this morning (see AT&T Q1 Profits Grow). But the way forward seems anything but guaranteed.

Indeed, AT&T's CEO David W. Dorman acknowledges the upcoming year will be one of pricing pressure and consolidation in the telecom industry. But he says AT&T's position is one of "relative strength."

For the first quarter of 2003, AT&T reported net income of $571 million, or earnings per diluted share of $0.73, on consolidated revenues of $9 billion. These earnings beat First Call estimates of $0.52 per share, though revenues were down 3 percent sequentially. Quarterly operating income was $1.2 billion, and the consolidated operating margin was 13 percent.

These figures compare favorably with the same quarter last year, when income was $446 million, and EPS $0.62. And AT&T's last quarterly report (see AT&T Results Disappoint) showed an 8.6 percent drop in revenue, a profit of $516 million, and EPS of $0.66, less than the $0.71 analysts had expected.

AT&T also reported a $900 million reduction in net debt since the start of the year. Current net debt is $12 billion.

But revenue remains a problem: AT&T Business Services revenue was $6.4 billion for the quarter, down 1.4 percent year over year, though wholesale service volumes were up by 12 percent. AT&T Consumer Services revenue was $2.5 billion, down 17.8 percent year over year. Overall revenue was down 5.9 percent from the first quarter 2002.

AT&T blames "continued declines in long-distance voice services" for the main decline. There's ongoing weak spending in Business Services, and pricing pressure and wireless and Internet displacement of voice lines has hit Consumer Services hard.

AT&T is meeting the challenge in several ways, say execs. There's ongoing emphasis on cost reduction, including the 3,500 layoffs expected to bring the company roster to 70,000 by the end of this year. There's the management streamlining campaign (see Can AT&T Regrouping Work?). AT&T also has refocused its spending on the network edge and will be reducing its capex estimate for the year from $3.3-$3.5 billion down to $3 billion.

Analysts on today's call questioned this strategy on a couple of fronts. There were also questions about persistent rumors that AT&T might merge with BellSouth Corp. (NYSE: BLS) or SBC Communications Inc. (NYSE: SBC).

Someone asked, for instance, whether AT&T's foray into local bundled services, such as those cited in yesterday's report from Verizon Communications Inc. (NYSE: VZ) (see Verizon Earnings Don't Disappoint), would preclude its possible merger with one of the RBOCs. Peculiarly, Dorman answered: "You'd have to ask the Department of Justice."

Analysts also questioned whether AT&T has sufficient wireless and local service offerings to keep pace with RBOC bundles. To this, Dorman said mobile access isn't everything. He cited AT&T's trials in fixed wireless access, and he said the carrier will focus on using its nationwide and global foothold with business customers, along with strength in managed services, as a way to differentiate.

AT&T will add digital content and customization for high-volume business customers, for instance, to entice them away from RBOCs with limited interstate reach. "We plan to take our bundles a lot further than RBOCs," he noted.

AT&T's also doubling the number of its access lines to 1.5 million nationwide and doubling salespeople to focus on bundled services.

While capex was cut, AT&T said it expects to "meet or exceed" previously stated guidance for 2003. To wit: a slower rate of revenue decline than the 10.4 percent in 2002; and an operating income margin comparable to the 14.2 percent posted in 2002 (after charges).

The announcment got a rousing reception on Wall Street. At press time, shares of AT&T were trading at $16.30, up $2.49 (18.03%).

— Mary Jander, Senior Editor, Light Reading

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