10-QPeriod: Q3 FY2004

AT&T INC. Quarterly Report for Q3 Ended Sep 30, 2004

Filed November 5, 2004For Securities:TT-PCTBBT-PA

Summary

SBC Communications Inc. (later AT&T) reported its third-quarter and nine-month results for 2004. For the quarter, total operating revenues were $10.3 billion, a slight increase from the prior year, driven by growth in data and long-distance voice services. Net income for the quarter significantly increased to $2.09 billion, largely due to a substantial gain from discontinued operations. For the first nine months, revenues remained flat at $30.5 billion, while net income decreased to $5.2 billion compared to $7.6 billion in the prior year, impacted by higher expenses and a significant cumulative accounting adjustment in 2003. The company saw continued growth in its data services, particularly DSL, and a strong increase in long-distance voice revenue, largely attributed to bundling strategies. However, voice revenues continued to decline due to the loss of retail access lines, exacerbated by competition and the economics of UNE-P regulations. The significant event impacting the quarter was the completion of Cingular Wireless' acquisition of AT&T Wireless for approximately $41 billion, in which SBC participated by contributing $21.6 billion. This transaction is expected to reshape the wireless landscape, with integration costs anticipated in the near term and synergy benefits to follow.

Key Highlights

  • 1Total operating revenues for Q3 2004 increased 1.4% year-over-year to $10.3 billion, while nine-month revenues were flat at $30.5 billion.
  • 2Net income for Q3 2004 surged to $2.09 billion, a 72.2% increase year-over-year, significantly boosted by an $827 million after-tax gain from the sale of a directory advertising business.
  • 3Data revenue (driven by DSL) and long-distance voice revenue showed strong growth, offsetting declines in traditional voice revenue.
  • 4The company's wireline segment experienced a continued decline in switched access lines (down 2.3 million year-over-year), though the rate of loss showed some signs of slowing.
  • 5Cingular Wireless, SBC's wireless joint venture, acquired AT&T Wireless for approximately $41 billion, with SBC contributing $21.6 billion. This significant event will impact future results.
  • 6Operating expenses for the nine-month period increased 1.7%, primarily due to strike preparation, labor settlements, and growth initiatives, impacting year-over-year profitability.
  • 7The company reported a substantial increase in cash and cash equivalents to $13.3 billion at the end of the quarter, although a significant portion was earmarked for the Cingular/AT&T Wireless acquisition.

Frequently Asked Questions

SBC Communications Inc. reported a notable increase in net income for the third quarter of 2004, reaching $2.09 billion compared to $1.22 billion in the prior year's quarter. This substantial growth was largely driven by a significant gain from the sale of its Illinois and northwest Indiana directory advertising business. Total operating revenues saw a modest increase of 1.4% to $10.3 billion, supported by growth in data and long-distance voice services, which helped offset a continued decline in traditional voice revenues.

The acquisition of AT&T Wireless by Cingular (in which SBC holds a 60% stake) for approximately $41 billion was a major event. SBC contributed $21.6 billion to this transaction. While this acquisition positions Cingular as the largest U.S. wireless provider, SBC anticipates significant integration costs and potential dilution to Cingular's performance in the near term. Synergy cost savings are expected to begin later in 2004 and significantly in 2005, with a positive impact on operating margins anticipated from 2007 onwards.

The wireline segment continues to face challenges with a decline in total switched access lines (down 2.3 million year-over-year). While DSL and long-distance voice revenues are growing, the overall segment's operating income margin decreased year-to-date due to increased expenses from strike preparation and labor settlements. The Unbundled Network Element-Platform (UNE-P) regulation, which requires SBC to lease network elements to competitors at below-cost rates, continues to pressure margins. However, recent court decisions vacating key UNE-P rules may offer regulatory relief, although the FCC is expected to implement new rules. The company is also investing in Project Lightspeed, a fiber-optic network build-out.

SBC's combined net pension and postretirement cost decreased for both the quarter and the nine-month period, primarily due to better-than-expected asset returns in 2003, changes affecting nonmanagement retirees, and the accounting treatment of the Medicare Prescription Drug Act. The company restated its first-quarter 2004 results to align with new FASB guidance on accounting for the Medicare Act, resulting in a minor decrease in net income. There were no material cumulative effect of accounting changes impacting the current period's results, unlike in 2003.