At first glance, third-quarter results from telecom giant AT&T (T)
appear strong. The Dallas-based phone service provider posted net
income of $3.23 billion, or 55¢ a share, a 5.5% increase from $3.06
billion, or 50¢ a share, a year earlier. Revenue gained 4%, to $31.3
billion, led by a notable 15.4% increase in wireless sales. To boot,
the wireless business logged a whopping 2 million net new customers,
giving AT&T nearly 75 million subscribers nationwide.
But troubling signals lie just beneath the surface. Customers are
disconnecting phone lines at an alarming rate. Too few are signing on
for broadband connections, and though the number of new wireless
subscribers is impressive, AT&T's wireless
margins are getting squeezed. All of this comes in the face of a
weakening economic outlook that's forcing consumers to cut household
budgets and banks to rein in lending. Worried shareholders traded
AT&T stock down 7.6%, to about 23.78, after the results were
released on Oct. 22. "The market is telling you there is a lot of risk
out there for AT&T," says Timothy Horan, an analyst for Oppenheimer & Co.
And what's risky for AT&T may prove just as ominous for the rest of the telecom sector. Analysts expect Verizon Communications (VZ), Sprint (S),
and other phone service providers to show similar signs of weakness
when they report results in the coming days. In fact, AT&T is
something of a proxy for the broader economy. As a huge provider of
services to major businesses, AT&T's customer list contains
businesses of every stripe. It is instructive that the carrier's
enterprise services unit saw sales dip 1.4% from a year ago. "That is
troubling as you head into the teeth of the recession," says Sanford C. Bernstein analyst Craig Moffett, who adds that the view of AT&T's financial future right now is "as clear as mud."
Existing strains in AT&T's local-phone business were accentuated in
the third quarter. The number of consumer voice lines in service fell
10.5%, to 28.33 million, from a year ago. Things are not much better in
the broadband arena. Last year at this time, AT&T added nearly
500,000 digital subscriber lines. This year, it added 148,000, a
decline of more than 70%. "These are obviously challenging times,"
AT&T Chief Financial Officer Rick Lindner said on an Oct. 22
conference call with analysts.
