REMNANTS OF POST-CABLE AT&T NOT FADING INTO THE SUNSET

While AT&T's sale of its broadband unit has reshaped the cable industry, the move also raises questions about the venerable carrier's future. Opinions vary greatly: Some claim the company is a remnant of its former self and will be taken over, while others point to its ability to maintain the No. 1 market share in the enterprise space as evidence that AT&T will grow again.

The sale of its broadband division and a July 2001 spinoff of its wireless business leaves AT&T with its business and consumer units, which together generate $40 billion in annual revenue. While AT&T is certainly still a formidable company, it's a far cry from the bundled behemoth that former CEO C. Michael Armstrong envisioned.

With the company facing a marketplace that is expected to shift radically over the next few years, analysts say new Chairman and CEO David Dorman, with his extensive operational experience in telecom, is the right man for AT&T.

“I think you have a guy at the helm who's more of a telephone expert,” said Patrick Comack, senior telecom analyst with Guzman & Co, who has a “sell” rating on the company. “Certainly Dave is a risk to my bearish view of AT&T. But he's the man to do it if it can be done.”

One of the main reasons for a bearish outlook is the decline of the company's consumer segment, in which year-over-year revenues dropped 25.9% in the third quarter, due largely to the RBOCs gaining long-distance approval in several states.

With section 271 approvals expected to accelerate in 2003, the company will lose more market share. RBOCs tend to grab 35% of the long-distance business in markets they enter, according to Aurica Yen, senior analyst for consumer and technology services at The Yankee Group.

The most AT&T can realistically hope for is to stem the losses, largely through its plan to use controversial UNE-P offerings, the future of which depends on an upcoming policy review by the FCC.

Fortunately for AT&T, the consumer segment only accounted for $2.8 billion of the company's $12 billion third quarter revenues, which included results from its former cable unit. For actual growth, the company must rely on AT&T Business, which contributed $6.7 billion.

That unit has performed well recently. For the quarter, AT&T Business' revenues dropped 1.6% year-over-year — a much less severe decline than those experienced by the company's competitors. Qwest Communications' Business Services, for example, saw revenues fall 5.8% during the third quarter. WorldCom likewise is expected to lose business market share due to its accounting scandals.

According to Drake Johnstone, an analyst with Davenport & Co., AT&T's avoidance of scandal should convince enterprise customers of the company's long-term viability.

AT&T's balance sheet also is in such a state that the company can work to strengthen its grip on the No. 1 spot in the enterprise market. The sale of its broadband unit to Comcast reduced AT&T's debt by more than $24 billion to $14 billion to $16 billon range. (An exact number will be announced at a later date). This is significantly less than the $57.5 billion debt held by Verizon Communications and even the $24 billion owed by SBC Communications, two RBOCs moving into the business market.

Because it has few obligations, AT&T could easily expand its business offerings by taking advantage of the down market, Johnstone said.

“From a financial standpoint, they're far better off than their peers,” Johnstone said. “They have $20.3 billion in free cash flow and roughly $16 billion net debt. They could acquire distressed assets to expand the international network.”