AT&T doubles profit

In its first earnings report as a merged entity, AT&T has mostly good news to report.

Based on strong wireless growth, continued broadband expansion and cost control, the "new" AT&T posted a $1.66 billion profit in its first quarterly earnings report. That translates to 46 cents per share, after merger-related expenses, hurricane costs for Cingular Wireless, severance costs and an almost $1 billion tax settlement is factored in.

AT&T CFO and Senior Executive Vice President Rick Lindner told analysts the company has been able to avoid some of the distraction of the merger process to stay focused on doing business.

“Our people did a terrific job of staying focused and producing results,” he said. “We are a large momentum kind of business, and what you saw in the fourth quarter was the result of work throughout the year in terms of taking costs out of the business, and work throughout the year in terms of growing revenue. This has been an extremely busy and a very exciting time for us. We have exceeded expectations and returned value to our owners. We are very pleased with the AT&T acquisition, the assets are in great shape, the people are terrific; it’s a great way to start 2006.”

AT&T is promising more detailed information on the merger process and status when it hosts analysts for a day-long presentation next week in New York.

In a complex filing that combines the two companies for the one month following the November 2005 close of their merger, AT&T said its consolidated fourth-quarter 2005 revenues totaled $12.97 billion, while operating expenses totaled $11.83 billion, and operating income was $1.13 billion, resulting in an operating income margin of 8.7 percent.

The extraordinary items include AT&T’s portion of Cingular’s $707 million in costs related to its acquisition of AT&T Wireless and the wireless company’s $20 million in hurricane-related costs, plus a tax gain of $902 million, and non-merger force reduction costs of $106 million, as well as AT&T merger-related costs of $866 million.

In talking with analysts, Lindner highlighted the company’s substantial margin expansion, which drove adjusted wireline operating income margin up 400 basis points versus the year-previous quarter overall. Overall, including Cingular, the consolidated adjust operating margin rose 170 basis points over the fourth quarter of 2004, based largely on automation efforts by AT&T that have increased Web-based self-service and IVR transactions, he said. As a result, the legacy SBC work force was trimmed by 10,000 for the full year, including 2400 in the fourth quarter.

“This is our seventh consecutive quarter of wireline revenue growth,” he said. AT&T saw its best growth in hi-cap data revenues in more than two years, with 7.7% expansion.

Much of the good news had been reported earlier in the week by Cingular , in which AT&T has a 60% stake.

On the wireline side, AT&T reported business revenue growth on the legacy SBC side of 1.9%, and consumer revenue growth of 4.6%. Wholesale revenues were down 3.3% but that reflects a slower decline as demand from wireless carriers offsets the loss of UNE-P business. Wireline data revenues grew 7.8% and now represent one-third of total wireless revenues, Lindner said.

Revenues were up by 7.2% in the small to medium business arena, a major area of focus for the new AT&T, and the company recorded a 229,000 net increase in SMB access lines over 2005.

Overall, however, business access lines were down 54,000 in the fourth quarter within the legacy SBC business.

Average revenue per user within the consumer business was up 7.8% versus the year-previous quarter as the company achieved greater sales of its product bundles. AT&T is not seeing a major impact from increased competition from cable and VoIP players, Lindner said.

“We frankly are seeing the customers going to cable more out of our wholesale base, where we’ve lost those customers,” he told industry analyst. “The retail line loss has been pretty stable despite a lot of entry and marketing by cable and VoIP providers. Wholesale line losses are starting to come down somewhat and that’s a reflection of the fact we are moving through the bubble from UNE-P pricing changes – most are now on commercial agreements.”

AT&T also saw a 21% year-over-year increase in DSL/Internet revenues, achieving 25.5% DSL penetration, and 1.8 million net increase in lines over the year.

AT&T’s legacy business is doing better than expected, Lindner added. There was an 8.3% decline in business revenues and a 24.9% decline in consumer revenues but those figures were above expectations.