News Release
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FOR RELEASE FRIDAY, OCTOBER 21, 2005
AT&T Announces Third-Quarter 2005 Earnings
o Third-quarter earnings per diluted share of $0.64
o Consolidated revenue of $6.6 billion
o Operating income of $955 million
o Third-quarter cash from operating activities of $1.4 billion
o Increased full-year 2005 revenue and operating margin guidance
BEDMINSTER, N.J. -- AT&T (NYSE: T) today reported net income of $520 million, or
earnings per diluted share of $0.64, for the third quarter of 2005. This result
includes a previously announced pretax charge of $92 million, or $0.06 per
diluted share, related to the company's aircraft lease investments. AT&T's
current-quarter net income compares to a net loss of $7.1 billion, or a loss per
share of $8.99, in the third quarter of 2004, which included a pretax asset
impairment charge of $11.4 billion, or $8.86 per share, and pretax restructuring
and other charges of $1.1 billion, or $0.84 per share. Third quarter of 2004
also included a pretax charge of $46 million, or $0.04 per share, related to the
company's aircraft lease investments.
"AT&T's solid third quarter results demonstrate the successful execution of our
strategies across both our consumer and business portfolios," said AT&T Chairman
and Chief Executive Officer David W. Dorman. "We've expanded our margins in the
consumer and small business markets as we wind down these businesses, and our
enterprise portfolio has benefited from significant cost structure improvement,
revenue and volume growth in IP and enhanced services and share expansion in
other product lines."
AT&T reported third-quarter 2005 consolidated revenue of $6.6 billion, which
includes $5.1 billion from AT&T Business and $1.5 billion from AT&T Consumer.
Consolidated revenue declined 13.3 percent versus the third quarter of 2004,
primarily due to continued declines in long distance (LD) voice and data
revenue.
The company reported consolidated operating income of $1.0 billion in the third
quarter of 2005, for a margin of 14.4 percent. This compares to a consolidated
operating loss of $11.3 billion in the prior-year third quarter. Excluding asset
impairment and net restructuring and other charges of $12.5 billion, operating
income in the third quarter of 2004 was $1.1 billion, for an operating margin of
15.0 percent. The company noted that ongoing efforts to reduce costs and improve
productivity have helped reduce the rate of operating income decline,
notwithstanding the ongoing revenue declines.
PAGE>
AT&T UNIT HIGHLIGHTS
AT&T Business
o Revenue was $5.1 billion, a decline of 9.5 percent from the prior-year
third quarter, primarily driven by ongoing pricing pressure in
traditional voice and data services and volume weakness in data
services. Continued year-over-year growth in IP&E services favorably
impacted revenue.
o Long distance voice revenue decreased 12.7 percent from the prior-year
third quarter. Ongoing pricing pressure led to revenue declines,
despite an approximate 10 percent increase in volumes, as growth in
wholesale more than offset the decline in retail volumes.
o Data revenue declined 11.1 percent from the prior-year third quarter
as a result of continued pricing pressure and lower volumes, including
the impact of technology migration. Data revenue was also negatively
impacted by approximately 1.5 percentage points due to higher customer
disconnects of prepaid network capacity in the prior year third
quarter.
o Local voice revenue declined 19.7 percent from the prior-year third
quarter, reflecting lower payphone-related revenue as a result of the
sale of the company's National Public Markets business. The decline
also reflects the company's ongoing strategy of selectively
approaching the small business market, placing a greater focus on
profitability than overall market share.
o IP&E-services revenue increased 7.3 percent over the prior-year third
quarter, led by growth in next-generation networking services such as
Enhanced Virtual Private Network (E-VPN) and IP-enabled frame relay
services, partially offset by declines in mature products such as
Managed Internet Access and Virtual Private Networks.
o Operating income totaled $513 million for the third quarter of 2005,
yielding an operating margin of 10.0 percent. This compares to an
operating loss of $11.1 billion in the prior-year third quarter.
Excluding asset impairment and net restructuring and other charges of
$11.9 billion, operating income in the third quarter of 2004 was $764
million, for an operating margin of 13.5 percent. The decline in
operating income in the third quarter of 2005 reflects decreased long
distance voice and data services revenue, partially offset by a
reduction in operating expenses due to cost controls.
o Capital expenditures were $344 million as AT&T Business continues to
upgrade its network and integrate its systems to further rationalize
the company's cost structure, improve the customer experience and
support growth in next-generation products and services.
o During the quarter, a number of sizable customer wins and contract
extensions were signed with such leading companies as Wal-Mart,
Northrop Grumman Corporation, Sony Electronics, Enterprise Rent-A-Car
and Panasonic, among many others.
o In addition to numerous other industry accolades received during the
quarter, AT&T received the Frost & Sullivan Award for "Product Line
Strategy" in managed telecom services, recognizing the company's
comprehensive suite of managed services for enterprise customers.
Additionally, AT&T received the Frost & Sullivan Award for "Ethernet
Market Leadership."
AT&T Consumer
o Revenue was $1.5 billion, a decline of 24.3 percent versus the
prior-year third quarter, largely driven by a decline in standalone
long distance revenue due to volume declines associated with
competitive customer losses and the continued impact of wireless and
Internet substitution, partially offset by targeted price increases.
In addition, the revenue decline was impacted by decreased bundled
revenue.
o Operating income totaled $541 million, yielding an operating margin of
36.1 percent. This compares to operating income of $281 million in the
prior-year third quarter. Excluding asset impairment and net
restructuring and other charges of $188 million, operating income in
the third quarter of 2004 was $469 million, for an operating margin of
23.7 percent.
o The year-over-year increase in operating income and margin reflects a
substantial decrease in operating expenses, primarily attributable to
the strategic decision to discontinue marketing to residential local
and standalone long distance customers.
OTHER CONSOLIDATED FINANCIAL HIGHLIGHTS
o Given the trends experienced throughout the first three quarters of
2005, AT&T now expects consolidated revenue for the full year to be at
or above $26.5 billion, approximately $500 million above the high-end
of the revenue guidance range set at the beginning of the year. The
company also expects its consolidated operating margin percentage for
2005, excluding restructuring and merger-related transaction costs, to
be in the low teens, outpacing prior expectations.
o The following items were included in the third quarter results:
o a previously mentioned pretax charge of $92 million, or $0.06 per
diluted share, in the third quarter of 2005 and a pretax charge
of $46 million, of $0.04 per diluted share, in the third quarter
of 2004, related to the company's investment in aircraft
leveraged leases;
o transaction costs of $20 million, or $0.02 per diluted share, in
the third quarter of 2005, related to AT&T's pending merger with
SBC Communications, which we expect to close by the end of 2005;
and
o a $41 million pretax benefit, or $0.03 per diluted share, in the third
quarter of 2005, from insurance proceeds related to business losses
sustained during 2001.
o Free cash flow was $1.0 billion for the quarter. Free cash flow is
defined as cash flows provided by operating activities of $1.4 billion
less cash used for capital expenditures and other additions of $0.4
billion.
o AT&T ended the quarter with net debt of $4.7 billion. Net debt is
defined as total debt of $7.7 billion less cash of $2.8 billion and
net foreign debt fluctuations of $0.1 billion.
o Consolidated capital expenditures for the quarter were $349 million.
DEFINITIONS and NOTES
AT&T Business
LD Voice - includes all of AT&T's domestic and international LD revenue,
including Intralata toll when purchased as part of an LD calling plan.
Local Voice - includes all local calling and feature revenue, Intralata toll
when purchased as part of a local calling plan, as well as Inter-carrier local
revenue.
Data Services- includes bandwidth services (dedicated private line services
through high-capacity optical transport), frame relay and asynchronous transfer
mode (ATM) revenue for LD and local, as well as revenue for managed data
services.
Internet Protocol & Enhanced Services (IP&E-services) - includes all services
that ride on the IP common backbone or that use IP technology, including managed
IP services, as well as application services (e.g., hosting, security).
Outsourcing, Professional Services & Other - includes complex bundled solutions
primarily in the wide area/local area network space, AT&T's professional
services revenue associated with the company's federal government customers, as
well as all other Business Services revenue (and eliminations) not previously
defined.
Data, IP&E-Services - Percent Managed - managed services refers to AT&T's
management of a client's network or network and applications including
applications that extend to the customer premise equipment.
Data, IP&E-Services - Percent International - a data service that either
originates or terminates outside of the United States, or an IP&E-service
installed or wholly delivered outside the United States.
AT&T Consumer
Bundled Services - includes any customer with a local relationship as a starting
point, and all other AT&T subscription-based voice products provided to that
customer.
Standalone LD, Transactional & Other Services - includes any customer with
solely a long distance relationship, non-voice products, or a non
subscription-based relationship.
Local Customers - residential customers who subscribe to AT&T local service.
Other Definitions and Notes
Foreign currency fluctuations - represents mark-to-market adjustments, net of
cash collateral collected, that increased the debt balance by approximately $0.1
billion at September 30, 2005, from December 31, 2004, on non-U.S. denominated
debt of approximately $0.6 billion. AT&T has entered into foreign exchange
hedges that substantially offset the fluctuations in the debt balance. The
offsetting mark-to-market adjustments of the hedges are included in "other
current assets" and "other assets" on the balance sheet.
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AT&T Corp. Consolidated Statements of Operations (Unaudited)
Dollars in millions (except per share amounts)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
REVENUE
AT&T Business $ 5,109 $ 5,645 $ 15,583 $ 17,128
AT&T Consumer 1,499 1,980 4,777 6,098
Corporate and Other 12 13 35 38
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Total Revenue 6,620 7,638 20,395 23,264
OPERATING EXPENSES
Access and other connection 2,317 2,411 7,111 7,530
Costs of services and products 1,498 1,783 4,686 5,406
Selling, general and administrative 1,228 1,653 3,830 5,160
Depreciation and amortization 623 647 1,889 3,128
Asset impairment and net restructuring
and other charges (1) 12,469 35 12,736
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Total operating expenses 5,665 18,963 17,551 33,960
Operating income (loss) 955 (11,325) 2,844 (10,696)
Other income (expense), net 10 (34) (113) (172)
Interest (expense) (166) (192) (538) (611)
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Income (loss) before income taxes,
minority interest (loss) income and net
earnings related to equity investments 799 (11,551) 2,193 (11,479)
(Provision) benefit for income taxes (279) 4,402 (845) 4,741
Minority interest (loss) income (1) - (1) 1
Net earnings related to equity investments 1 2 9 2
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Net income (loss) $ 520 $(7,147) $ 1,356 $ (6,735)
======== ======== ========= =========
Weighted-average common shares (millions) 803 795 801 794
Weighted-average common and potential
common shares (millions) 812 795 809 794
Earnings (loss) per basic share $ 0.65 $ (8.99) $ 1.69 $ (8.48)
Earnings (loss) per diluted share $ 0.64 $ (8.99) $ 1.68 $ (8.48)
Dividends declared per share $ 0.2375 $ 0.2375 $ 0.7125 $ 0.7125
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AT&T Corp. Consolidated Statements of Operations (unaudited)
Dollars in millions (except per share amounts)
3Q05 2Q05 1Q05 4Q04 3Q04 2Q04 1Q04 2004
REVENUE
AT&T Business $ 5,109 $ 5,155 $ 5,319 $ 5,454 $ 5,645 $ 5,611 $ 5,872 $22,582
AT&T Consumer 1,499 1,593 1,685 1,806 1,980 2,011 2,107 7,904
Corporate and Other 12 12 11 13 13 14 11 51
Total revenue 6,620 6,760 7,015 7,273 7,638 7,636 7,990 30,537
OPERATING EXPENSES
Access and other connection 2,317 2,390 2,404 2,924 2,411 2,481 2,638 10,454
Costs of services and products 1,498 1,560 1,628 1,668 1,783 1,759 1,864 7,074
Selling, general and administrative 1,228 1,325 1,277 1,397 1,653 1,763 1,744 6,557
Depreciation and amortization 623 630 636 640 647 1,231 1,250 3,768
Asset impairment and net restructuring
and other charges (1) 36 - 36 12,469 54 213 12,772
Total operating expenses 5,665 5,941 5,945 6,665 18,963 7,288 7,709 40,625
Operating income (loss) 955 819 1,070 608 (11,325) 348 281 (10,088)
Other income (expense), net 10 (153) 30 28 (34) 36 (174) (144)
Interest (expense) (166) (169) (203) (192) (192) (191) (228) (803)
Income (loss) before income taxes,
minority interest (loss) income and net
earnings (losses) related to equity investments 799 497 897 444 (11,551) 193 (121) (11,035)
(Provision) benefit for income taxes (279) (198) (368) (181) 4,402 (87) 426 4,560
Minority interest (loss) income (1) - - - - 1 - 1
Net earnings (losses) related to equity investments 1 8 - 3 2 1 (1) 5
Net income (loss) $ 520 $ 307 $ 529 $ 266 $(7,147) $ 108 $ 304 $(6,469)
Weighted-average common shares (millions) 803 801 800 797 795 794 793 795
Weighted-average common shares and potential
common shares (millions) 812 809 806 803 795 797 796 795
Earnings (loss) per basic share $ 0.65 $ 0.38 $ 0.66 $ 0.33 $ (8.99) $ 0.14 $ 0.38 $ (8.14)
Earnings (loss) per diluted share $ 0.64 $ 0.38 $ 0.66 $ 0.33 $ (8.99) $ 0.14 $ 0.38 $ (8.14)
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AT&T Corp. Historical Segment Data (Unaudited)
Dollars in millions
3Q05 2Q05 1Q05 4Q04 3Q04 2Q04 1Q04 2004
AT&T Business
LD Voice $ 2,063 $ 2,080 $ 2,168 $ 2,163 $ 2,364 $ 2,386 $ 2,613 $ 9,526
Local Voice 313 364 371 490 390 404 389 1,673
Total Voice 2,376 2,444 2,539 2,653 2,754 2,790 3,002 11,199
Data Services 1,505 1,518 1,585 1,595 1,693 1,690 1,715 6,693
IP&E-Services 630 619 589 625 587 565 553 2,330
Total Data and IP&E-Services 2,135 2,137 2,174 2,220 2,280 2,255 2,268 9,023
Outsourcing, Professional Services & Other 598 574 606 581 611 566 602 2,360
Total revenue 5,109 5,155 5,319 5,454 5,645 5,611 5,872 22,582
Operating income (loss) (1) (5) 513 528 588 781 (11,095) 152 83 (10,079)
Operating margin 10.0% 10.2% 11.0% 14.3% (196.5%) 2.7% 1.4% (44.6%)
Capital expenditures 344 387 332 377 391 463 470 1,701
Depreciation & amortization (5) 596 596 601 607 610 1,176 1,192 3,585
Total Data and IP&E-Services - % managed 32% 32% 32% 33% 32% 32% 32% 32%
Total Data and IP&E-Services - % international 15% 16% 16% 16% 15% 15% 15% 15%
LD volume growth - yr/yr 10% 1% (3%) (2%) (2%) 0% 2% 0%
LD volume % wholesale 63% 59% 57% 57% 56% 54% 54% 55%
AT&T Consumer
Standalone LD, Transactional and Other Services $ 924 $ 974 $ 1,025 $ 1,116 $ 1,256 $ 1,327 $ 1,462 $ 5,161
Bundled Services 575 619 660 690 724 684 645 2,743
Total revenue 1,499 1,593 1,685 1,806 1,980 2,011 2,107 7,904
Operating income (loss) (2) (5) (6) 541 489 575 (60) 281 240 371 832
Operating margin 36.1% 30.7% 34.1% (3.3%) 14.2% 11.9% 17.6% 10.5%
Capital expenditures 0 0 0 5 9 15 13 42
Depreciation & amortization (5) 9 14 12 13 15 33 32 93
Local customers (in thousands) 3,301 3,565 3,859 4,156 4,477 4,677 4,364 4,156
Corporate and Other
Revenue $ 12 $ 12 $ 11 $ 13 $ 13 $ 14 $ 11 $ 51
Operating (loss) (3) (99) (198) (93) (113) (511) (44) (173) (841)
Capital expenditures 5 6 3 14 6 2 2 24
Depreciation & amortization 18 20 23 20 22 22 26 90
Total AT&T
Revenue $ 6,620 $ 6,760 $ 7,015 $ 7,273 $ 7,638 $ 7,636 $ 7,990 $30,537
Operating income (loss) (4) (6) 955 819 1,070 608 (11,325) 348 281 (10,088)
Operating margin 14.4% 12.1% 15.3% 8.4% (148.3%) 4.6% 3.5% (33.0%)
Capital expenditures 349 393 335 396 406 480 485 1,767
Depreciation & amortization (5) 623 630 636 640 647 1,231 1,250 3,768
<FN>
(1) Includes asset impairment and net restructuring and other charges of $(18M) in 2Q05, $9M in 4Q04, $11,859M in 3Q04, $52M in 2Q04
and $91M in 1Q04, totaling $12,011M in 2004.
(2) Includes asset impairment and net restructuring and other charges of $10M in 2Q05, $188M in 3Q04 and $1M in 1Q04, totaling $189M
in 2004.
(3) Includes asset impairment and net restructuring and other charges of $(1M) in 3Q05, $44M in 2Q05, $27M in 4Q04, $422M in 3Q04,
$2M in 2Q04 and $121M in 1Q04, totaling $572M in 2004.
(4) Includes asset impairment and net restructuring and other charges of $(1M) in 3Q05, $36M in 2Q05, $36M in 4Q04, $12,469M in
3Q04, $54M in 2Q04 and $213M in 1Q04, totaling $12,772M in 2004.
(5) As a result of the third-quarter 2004 asset impairment charge, second-quarter 2005, first-quarter 2005, fourth-quarter 2004 and
third-quarter 2004 depreciation and amortization expense decreased by $542 million, $533 million, $538 million and $527 million,
respectively, for AT&T Business and $6 million, $7 million, $8 million and $10 million, respectively, for AT&T Consumer. In
addition, as a result of the transport service arrangement between AT&T Business and AT&T Consumer, network-related charges from
AT&T Business (recorded as contra-expense) to AT&T Consumer were reduced by $29 million, $24 million, $30 million and $28
million in the second-quarter 2005, first-quarter 2005, fourth-quarter 2004 and third-quarter 2004, respectively, as a result of
the lower depreciation and amortization expense recorded by AT&T Business. This resulted in a reduction in AT&T Business'
operating income and an increase in AT&T Consumer's operating income.
(6) Includes $553M prepaid card accrual in 4Q04.
</FN>
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AT&T Corp. Consolidated Balance Sheets (Unaudited)
Dollars in Millions
September 30, December 31,
2005 2004
ASSETS
Cash and cash equivalents $ 2,837 $ 3,698
Accounts receivable, less allowances of $401 and $523 2,994 3,195
Deferred income taxes 1,016 1,111
Other current assets 546 1,383
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Total Current Assets 7,393 9,387
Property, plant and equipment, net of accumulated
depreciation of $2,791 and $1,588 10,845 11,509
Goodwill 4,753 4,888
Other purchased intangible assets, net of accumulated
amortization of $438 and $428 290 375
Prepaid pension costs 4,149 3,991
Other assets 2,278 2,654
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TOTAL ASSETS $ 29,708 $ 32,804
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LIABILITIES
Accounts payable and accrued expenses $ 2,361 $ 2,716
Compensation and benefit-related liabilities 1,684 2,193
Debt maturing within one year 522 1,886
Other current liabilities 2,456 2,293
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Total Current Liabilities 7,023 9,088
Long-term debt 7,160 8,779
Long-term compensation and benefit-related liabilities 3,240 3,322
Deferred income taxes 1,667 1,356
Other long-term liabilities and deferred credits 2,743 3,240
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Total Liabilities 21,833 25,785
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SHAREOWNERS' EQUITY
Common Stock, $1 par value, authorized 2,500,000,000 shares;
issued and outstanding 803,013,312 shares (net of 171,983,367
treasury shares) at September 30, 2005 and 798,570,623 shares
(net of 171,983,367 treasury shares) at December 31, 2004 803 799
Additional paid-in capital 26,787 27,170
Accumulated deficit (19,824) (21,180)
Accumulated other comprehensive income 109 230
-------- --------
Total Shareowners' Equity 7,875 7,019
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TOTAL LIABILITIES & SHAREOWNERS' EQUITY $ 29,708 $ 32,804
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AT&T Corp. Consolidated Statements of Cash Flows (Unaudited)
Dollars in Millions
For the Nine Months Ended
September 30,
2005 2004
Operating Activities
Net income $ 1,356 $ (6,735)
Adjustments to reconcile net income to net cash provided by
operating activities:
Asset impairment and net restructuring and other charges 21 12,662
Net (gains) on sales of assets (6) (16)
Loss on early extinguishment of debt 206 301
Depreciation and amortization 1,889 3,128
Provision for uncollectible receivables 122 371
Deferred income taxes 478 (4,469)
Decrease in receivables 90 178
Decrease in accounts payable and accrued expenses (387) (488)
Net change in other operating assets and liabilities (1,012) (839)
Other adjustments, net (29) (82)
----------------------
Net Cash Provided by Operating Activities 2,728 4,011
----------------------
Investing Activities
Capital expenditures and other additions (1,072) (1,459)
Proceeds from sale or disposal of property, plant and equipment 150 58
Investment distributions and sales 14 37
Net dispositions of businesses 82 8
Decrease in restricted cash 546 7
Other investing activities, net 27 9
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Net Cash Used in Investing Activities (253) (1,340)
---------------------
Financing Activities
Retirement of long-term debt, including redemption premiums (2,723) (3,711)
Decrease in short-term borrowings, net (316) (511)
Issuance of AT&T common shares 68 45
Dividends paid on common stock (570) (565)
Other financing activities, net 205 345
----------------------
Net Cash Used in Financing Activities (3,336) (4,397)
----------------------
Net decrease in cash and cash equivalents (861) (1,726)
Cash and cash equivalents at beginning of year 3,698 4,353
----------------------
Cash and Cash Equivalents at End of Period $ 2,837 2,627
----------------------
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Reconciliation of Non-GAAP Measures
AT&T is providing information on net debt and adjusted operating income and
related margins because these measures are commonly used by the investment
community for evaluation purposes. They should be considered in addition to, but
not in lieu of, other measures of liquidity, profitability and cash flows
reported in accordance with generally accepted accounting principles.
Additionally, they may not be comparable to similarly captioned measures
reported by other companies.
Net Debt
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Net debt is defined as total debt, less cash and net foreign debt fluctuations:
(dollars in billions) September 30, 2005*
Total debt $7.7
Less: Cash 2.8
Foreign debt fluctuations 0.1
------------------
Net debt $4.7
==================
* Numbers may not add due to rounding
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Operating Income
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(dollars in millions) For the three months ended September 30, 2004
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AT&T Business AT&T Consumer Corp. and Other Consolidated
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Reported operating (loss) income
and margin $ (11,095) (196.5)% $ 281 14.2% $ (511) NMF $(11,325) (148.3)%
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Add:
Asset impairment and
net restructuring and other
charges 11,859 188 422 12,469
------ --- --- ------
Adjusted operating income (loss) $ 764 13.5 % $ 469 23.7% $ (89) NMF $ 1,144 15.0 %
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NOTE TO FINANCIAL MEDIA: AT&T executives will discuss the company's performance
in a two-way conference call for financial analysts at 8:15 a.m. ET today.
Reporters are invited to listen to the call. U.S. callers should dial
888-428-4479 to access the call. Callers outside the U.S. should dial +
1-612-332-0630.
In addition, Internet rebroadcasts of the call will be available on the AT&T Web
site beginning later today. The Web site address is www.att.com/ir. An audio
rebroadcast of the conference call will also be available beginning at 12:30 PM
on Friday, October 21 through 12:00 AM on Friday, October 28. To access the
audio rebroadcast, U.S. callers can dial 800-475-6701, access code 763294.
Callers outside the U.S. should dial + 1-320-365-3844, access code 763294.
The foregoing contains "forward-looking statements" which are based on
management's beliefs as well as on a number of assumptions concerning future
events made by and information currently available to management. Readers are
cautioned not to put undue reliance on such forward-looking statements, which
are not a guarantee of performance and are subject to a number of uncertainties
and other factors, many of which are outside AT&T's control, that could cause
actual results to differ materially from such statements. These risk factors
include the impact of increasing competition, continued capacity oversupply,
regulatory uncertainty and the effects of technological substitution, among
other risks. For a more detailed description of the factors that could cause
such a difference, please see AT&T's10-K, 10-Q, 8-K and other filings with the
Securities and Exchange Commission. AT&T disclaims any intention or obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. This information is presented solely to
provide additional information to further understand the results of AT&T.
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