This summary is based on the third quarter fiscal 2006 earnings call conducted AT&T (T) on October 23, 2006.
Management:
CFO: Rick Lindner
IR: Rich Dietz
Key Investor Issues:
- Q3 adjusted EPS were 63 cents versus 47 cents in the year ago quarter.
- Adjusted operating income margin for Q3 was 19.5%, an increase of 50 basis points versus Q3 last year and 50 basis points sequentially.
- The total share repurchases by the end of the year are forecast to be $10 billion.
Third-Quarter Financial Highlights:
During the quarter, the adjusted EPS were 63 cents.
- The quarterly reported EPS were 56 cents.
- The additions included 5 cents of Cingular integration and intangible amortization cost and 2 cents of merger related costs at AT&T.
- According to the management, a high percentage of the EPS adjustments are non-cash.
- The AT&T merger costs were lower during the quarter versus the past two quarters.
- This is a result of a $246 million expense reduction which came from a change in policy regarding the timing of earning vacation days.
- The reduction has an impact on reported results but since it is a merger-related item, it has no effect on adjusted results.
- The vacation policy change has a remaining expense benefit of approximately $80 million that will be recognized in Q4.
- In Q3 of 2005, reported EPS were 38 cents.
- The company recorded 8 cents of Cingular merger-related costs and 1 cent for Cingular hurricane-related costs.
- The earnings drivers during the quarter include Wireless, where contributions have ramped up substantially and there is more upside ahead.
- The second driver is Wireline, where AT&T merger integration, in addition to good operational progress, has driven margin expansion.
- The company is also beginning to record some progress in Wireline revenue trends.
The management advised that the BellSouth integration awaits FCC approval.
- The FCC has scheduled a meeting on November 3, 2006 to vote on the merger.
- The management believes that the timing is correct for the Cingular and BellSouth integration process.
- In terms of the progress, the management is ahead of the original integration schedule.
- During the quarter, the company has realized approximately $650 million in operating expense savings.
Given the size of the customer base, churn has come down and stayed low.
- This is despite the fact that churn is typically higher in Q3.
- The management also made strong pricing changes that affected the remaining customers on the TDMA network.
- The postpaid churn was 1.5% and total churn, inclusive prepaid and resale, was 1.8%, both down 50 basis points year-over-year.
- The retail subscribers represented 87% of Cingular’s net additions during the quarter.
- This represents an increase from 75% in the preceding quarter and 74% in the year ago.
- The postpaid retail net subscriber additions were 928,000 in the quarter, the third straight quarter of at least 900,000 net additions.
- Cingular’s Q3 total revenues increased 9.2% to $9.6 billion and service revenues firmed 12.2% to $8.7 million.
- Cingular’s retail ARPU and service ARPU both posted growth during the quarter.
- Voice revenues were noted to be stabilizing and Data growth continues to be strong.
- The Data ARPU firmed 46% to $6.32 representing a 55 cents increase from last quarter and Data ARPU prepaid is now an estimated $7.25.
- This was Cingular’s third consecutive quarterly increase in Data ARPU of more than 50 cents and the management still sees upside potential for Data.
The third quarter Wireless margins before merger costs were 35.6%.
- This is an increase of 400 basis points year-over-year.
- The sequential increase is 300 basis points.
The company has been on a path of margin expansion in the Wireline and Consolidated operations.
- As a result of the JV accounting requirements, Cingular’s results are not reflected in the consolidated margins.
- The position is therefore on Wireline, Directory and Other.
- The adjusted operating income margin for Q3 was 19.5%, an increase of 50 basis points versus Q3 last year and 50 basis points sequentially.
- The drivers of margin improvement include merger synergies and the separate operational initiatives underway to streamline costs.
- The consolidated operating expenses before merger costs dipped $188 million sequentially and this follows a $264 million sequential decline in the quarter before that.
- Based on the year-to-year results, the management now expects full year adjusted margin in the mid-18% range.
