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Att profit plummets stops residential service Original Source Link: (May no longer be active)
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AT&T to Stop Consumer Sales; 2nd-Qtr Profit Plunges (Update7) Listen
July 22 (Bloomberg) -- AT&T Corp., the company that brought telephone service to American homes a century ago, said it plans to retreat from the residential business because regulatory changes make it too expensive. Second-quarter profit plunged 80 percent as sales dropped for the 18th consecutive period.
The company will stop advertising and marketing to attract local and long-distance customers while still offering service to existing users. Bedminster, New Jersey-based AT&T said in a statement it will focus on winning new business customers and building its Internet-based calling network.
``Consumer was not a sustainable business for them,'' said Daniel Zito, an analyst at Legg Mason Wood Walker Inc. in Washington. He rates AT&T ``hold'' and doesn't own it. ``This puts them on a course to reap as much cash flow in the near-term as they can without worrying about their consumer base.''
Chief Executive David Dorman, 50, described his decision as an ``historic shift'' for the company and an industry that AT&T had dominated since it began 129 years ago. Consumer revenue contributed a quarter of AT&T's sales and 70 percent of its operating income in the second period. AT&T threatened to drop retail services after the government refused to back efforts to keep rules that enable it to rent local-phone lines cheaply.
Second Quarter
Second-quarter net income fell to $108 million, or 14 cents a share, from $536 million, or 68 cents, a year earlier, AT&T said in the statement. That beat the 7-cent average estimate of 17 analysts surveyed by Thomson Financial. Revenue fell 13 percent to $7.64 billion from $8.8 billion.
Operating income from the consumer business, which includes local, long-distance and Internet telephony, fell 35 percent from the first quarter to $240 million. Revenue from the unit dropped 4.5 percent to $2.01 billion and declined 15 percent from a year earlier. Operating income from businesses surged 83 percent to $152 million.
AT&T, which has 4.68 million local customers, in June said it will stop marketing in seven states. The company today said it will retreat from the business nationwide. AT&T had 30.3 million long-distance customers at the end of last year.
``There are substantial numbers of customers who walk in the front door of AT&T, because we're AT&T, and we're not going to turn those customers away,'' Dorman said on a conference call with analysts. ``But what we're not going to do is the proactive marketing, telemarketing, direct mail, advertising and the like.''
The company didn't say how much money it expected to save on advertising. It likely spends more than $1 billion a year to market its long-distance service, said David Barden, a Banc of America Securities Inc. analyst.
Rule Changes
The Bush administration last month said it wouldn't back AT&T's effort to wage a Supreme Court battle to keep in place the regulations that let AT&T rent competitors' networks at discount rates set by regulators.
``We will not invest to fight legal battles that no longer make sense given the dramatic shift in the government's position on local-market competition,'' Dorman said today.
AT&T, MCI Inc. and other long-distance providers lodged an appeal to the Supreme Court in July, asking it to restore the regulations that provided the discounts. The rules expired June 15.
Taking Advantage
Verizon Communications Inc. and other local-phone companies will probably take advantage of the regulatory change to charge more for their local lines and AT&T won't be able to provide competitively priced bundles of services, Dorman said.
Shares of AT&T fell 8 cents to $14.24 at 4 p.m. in New York Stock Exchange composite trading. The have tumbled 30 percent this year as revenue and profit declines.
The extra yield demanded by investors for AT&T's 8 percent notes maturing in 2031 narrowed 5 basis points to 343 basis points, traders said. A basis point is 0.01 percentage point.
The decision to retreat from the consumer business will leave AT&T dependent on business customers, a market where price competition with MCI has caused a slide in revenue.
The move surprised some analysts who thought the company's threats were designed to put pressure on lawmakers to change their minds, said Patrick Comack, analyst at Guzman & Co. in Coral Gables, Florida.
`Downward Spiral'
AT&T's decision ``continues a downward spiral'' begun when Dorman's predecessor C. Michael Armstrong expanded into wireless and cable-television businesses, said Brian Bruce, head of equity investments at PanAgora Asset Management in Boston, which has $13 billion in assets and owns 455,764 AT&T shares.
Armstrong spent more than $112 billion on cable-television providers, overseas expansion and stakes in start-up businesses between 1998 and 2002. The company's debt soared to more than $60 billion, forcing AT&T to shed many of those assets at a loss.
AT&T sold its wireless unit and its cable-television business to focus on telephone calling, a market where prices have tumbled and competition increased.
The shift in strategy will have a ``significant impact'' on jobs, Chief Financial Officer Thomas Horton said on the call, without giving specifics. AT&T has reached its goal of cutting 8 percent of the workforce this year, Horton said. The company had 61,600 employees at the end of 2003.
Forecasts Maintained
AT&T maintained a reduced forecast for 2004 given last month. Operating income will be $1 billion to $1.4 billion, from an earlier prediction of as much as $2.5 billion, and $3.66 billion in 2003, the company said at the time. Sales will be as much as $30.5 billion from an earlier forecast of as much as $32 billion.
AT&T's operating income is revenue minus operating expenses.
AT&T is trying to salvage its consumer division by expanding in so-called Voice over Internet Protocol, or VoIP service, through its CallVantage service. Calls over the Internet are sent cheaply as packets of data, similar to e-mail. Callers must have a high-speed Internet, or broadband, connection to sign up for the service.
Expanding its Internet service may be an uphill battle, said Taher Bouzayen, a consultant at Boston-based market researcher Atlantic-ACM.
``The VoIP product will be difficult to market to relatively unsophisticated customers,'' Bouzayen said. ``The average Joe doesn't even know what broadband means.''
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