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AT&T Posts 74% Increase in Profit
Acquisitions Help Expand Margins in Land-Line And Wireless Businesses
By Amol Sharma
Tuesday, October 24, 2006

AT&T Inc.'s third-quarter results showed Wall Street that a string of acquisitions under Chief Executive Edward E. Whitacre Jr. is starting to pay off.

After a wave of big U.S. telecommunications mergers in recent years, investors are looking for signs that bigger means better. That isn't always the case: Sprint Nextel Corp. has lost significant ground to competitors since it acquired Nextel Communications Inc. last year and has seen its share price tumble more than 30%.

At AT&T, however, the upside of dealmaking is starting to come into focus with margin expansion in wireless and land-line business units. Revenue jumped 52% to $15.64 billion. That doesn't include $5.7 billion in wireless revenue linked to the company's 60% stake in Cingular Wireless, though AT&T's net-income figure reflects Cingular's contribution.

AT&T benefited from 1.4 million net subscriber additions at Cingular Wireless, a joint venture with BellSouth Corp. that has successfully completed its integration of AT&T Wireless. On the wire-line side, the company is seeing cost savings from its AT&T Corp. acquisition and is preparing to close on a merger with BellSouth, a deal the Federal Communications Commission is expected to vote on as soon as Nov. 3.

AT&T, like other giant carriers, is trying to transition into a high-speed Internet and entertainment provider. The rollout of new services has been slow: AT&T said it has only 3,000 subscribers for its high-end television-and-Internet service in the San Antonio area, where the service launched.

Rival Verizon Communications Inc., which is busy integrating long-distance provider MCI Inc., has been more aggressive in its rollout of fiber-optic cable to carry ultra-high-speed Internet and video, a project that is expected to cost $18 billion through 2010. The company is in the process of spinning off its directory unit, which analysts say could generate cash to put toward the fiber rollout, a share buyback, or a buyout of the 45% stake in Verizon Wireless owned by Vodafone Group PLC. Verizon reports third-quarter results next week.

Skeptical about the size of the future U.S. market for online video, Qwest Communications International Inc. is taking a more measured approach, forgoing major network upgrades for now -- a tack investors have cheered. Qwest shares are up about 47% this year. The company, which reports earnings next week, now has to show it can keep up with industry trends without the deep pockets of its bigger competitors.

For Verizon and AT&T, the transformation from phone company to Internet provider also applies to their wireless units, which are trying to offset declining cellular voice revenue by selling more data services such as downloads of music and ringtones.

Write to Amol Sharma at amol.sharma@wsj.com

http://online.wsj.com/article/SB116160338350400707-search.html?KEYWORDS=Qwest&COLLECTION=wsjie/6month