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AT&T, SBC Post Weak Results

Long-distance firm says it understated expenses in 2001 and '02. Four are fired for hiding errors.

October 22, 2003|James S. Granelli | Times Staff Writer

Battling for bigger slices of a shrinking pie, SBC Communications Inc. and AT&T Corp. on Tuesday reported weak results for another quarter marked by price wars and lagging demand.

SBC, the dominant local carrier in California, said third-quarter net income dropped nearly 30% to $1.2 billion, or 37 cents a share, from the same period last year. Earnings were about 2 cents a share lower than analysts expected.

Revenue fell 3.8% to $10.2 billion.

At long-distance carrier AT&T, quarterly profit more than doubled to $418 million, or 53 cents a share, partly because of cost cutting and tax credits, but it was lower than in each of the first two quarters this year.

Sales were down 8.5% to $8.6 billion.

AT&T disclosed Tuesday that two employees and their two supervisors were fired for covering up accounting errors that caused the company to understate expenses in 2001 and 2002. AT&T took a pretax charge of $125 million to cover the errors and said the effect was "not material" to the company's financial condition.

"It simply appears to be an error, and someone tried to work around the controls to avoid detection," Chief Financial Officer Thomas Horton said.

AT&T Chairman David Dorman noted grimly that he had yet to see any signs of improvement among telecommunications companies, which are saddled with debt and fighting for customers.

Customers are turning in droves to other technologies -- cellphones, cable telephony and even the Internet.

SBC and AT&T also have been losing customers to each other and to other traditional phone companies as deregulation allows them to compete in new markets.

Wall Street punished SBC and AT&T, even though the results came as no surprise to analysts who have grown accustomed to bad news from telecom firms.

Shares of Bedminster, N.J.-based AT&T fell $1.07 to $20. San Antonio-based SBC fell 40 cents to $22. Both trade on the New York Stock Exchange.

"People are recognizing there is no immediate recovery for telecom," said David Willis, a telecom analyst at research firm Meta Group Inc. "We'll continue to see what we've been seeing: declining revenue and cost cutting and no sign of anything that is going to let the telcos dig themselves out from under."

Analyst Richard G. Klugman at Jefferies & Co. expects the stocks to fall further, to $18 for AT&T, which has seen its value erode 23% this year, and to $16 for SBC, which has fallen 19% this year.

"SBC faces growing fundamental difficulties as data demand remains weak and as competition/substitution intensifies," Klugman wrote to investors Tuesday.

AT&T, he said, faced possible wholesale price increases for Bell lines and equipment it leases as well as stiff price competition, especially once WorldCom Inc. emerges from bankruptcy protection as MCI.

Although AT&T's earnings were well ahead of last year's third-quarter profit of $207 million, or 26 cents a share, revenue was off from $9.4 billion a year earlier.

Sales have fallen for six consecutive quarters.

Dorman said his company was looking to the emerging Internet telephony technology as one of several initiatives to boost revenue.

Bundling its local and long-distance voice service with cellphones from separately owned AT&T Wireless Services Inc. and high-speed DSL Internet lines from Covad Communications Inc. will help to spur the company's revenue too, he said.

SBC likewise is betting on bundles to sell its local customers wireless, DSL and, early next year, video offerings.

Cingular Wireless, a joint venture 60% owned by SBC, is the nation's second-largest mobile phone company and has posted big gains in subscriptions this year -- 745,000 in the third quarter to give it 23.4 million customers.

Those new customers, though, came at a price: higher marketing costs and deeper discounts.

SBC also added 365,000 DSLs in the third quarter to give it a total of 3.1 million high-speed lines. Customers who have two lines typically give one up to get DSL, which can be used for voice and data. SBC also has had to offer heavy discounts to compete with the more popular cable modem service.

"Longer term, SBC has to invest in new services to compete," Willis said. "What's more compelling to consumers: TiVo and video on demand or buying more long-distance minutes?"

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