10-QPeriod: Q1 FY2003

AT&T INC. Quarterly Report for Q1 Ended Mar 31, 2003

Filed May 12, 2003For Securities:TT-PCTBBT-PA

Summary

SBC Communications Inc. (SBC) reported its first quarter 2003 financial results, showing a significant year-over-year improvement in net income, largely driven by accounting changes and a substantial gain from the sale of an investment. Total operating revenues saw a slight decrease of 1.8%, reflecting ongoing challenges in the wireline segment due to regulatory pressures like UNE-P, increased competition, and a weak economy. However, operating income declined by 13.0%, primarily due to these revenue pressures and increased pension and postretirement costs. The most impactful financial events were the adoption of new accounting standards, which resulted in a significant net income boost. Specifically, changes in directory accounting and the adoption of FAS 143 led to a substantial cumulative effect gain. Furthermore, the company reported a large gain on the sale of its investment in Cegetel, which significantly boosted income before taxes. Despite revenue pressures, the company highlighted strength in its Cingular wireless joint venture and growth in its data services, particularly DSL. Investors should note the ongoing competitive and regulatory challenges, particularly the impact of UNE-P on access line revenues. The company's capital expenditures are expected to remain focused on the wireline segment, funded by operations and potential borrowings. The company's dividend per share increased, signaling continued commitment to returning value to shareholders.

Key Highlights

  • 1Net income surged to $5,003 million ($1.51 per share) from a net loss of $(193) million ($(0.06) per share) in the prior year, largely due to a $2,548 million cumulative effect from accounting changes and a $1,574 million gain on the sale of Cegetel.
  • 2Total operating revenues decreased by 1.8% to $10,333 million, primarily impacted by a decline in voice revenues in the wireline segment due to UNE-P regulations and competition.
  • 3Operating income declined by 13.0% to $1,898 million, reflecting revenue pressures in the wireline segment and increased pension and postretirement costs.
  • 4The Cingular wireless joint venture showed resilience, with segment operating income increasing by 7.3% to $716 million, driven by service and equipment revenue growth.
  • 5Data revenues, particularly from DSL services, increased by 3.7% to $2,479 million, indicating growth in broadband offerings.
  • 6Capital expenditures are projected between $5,000 million and $6,000 million for 2003, with the majority allocated to the wireline segment.
  • 7The company increased its quarterly dividend to $0.3325 per share, a 4.6% increase from the previous quarter, and announced an additional one-time dividend of $0.05 per share.

Frequently Asked Questions

The substantial increase in net income is primarily attributed to two major factors: a positive cumulative effect of accounting changes totaling $2,548 million, stemming from changes in directory accounting and the adoption of FAS 143, and a significant gain of $1,574 million from the sale of the company's investment in Cegetel.

The wireline segment faces significant headwinds, including the continued loss of retail access lines due to below-cost Unbundled Network Element-Platform (UNE-P) wholesale lines mandated by regulations, increased competition from wireless and cable technologies, and a generally weak U.S. economy. These factors are leading to declining revenues and operating income in this segment.

The Cingular wireless joint venture is performing well, with total segment operating revenues increasing by 1.3% to $3,590 million. Segment operating income also saw a healthy increase of 7.3% to $716 million, indicating improved profitability driven by service and equipment revenue growth, as well as cost control measures.

SBC anticipates capital spending for 2003 to be between $5,000 million and $6,000 million, excluding Cingular. The majority of this investment is expected to be directed towards the wireline segment. These expenditures are planned to be funded through operating cash flow and potential borrowings, reflecting the company's ongoing investment in its core infrastructure despite current market pressures.