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AT&T's Net Income Soars on Cost Cuts; Shares Jump

July 26, 2006|James S. Granelli | Times Staff Writer

Phone giant AT&T Inc. on Tuesday posted an 81% rise in second-quarter profit and forecast a bullish year, sending its stock soaring.

Bolstered by cost cutting and its stake in Cingular Wireless, the nation's largest phone company earned $1.8 billion, or 46 cents a share, compared with $1 billion, or 30 cents, in the same period last year. Revenue rose 53% to $15.8 billion.

AT&T shares surged 4% to their highest price in three years, climbing $1.17 to $28.95.

The San Antonio-based company, which is the dominant local phone carrier in California, changed its name last fall from SBC Communications Inc. after completing its purchase of long-distance carrier AT&T Corp.

Quarterly results reflect the combined operation but are compared only with SBC results last year. Adding the old AT&T results to last year's numbers, the company's earnings would have risen 43% from $1.26 billion and revenue would have slipped 5% from $16.6 billion.

"People are more interested in ongoing earnings power," explained analyst Timothy Horan of CIBC World Markets Corp.

AT&T expects to win federal approval this fall to purchase Cingular co-owner BellSouth Corp., expanding its local phone and broadband Internet reach to 22 states from 13. The deal would unify Cingular under one company.

For the quarter, AT&T seemed to surprise analysts by meeting or exceeding most performance measurements.

"We're doing what we said we would do and then some," said Richard G. Lindner, the company's chief financial officer. Expense savings from last fall's acquisition are "ahead of plan," with $300 million in the first six months, Lindner said. He raised the annual estimate to as much as $900 million from the previous projection of as much as $700 million.

Much of the post-merger cost savings have come through job cuts. AT&T Chief Executive Edward Whitacre eliminated almost 3,600 positions in the second quarter and plans a total payroll reduction of 26,000 over three years. AT&T also benefited from a slowdown in the dramatic price cutting that all telecommunications companies engaged in over the last five years.

With costs falling, Horan said, prices should stabilize, even with competition from cable companies and other providers. "It looks as if they have some pricing power now," Horan said. "Price reductions have been rather draconian in the past five years."

Some analysts increased projections for the company's annual earnings. Prudential Equity Group's Richard Klugman raised his estimate 15 cents to $2.20 a share for the year.

Subtracting merger-related costs, AT&T would have earned 58 cents a share for the quarter, well ahead of analysts' average estimate of 53 cents a share in a Thomson Financial survey.

But analyst Patrick Comack of Zachary Investment Research said backing those costs out was wrong. "They strip out the costs of integration, but they include the synergies," he said, complaining that other companies do the same thing. "The cost could be more than the savings."

Cingular, the nation's largest mobile phone company, added 1.5 million subscribers in the quarter, giving it 57.3 million total customers. And it's keeping more of its customers, reducing churn -- the number of customers who quit -- to 1.7%.

The Achilles' heel for AT&T could be its Project Lightspeed broadband network, designed to deliver high-speed Internet access and pay television.

Pay television has been launched in only a few areas, and analysts don't see how the company can ramp up its sluggish launch to reach the previously announced 15 to 20 cities by the end of the year.

Comack said the company's technology paled in comparison with the more-robust networks put together by cable TV companies and Verizon Communications Inc., the nation's second-largest phone company.

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