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AT&T Wireless Shows Signs of Recovery

The company narrows its quarterly loss amid a jump in sales.
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Updated From 8:53 a.m. EST

AT&T Wireless

(AWE)

showed signs of a moderate recovery in the fourth quarter, narrowing its loss on improved sales. For 2003, it plans to show you the money -- in the form of free cash flow.

The nation's third-largest wireless carrier lost $131 million, or 5 cents a share, in the quarter, compared with a loss of $1.2 billion, or 48 cents a share, in the same period last year. The quarterly loss reflects a $108 million charge associated with an agreement with Alaska Native Wireless. Last year's quarter reflects charges related to the shutdown of the firm's fixed wireless business.

Excluding the charge in the fourth quarter, the company beat expectations by a penny, losing $23 million, or a penny a share. The company more than doubled its net loss for the full year to $2.3 billion, or 87 cents a share, from a net loss of $963 million, or 34 cents a share, in 2001.

Sales in the fourth quarter jumped 14.7% to $4.04 billion from $3.52 billion. For the full year, sales improved 14.8% to $15.63 billion from $13.6 billion in 2001.

Wall Street analysts expected the company to lose 2 cents a share on revenue of $4.01 billion in the quarter, according to Thomson Financial/First Call. For the full year, the company was expected to earn a penny a share on sales of $15.6 billion.

Analysts applauded the results. "The numbers are solid, particularly in the context of such a weak economic environment," said Ned Zachar, a telecom analyst at Thomas Weisel Partners.

J.P. Morgan wireless services analyst Thomas Lee said in a note to clients that AT&T Wireless "reported strong 4Q02 results and provided solid '03 guidance, further underscoring strong execution and

free cash flow."

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The company added 705,000 net subscribers in the quarter, reflecting a year-on-year decrease of 23.9%. For the year, AT&T Wireless added a net total of 1.97 million, bringing the total to 20.39 million customers.

The rate at which customers defected from the service, or churn rate, dropped to 2.4% from 2.7% in the year-ago quarter, and from 2.9% in the third quarter. Third-quarter defections were the result of Worldcom's exiting the wireless business. The shutdown cut about 300,000 customers from AT&T Wireless' customer tally. Since the third quarter, the company said it picked about 70,000 of the highest-paying customers. Worldcom operated a wireless reselling business for AT&T Wireless and Cingular.

The competitive environment and an aggressive price war clipped average revenue per user in the quarter to $60 from $60.80 per user in the year-ago period. For the year, ARPU declined to $60.20 from $62.60.

Focus on Cash

"The real thing is cash," AT&T Chief Executive John Zeglis said at the investor's meeting Tuesday morning. With the bulk of spending on equipment upgrades largely behind the company, stability and cash generation are the focus for 2003. The company said services revenue is expected to rise 5% to 7% in 2003 from $14.48 billion this year. Earnings before interest, tax, depreciation and amortization are expected to rise in the low double digits. The company is planning to ratchet down capital spending to $3 billion in the year from $4.88 billion in 2002.

The spending cuts and its growth plans are expected to lead to the company's first-ever free cash flow year in 2003, 12 months ahead of previously disclosed plans. By J.P. Morgan's calculation, AT&T Wireless is expected to generate $600 million to $800 million in free cash flow, before excluding the expected nearly $1 billion of tax refunds from 2002 and 2003.

Executives expect to maintain market share of 14% to 15% in 2003, with average revenue per user remaining at fourth-quarter levels of $60.

Price Wars Wane

To subscribers and potential new customers, those targets mean the free lunch is over. Since last year, the nation's six largest wireless companies have been locked in a heated struggle for new customers in the face of slowing growth. Currently a little more than half of the nation's 300 million people use wireless phones. Nonetheless, AT&T's Zeglis told investors the company plans to drive profit higher by raising rates in several of the company's pricing plans. It also plans to eliminate its controversial promotional plans that charged $99 for unlimited usage on its newly constructed GSM network.

AT&T Wireless also plans to launch a monthly prepaid plan called GoPhone. It differs from regular prepaid plans by requiring users to pay in advance at the beginning of each month for a set amount of usage. No credit checks, deposits or long-term contracts will be required. AT&T Wireless estimated that the potential target market for credit-strapped consumers will reach 4 million.

AT&T Wireless's plan illustrates the end of the industry's years of booming growth. Instead wireless companies now are focusing on more finance-based improvements, even at the expense of subscriber growth.

"The subscriber isn't creating value," said Zeglis, during a question-and-answer session at the investor's conference. "The cash is."

Meanwhile, the company is preparing to try to cash in on the growing market in so-called WiFi, or wireless fidelity services. Such services let laptop and PDA users surf the Net on wireless-enabled devices at broadband speeds, within a 300-feet perimeter around a local transmitting station. The company announced a deal Tuesday morning with service provider Wayport to offer WiFi services in several airports including Dallas, Seattle and San Jose, and about 475 hotel locations nationally.

AT&T Wireless shares closed down 30 cents, or 4.5%, at $6.40.