AT&T Cutting Deeper

The company tells analysts it sees strong growth in wireless, broadband and business.
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AT&T

(T) - Get Report

was talking blockbuster Tuesday in its first visit to Manhattan as a merged company.

The San Antonio, Texas, telco laid out plans to lean on its fast-growing wireless and broadband businesses and to cut costs even more deeply than expected. The company will also buy back $2 billion worth of stock this year.

The comments -- featuring a 20% rise in so-called merger synergy targets and an added $1.2 billion in multiyear expense reductions -- came as the company met analysts en masse for the first time following last November's merger of the former SBC with New Jersey's shrinking long-distance titan AT&T.

"The assets we acquired are in excellent shape, their 2005 performance topped expectations, we have a good integration plan, we retained key talent, and the response from customers has been overwhelmingly positive," CEO Ed Whitacre said. "The AT&T merger is everything we hoped it would be and more."

The company boosted its synergy estimate, reflecting revenue gains and cost reductions arrived at through the merger, to $18 billion from the previous $15 billion. The company said it expects those synergies to be worth $3 billion a year by 2008.

The company said overall integration costs are largely unchanged from earlier estimates, although they will be incurred sooner due to the transaction's earlier-than-expected close and accelerated project schedules.

AT&T also said it aims to make added cost cuts amounting to $1.2 billion by 2008, though it offered little detail.

The company said its 60%-owned Cingular Wireless is on schedule with merger initiatives and expects to largely complete deployment of third-generation wireless data network technology this year.

Meanwhile, free cash flow after dividends is expected to grow to $4 billion in 2007 and $5 billion in 2008, from $2 billion in 2006. Free cash flow after dividends is cash from operations including proportionate Cingular cash flow less capital expenditures and dividends.

Earnings per share, adjusted to exclude merger-related costs, are expected to grow at a double-digit percentage pace in each of the next three years, AT&T said.

Revenue trends, including proportionate results from Cingular Wireless, in 2006 and 2007 are expected to reflect continuing but diminishing declines from the former AT&T operations, with total year-over-year revenue growth expected to turn positive in 2008. The company said three-fourths of total revenue, including proportionate Cingular results, now come from wireless, business and wholesale.

Adjusted consolidated operating income margin is expected to expand to 16% to 17% by 2008, with a 15% to 16% adjusted margin in 2006. Capital expenditures in 2006 are expected to be $8 billion to $8.5 billion, in the low teens as a percentage of revenue. This includes capital for merger-integration projects and Project Lightspeed deployment.

On Tuesday, AT&T shares rose a penny to $26.06.