10-QPeriod: Q1 FY2005

AT&T INC. Quarterly Report for Q1 Ended Mar 31, 2005

Filed May 6, 2005For Securities:TT-PCTBBT-PA

Summary

SBC Communications Inc. (now AT&T Inc.) reported first quarter 2005 results showing a notable increase in total operating revenues, up 2.4% to $10.25 billion. This growth was primarily driven by strong performance in data services, particularly DSL, and an increase in long-distance voice revenue, bolstered by bundled service offerings. However, overall net income saw a significant decrease of 54.3% to $885 million, largely due to a substantial decline in "Equity in net income (loss) of affiliates," which was impacted by the divestiture of international holdings and lower results from Cingular Wireless. The company also experienced a significant increase in interest expense due to debt issued for the Cingular/AT&T Wireless acquisition. Looking ahead, SBC is actively pursuing the acquisition of AT&T Corp., a transaction valued at approximately $16 billion. This strategic move is expected to generate substantial cost synergies and enhance the company's market position. The company is also investing in "Project Lightspeed," its next-generation broadband initiative, signaling a commitment to future growth and technological advancement despite ongoing competitive pressures and regulatory complexities in the telecommunications industry.

Key Highlights

  • 1Total operating revenues increased by 2.4% to $10.25 billion, driven by data and long-distance voice growth.
  • 2Net income decreased significantly by 54.3% to $885 million, primarily due to reduced equity in net income from affiliates.
  • 3The company is actively pursuing the acquisition of AT&T Corp., with a total transaction value of approximately $16 billion.
  • 4Operating expenses increased by 2.3%, with notable rises in costs related to weather, network integration services, and increased pension and postretirement benefit costs.
  • 5Interest expense increased by 52.2% due to debt financing for the Cingular/AT&T Wireless acquisition.
  • 6Cingular Wireless customer base significantly grew to over 50 million, largely due to the acquisition of AT&T Wireless.
  • 7The company is making significant investments in its 'Project Lightspeed' initiative for next-generation broadband services.

Frequently Asked Questions

SBC announced its agreement to acquire AT&T Corp. for approximately $16 billion. This strategic acquisition is expected to yield significant cost synergies, primarily from reduced operational expenses and the elimination of duplicative corporate functions. While the acquisition is expected to slow near-term revenue growth, SBC anticipates it will increase earnings per share starting in 2008. Regulatory approvals from the DOJ, FCC, and other authorities are pending, with an expected closing in late 2005 or early 2006.

Cingular Wireless, in which SBC holds a 60% economic interest, saw substantial growth in its customer base to over 50 million, largely driven by the acquisition of AT&T Wireless. However, Cingular's operating income margin decreased significantly in Q1 2005 due to increased expenses related to the AT&T Wireless integration, higher network operating costs, and customer acquisition initiatives. Despite these challenges, Cingular remains a critical component of SBC's strategy, representing a significant portion of SBC's consolidated revenues and future growth potential, particularly in the wireless market.

The substantial decrease in net income from $1.937 billion in Q1 2004 to $885 million in Q1 2005 is primarily attributed to a significant drop in 'Equity in net income (loss) of affiliates.' This decline was influenced by the divestiture of international holdings (like Belgacom, Telkom, and TDC), lower results from Cingular Wireless, and a large gain on the sale of the Belgacom investment in the prior year's quarter which did not recur. Additionally, interest expense increased due to new debt financing for the Cingular/AT&T Wireless acquisition, impacting overall profitability.

'Project Lightspeed' is SBC's initiative to develop and deploy a next-generation network capable of delivering integrated IP video, super-high-speed broadband, and VoIP services to residential and small-business customers. The company is investing significantly in fiber-to-the-premises deployment and expects to launch initial products by late 2005 or early 2006. This project is crucial for SBC's long-term strategy to remain competitive in the evolving telecommunications landscape, particularly in the broadband and video services market.