Fool.com: AT&T Sales Up, Earnings Down (News) October 25, 1999

AT&T Sales Up, Earnings Down

By Richard McCaffery (TMF Gibson)
October 25, 1999

Long distance telecommunications carrier AT&T (NYSE: T) reported earnings from continuing operations of $0.50 per diluted share today, down from $0.78 per share a year ago and shy of the mark analysts expected by $0.04 per share. The country's largest phone company reported income from continuing operations of $1.63 billion, down from $2.1 billion a year ago.

Earnings fell, in part, as a result of increased pricing pressure in the long distance services market and weak results in the company's consumer services division, which reported revenues of $5.6 billion, down 4.7% from a year ago.

It's not surprising to see AT&T lose revenue in its long distance consumer services division, which faces stiff competition from multiple carriers. AT&T has about 60% market share in this area, and it's very difficult to grow such a large customer base.

Instead, many investors were looking for AT&T to make solid gains in growth areas such as its Internet strategy, wireless services, and outsourcing business. On this front, the company did well, which may be why the company's stock price climbed more than $1 to $44 1/16 in trading this morning.

Pro forma total sales of $16.3 billion (including acquisitions) grew 5.6% from $15.4 billion a year ago. Revenue growth was driven by increased business services, which grew 5% to $6.3 billion, as well as wireless services, which grew (adjusted for sales and acquisitions) 41%. AT&T Broadband and Internet Services grew (excluding closed cable partnerships and Excite@Home) 6.7% to $1.4 billion.

It's the third consecutive quarter the wireless services division has achieved 40% sales growth, and the seventh consecutive quarter of overall revenue growth.

In addition, the company continued improving efficiency. AT&T Chairman Michael Armstrong, who repositioned Ma Bell to offer Internet access, cable, and telephony services through its purchase of cable company TeleCommunications Inc. and the pending acquisition of MediaOne (NYSE: UMG), plans to cut $2 billion in annual operating costs by 2001.

For the latest quarter, sales, general, and administrative (SG&A) expenses fell to 21.2% of total revenue, compared to 22.1% in the second quarter and 23% in the third quarter last year. This is solid improvement over SG&A costs that stood at 30% of total revenue in 1997. AT&T's operating margin (excluding broadband and Internet services and global network services), rose 3.7 percentage points to 24.5%.

For the company to continue its rebirth as a broad-based provider of communications services, investors should look for AT&T to continue broadening its nationwide wireless network as it competes against rivals such as Bell Atlantic (NYSE: BEL), Vodafone AirTouch (NYSE: VOD), SBC Communications (NYSE: SBC), Nextel (Nasdaq: NXTL), and VoiceStream Wireless (Nasdaq: VSTR). Recent moves such as its joint $2.3 billion purchase of American Cellular should help. (Click here to read more.)

In addition, investors should pay close attention to the company's progress regarding high-speed Internet access service offerings. Last month, AT&T rolled out a suite of cable Internet and digital subscriber line services for businesses. The company offered its DSL services in 17 markets and planned to quickly expand to more than 100 markets in the fourth quarter.

Since the ability to offer services such as this is the main reason AT&T spent billions acquiring TCI and MediaOne, investors should keep a watchful eye on growth in these areas.

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