Waiting to restructure

Divided by four, AT&T results still look bad When AT&T decided in October that a corporate schism was in order, the prevailing theory was that the pieces of AT&T would be more highly valued once separated from the parent company.

However, given the company's fourth quarter and year-end results, AT&T may want to rethink this strategy.

In what has become a painful quarterly rite, AT&T uncovered the carcass of another scary quarter, revealing a $1.7 billion net loss, revenue growth of only 3% and a 50% decline in operating earnings. The exception was AT&T Wireless, which saw revenues jump 39.1% in the fourth quarter to nearly $3 billion. In the first quarter of 2000, wireless accounted for 9.4% of AT&T's consolidated revenues, and by the fourth quarter, that contribution had increased to 16.8% (see figure).

After wireless, however, it's all downhill. The consumer unit is "evaporating," said Patrick Comack, analyst for Guzman & Company. Revenues plunged 14.7% and operational EBITDA dropped 21.0% in the fourth quarter, reflecting the ongoing price erosion in long-distance.

For 2001, expect nothing different, according to AT&T's guidance. The entry of RBOCs into long distance in more states will cause consumer long-distance revenue to decline at a percentage rate in the mid- to high-teens.

"We put no value on the consumer business," Comack said. "They will try to make it into a DSL business; they have some scale, but it might be a little late."

Over at business services, the transition to selling data and IP from selling voice is moving at a crawl. Revenues were flat for all of 2000, and 2001 quarterly sales will be on par - or even slightly less - than last year's totals, AT&T officials said. What's more, profit margins will drop about 7 percentage points.

"The situation at business services has worsened," Comack said. "This was a division that was supposed to grow revenue 12% during 2000." AT&T's forecast that business revenues in 2001 would be flat compared with last year's may even be a little optimistic, he added. That's because AT&T has many corporate contracts priced significantly above industry levels and will be up for renewal during the year.

After wireless, the favorite son of the divided AT&T will be AT&T Broadband, the largest cable operator in the U.S. "They are one of the best-clustered [cable] companies outside of the mid-Atlantic Comcast cluster and the Cablevision New York metro area cluster," said Richard Greenfield, vice president of Goldman Sachs. "Sixty-five percent of their subs are in their top 11 markets, with each of those clusters having 500,000 subs or more."

In the fourth quarter, the unit posted an 11.8% increase in quarterly revenue to $2.5 billion, driven by the addition of 825,000 new broadband telephony, high-speed data and digital video customers. The unit added 210,000 cable telephony customers, averaging 3100 truck rolls per day, boosting its total to 560,000 customers prior to the Comcast swap.

Although C. Michael Armstrong said the broadband unit hit every metric it set for 2000, the goal for cable telephony take-rates, including the MediaOne acquisition, was between 500,000 and 650,000 subscribers, making the end-of-year numbers a bit disappointing, said Michael Hodel, telecom analyst for Morningstar.com.

In a conference call with analysts, AT&T executives admitted that the company is not making a full-throttle effort to grab market share for high-speed data and video services, even though the relatively slow pace of the RBOCs' DSL rollouts gives it a window to do so. Instead, AT&T will focus on sustaining growth and reducing costs.

"It stems from the fact that [AT&T Broadband] is going to be a stand-alone business in a few months, and they want to get margins as high as possible," Hodel said. Broadband generated negative free cash flow, which is operational EBITDA minus capital expenditures, of about $3 billion during 2000, Hodel said - a statistic that, if not improved upon, would cause shareholders angst.