The incredible shrinking telephone.
That is the story behind
second-quarter earnings report Tuesday. Sure, the company beat Wall Street expectations, posting operating earnings, excluding charges and gains, of 57 cents a share. The profit jump boosted the beleaguered stock Tuesday morning, and strong results from
came as welcome news as well.
But AT&T's core business is in accelerating decline. The second-quarter earnings call with analysts Tuesday revealed that the breathtaking slide of its core consumer long-distance and business-services divisions continues. Meanwhile, the phone giant is dodging questions about next year's outlook, focusing instead on cutting costs and boosting income from outside investments.
"There was a lot of below-the-line stuff I didn't expect," says
Donaldson Lufkin & Jenrette
analyst Richard Klugman, referring to the $119 million in other income that helped AT&T make its earnings-per-share number. "I don't have a clear answer where this other income came from, whether it is a squeeze or whether it is legitimate. But the bottom line is, it's not coming from the traditional source of revenue and earnings growth in their core business." Klugman has a market perform rating on AT&T, and DLJ advised
on its merger with AT&T.
AT&T's second-quarter earnings of 53 cents a share, including charges, was 4 cents better than the year-ago figure. But the Street was looking beyond this quarter's numbers for a road map of long-term trends. What investors got instead is more evidence of the big phone company's spreading weakness. Consumer services suffered a 7.2% revenue decline, faster than last year and leaving the division's numbers below estimates. Even more surprising was a sharp slowdown in revenue growth on communications sales to businesses.
Last quarter, AT&T said it had lost several large corporate clients but had made adjustments to strengthen its sales to big-ticket accounts. But that problem clearly hasn't been remedied yet. Given the competitive pressures from new network operators such as
, it's not certain AT&T's business services will regain its stature.
"They tried to put the best face on it, but the reality is they just downwardly revised their revenue forecast for business, and that's the very thing that people had their eye on," says Klugman.
Some positive tones from AT&T's wireless group and broadband unit helped prevent the call from being a total calamity. AT&T wireless revenue grew 32%, and the division added over a half-million subscribers while boosting the average revenue per user to a formidable $71.50 per month, well above the industry average.
"They did well in wireless, and broadband is on schedule," says Klugman. "I think this made people, if not ignore their concerns, then push them aside a bit."
At midafternoon Tuesday, AT&T shares were up 1 3/4, or 5.3%, to 35 1/16. Still, the stock remains near a two-year low and more than 40% off its 52-week high. The wireless group was up 2 1/8, or 7.9%, to 29 3/16.
AT&T Chairman and CEO C. Michael Armstrong declined repeated requests from analysts to provide specifics on next year's outlook, leaving analysts and investors to rely on past guidance.
"We are not going to pre-empt the market in our judgment about 2001," said Armstrong on the earnings call.
Observers say the company will likely wait until its annual analyst conference in December to give detailed forecasts on the declines of its core businesses and the growth of its wireless and cable ventures.
Until then, AT&T's long road from top long-distance provider to a TV, Net and phone colossus seems destined for more bone-jarring bumps.