Why did operating income decline in 2000 despite revenue growth?

Operating expenses rose 7.4% to $40.73 billion, outpacing the 3.9% revenue increase. The filing attributes this to the DSL rollout, costs of network integration and e-commerce services, personnel growth, and national expansion, along with normalizing items such as merger integration costs and a SecurityLink impairment charge of $614 million.

What is the company's capital spending outlook for 2001?

Management expects total capital spending of $12.0 billion to $13.0 billion in 2001, primarily for the wireline network, including Project Pronto, DSL, and regulatory processes to gain state long distance approvals.

What are the main regulatory risks identified in the filing?

Key risks include reciprocal compensation disputes over Internet traffic, the FCC's unbundled network element and line-sharing rules, and pending Supreme Court review of the Eighth Circuit's ruling on FCC pricing rules, with a decision not expected before the fourth quarter of 2001 at the earliest. The company also faces potential performance-measurement payments of up to $863 million over three years under the Ameritech merger conditions.

AT&T INC. 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 2001. Cited figures are marked; the original filing is the authoritative source.

SBC Communications Inc. reported 2000 operating revenues of $51.48 billion^a, up from $49.53 billion in 1999, and operating income of $10.74 billion, down from $11.60 billion.

Net income was $7.97 billion^b ($2.32 diluted EPS), compared with $8.16 billion in 1999. The decline in operating income reflects normalizing items, including merger integration costs tied to Ameritech, a SecurityLink impairment, and DSL rollout and national expansion expenses. The filing states that operating expenses rose 7.4% in 2000, and the company points to several factors expected to raise first-quarter 2001 operating expenses above first-quarter 2000 levels.

The most significant structural change was the October 2000 contribution of substantially all domestic wireless operations to Cingular Wireless, a 60/40 joint venture with BellSouth. Going forward, SBC will report its 60%^c share of Cingular's results as equity in net income of affiliates rather than consolidating wireless revenue. Cingular served about 19 million customers at year-end 2000.

Total assets were $98.65 billion^d, long-term debt was $15.49 billion, and debt maturing within one year was $10.47 billion, including $6.44 billion of commercial paper. Capital expenditures were $13.12 billion, and free cash flow fell to $1.18 billion from $6.27 billion, while the company guided 2001 capital spending to $12.0 to $13.0 billion. The filing also covers the company's broadband strategy (Project Pronto, approximately 34% complete at year-end 2000), national expansion into new local markets, and interLATA long distance approvals in Texas, Kansas and Oklahoma, with Missouri approved by its state commission in March 2001.

Regulatory and legal risks remain significant, including reciprocal compensation disputes, unbundled network element rules and pending Supreme Court review of FCC pricing rules. Several items reference exhibits incorporated from the 2000 Annual Report to Shareowners.

02—Key points

Key Highlights

Operating revenues rose to $51.48 billion in 2000 from $49.53 billion in 1999, while operating income declined to $10.74 billion from $11.60 billion.
Net income was $7.97 billion, or $2.32 per diluted share, versus $8.16 billion, or $2.36 per diluted share, in 1999.
Wireless operations were contributed to Cingular Wireless (60% SBC, 40% BellSouth) in October 2000; Cingular served about 19 million customers, and SBC now records its 60% share as equity income.
Free cash flow fell to $1.18 billion in 2000 from $6.27 billion in 1999, as capital expenditures rose to $13.12 billion from $10.30 billion.
Long-term debt was $15.49 billion at year-end 2000, but debt maturing within one year rose to $10.47 billion, including $6.44 billion of commercial paper.
Project Pronto broadband initiative, a $6 billion program, was about 34% complete at December 31, 2000, with approximately 767,000 DSL subscribers.
Long distance service launched in Kansas and Oklahoma on March 7, 2001, following FCC approval, and Missouri state approval was granted in March 2001.

03—Questions

Frequently Asked Questions

Why did operating income decline in 2000 despite revenue growth?
Operating expenses rose 7.4% to $40.73 billion, outpacing the 3.9% revenue increase. The filing attributes this to the DSL rollout, costs of network integration and e-commerce services, personnel growth, and national expansion, along with normalizing items such as merger integration costs and a SecurityLink impairment charge of $614 million.
How does the Cingular joint venture change SBC's reported results?
Since October 2000, SBC no longer consolidates its domestic wireless revenues and expenses. Instead, it reports a 60% share of Cingular's results as equity in net income of affiliates. The filing notes that reported revenues and expenses in future periods will therefore exclude these wireless operations.
What is the company's capital spending outlook for 2001?
Management expects total capital spending of $12.0 billion to $13.0 billion in 2001, primarily for the wireline network, including Project Pronto, DSL, and regulatory processes to gain state long distance approvals.
What are the main regulatory risks identified in the filing?
Key risks include reciprocal compensation disputes over Internet traffic, the FCC's unbundled network element and line-sharing rules, and pending Supreme Court review of the Eighth Circuit's ruling on FCC pricing rules, with a decision not expected before the fourth quarter of 2001 at the earliest. The company also faces potential performance-measurement payments of up to $863 million over three years under the Ameritech merger conditions.

04—Continue

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