AT&T Hits Its Numbers, Gets Aggressive with Pricing (News) August 30, 1999

AT&T Hits Its Numbers, Gets Aggressive with Pricing

By Richard McCaffery (TMF Gibson) (TMF Gibson)
August 30, 1999

AT&T (NYSE: T) executives reaffirmed expectations to meet earnings expectations, grow revenue, and reduce costs in 1999 in a conference call with analysts today.

Management expects 1999 earnings in the range of $2.12 to $2.20 per share, in line with Zacks mean estimate of $2.18 per share. Pro forma revenue growth between 5% and 7% per share is expected, with the company's wireless, professional services, outsourcing and data units leading the way. Revenue from long distance services -- the company's traditional bread and butter operations -- will be lower than expected as a result of competition from hundreds of long distance players that have entered the market in the last two years, officials said.

But the company also announced aggressive new pricing plans to compete with moves by MCI WorldCom (Nasdaq: WCOM), and Sprint (NYSE: FON), which now offer long distance calls to consumers at $0.05 per minute. AT&T plans to combat the move with a $0.07 per minute plan, expected to best the MCI and Sprint offerings because the AT&T plan doesn't include time restrictions for long distance services. "This saves money compared to the $0.05 plan," said Michael Armstrong, AT&T chairman.

The good news for investors in all this is that the aggressive plan demonstrates Armstrong's cost-cutting moves should allow AT&T to become competitive once again in the long distance market. Since joining AT&T in October 1996, Armstrong has made great strides to reduce the company's bloated operational costs, which kept it from being competitive in shark-filled waters. Sales, General and Administrative costs (SG&A) represented 30% of revenue in 1997. Armstrong committed to reducing SG&A to 23% by year-end 1999, and actually exceeded that goal. SG&A expenses were 21% at June 30.

Perhaps even more important than getting costs under control, Armstrong has given AT&T a strategy. Through aggressive purchases of companies like TeleCommunications Inc. (TCI), AT&T now has access to 40 million homes via cable wire, which the company plans to use to offer consumers bundled, one-rate packages including cable, telephony, and Internet services. In the complicated world of technology, where consumers have to juggle Internet service providers, cable operators, local and long distance phone companies, AT&T's plan to reduce complexity by offering one-stop shopping is a compelling business model.

AT&T is currently trading at a little over two times book value and at a trailing P/E multiple of 19.7 -- not bad for a company that should be a major player over the next 10 years. AT&T's moves to reduce debt, trim operational costs, repurchase $3 billion in stock, and position itself as a complete communications services provider make it worth another look. Though its size will probably prevent it from generating double-digit earnings growth, investors should consider AT&T as a core holding for their portfolios.

The AT&T conference call replay will be available starting at 2:30 p.m. EDT today for 72 hours. Call 800-475-6701, enter access code 467773.

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