Sales Erosion Wears Thin at SBC, AT&T

Old-line telcos see their shares tumble as some new challenges join the time-tested ones.
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Wall Street showed its scorn for two big names in telecom Tuesday, as it surveyed a bleak landscape at erosion-scarred

AT&T

(T) - Get Report

and

SBC

(SBC)

.

First up was AT&T, the New York long-distance giant that has emerged as perhaps the most feckless participant in a years-long industrywide downhill sales slalom. The company surprised no one by noting a 16% decline in third-quarter revenue at its staggering consumer business. But observers were less than pleased with the quarter's 6% drop in business services revenue and the attending 2003 forecast for that once-stout unit. Worries about pricing pressure pushed AT&T down $1 to $20.07

Meanwhile, San Antonio local-phone leader SBC offered up its own soggy quarter, posting sharp drops in earnings and revenue from year-ago levels amid a worrisome decline in local access lines. Clutching at positive straws, the company noted the strong growth of its Cingular wireless venture and a companywide sequential sales rise in the latest period. But investors weren't impressed, sending the stock down 88 cents to $21.52.

The weak performances came as the telecom business continues to struggle through a massive shift in customer preferences. Users have fled the old-line telcos in droves in favor of wireless carriers such as Cingular,

Verizon Wireless

and

Nextel

(NXTL)

. Now the challenge grows thornier as the companies must try to alleviate ongoing problems -- like SBC's line losses -- while facing down new setbacks, such as the one at AT&T's venerable business services unit.

Price Wars

Though AT&T didn't alter its full-year guidance, executives on a conference call with analysts said increased price pressure and continued weak demand for business services will drive fourth-quarter sales declines. The setback will be steep enough that the company will suffer a deeper 2003 sales decline than it endured in 2002, when business sales dropped 4%.

Executives said the company could meet or exceed the full-year profit and sales predictions, which call for earnings of $2.26 per share on revenues of $34.9 billion. That represents an 29% earnings decline and a 8% drop in sales from the year-ago period.

Still, investors were clearly disappointed with reports that a new round of price wars has broken out amid the business services sector. This

alarming trend came to light last month as phone wholesaler

Level 3

(LVLT)

reported cutthroat pricing had returned, thanks largely to restructured postbankruptcy telcos like

WilTel

(WTEL)

and

ICG

.

Making matters worse, industry observers have watched as service integrators -- the outsourcing teams from

IBM

(IBM) - Get Report

,

Accenture

(ACN) - Get Report

,

EDS

(EDS)

and other outfits -- have started to supplant AT&T in its role as a business communications manager. The outsourcing crowd will buy wholesale phone and data services for their clients and take a cut of the price savings.

Ma Bell President Betsy Bernard tried to downplay the idea that AT&T is getting boxed out of big companies. This is "not a new trend" and it has "not been successful," says Bernard. "We have great relationships with key system integrators," she said, referring to the dual role AT&T has with consultants in a company's service management.

AT&T also said it fired four employees who had "circumvented the internal controls process," resulting in a $125 million past understatement of a cost-related liability. As properly recorded, the expense would have reduced 2001 and 2002 net income by a total of a dime a share. Executives said it was determined that the error was not done for personal gain and that it had no affect on the amounts it billed and received during that period.

Expenses and layoffs continue to be watchwords at AT&T. The company said it expects to have 8% less employees at the end of the year, roughly 65,000 compared to the 71,000 at the beginning of the year. The company declined to answer a question about job cuts next year.

Remember the Alamo

Meanwhile, SBC posted results that were notable more for the one statistic the company failed to furnish in its third-quarter press release than for the many that it offered up.

If the third quarter's declines in earnings and revenue were expected and therefore largely discounted by investors, it's clear that the company's loss of local access lines continues to rankle. As a matter of fact, SBC's release didn't even note how many access lines it had lost in the latest quarter -- only the 55 million it had in total.

But it provided an abundance of other metrics. SBC's release mentions a 365,000-unit rise in digital subscriber lines and a 1.7 million long-distance-line gain. Yet specifics were more difficult to locate on its declining core local phone business.

Though the San Antonio phone giant was able to slow the shrinking of its total line count, the company appears to have lost 835,000 lines, or 1.5% of its total in the third quarter. And that number was arrived at only by adding regional subtotals from SBC's earnings Web cast slide presentation.