Global Insight Perspective | |
Significance | AT&T has made moves that are aimed at pleasing shareholders and portray a positive outlook for 2008. |
Implications | Recent merger and acquisition activities, as well as moves to upgrade networks and differentiate the company's products—from the iPhone to U-Verse services—should help the dominant telco meet its targets. |
Outlook | AT&T has largely benefited from decisions made by the Federal Communications Commission (FCC) while led by Chairman Kevin Martin. As his tenure nears its end and judgements are attracting scrutiny from the government, such beneficial rulings cannot be guaranteed to continue. |
AT&T has given an analyst conference in New York outlining its financial expectations and strategy going forward. Chief Executive Officer (CEO) Randall Stephenson promoted the message that, as the company has integrated significant acquisitions and built out new networks over the last year, so AT&T is due to reap the benefits of its investments:
"We have a great outlook for the coming years. We are a company that is able to do things today that wouldn't have been possible just a year or two ago. Our unique set of assets and our investments in IP networks and wireless provide our customers with an unprecedented level of connectivity and mobility. The best news is we are just getting started. The velocity of change in this industry is stunning. Customer demand for bandwidth is growing at impressive levels. And no company is better positioned to take advantage of this growth than AT&T."
While this assessment of bandwidth capabilities ignores Verizon's industry-leading FiOS broadband speeds and the cableco's forthcoming upgrade to Docsis 3.0, by consolidation and tapping new revenue streams AT&T has been performing strongly and is well placed to meet the financial targets it has laid out (see United States:25 October 2007: FiOS Goes Symmetric in U.S. with 20/20 Mbps Service, 12 January 2007: Verizon 50Mbps FiOS to Expand over Fibre Footprint and 20 May 2007: Cable Companies Move on VoD).
The fourth-quarter dividend was raised by 12.7% from US$0.355 to US$0.40 and a share buyback of 400 million shares, or 6.6% of outstanding shares, was authorised. This will cost in the region of US$15-US$16 billion and is expected to run until the end of 2009. This will replace the previous US$13-billion share buyback programme, which ran until 7 December 2007.
A positive outlook for 2008 was detailed, with high expectations for growth in all segments of the business expected to deliver consolidated mid single-digit revenue growth. Adjusted consolidated income margin was expected to rise from the 23-24% range in 2007 to 25-26% in 2008. This is expected to come as a result of wireless growth, merger synergies and operational initiatives offsetting U-Verse deployment expenditure. Merger synergies are expected to total US$3.6 billion in 2007, rising to more than US$7.0 billion by 2010.
The wireless unit was expected to show revenue growth in the 'mid-teens', boosted by the Dobson acquisition, strong subscriber growth and wireless data revenues—the latter two no doubt helped by the exclusive iPhone deal. The Wireless unit is expected to deliver an OIBDA (Operating Income Before Depreciation and Amortisation) in the low 40% region, rising to the mid-40% mark by the end of the year. In separate news from AT&T, a six-year-old dispute with a large number of Missouri municipalities that had sued for back taxes (currently already collected by AT&T) was settled for US$76 million.
The enterprise unit—which saw a 3.9% drop in revenues in the quarter following the merger with BellSouth before climbing back to near parity in the year to the third quarter—is expected to continue to see positive revenue growth throughout 2008 (see United States: 25 October 2007: AT&T Feels iPhone Effect and U-Verse Gains Traction in Q3). AT&T also expects high growth from its directory unit, Yellowpages.com, in which it has been investing recently, buying in pay-per-call solution provider Ingenio (see United States: 20 November 2007: AT&T to Acquire Ingenio Search and Directory Provider)
Capital expenditure will remain in the mid-teens as a percentage of total revenues as wireless networks are upgraded and the wired network sees continued upgrading, particularly to support the U-Verse deployment. U-Verse, which counted 126,000 subscribers to its TV service, having added 75,000 subscribers over the third quarter, is expected to have over 1 million customers by the end of 2008. AT&T also announced the first deployment in the former BellSouth South East region with a 'controlled launch' in Atlanta. This is the first of the South East region deployments, which will take the total U-Verse deployment over the 22-state region covered by the merged AT&T to reach a footprint of 30 million living units by the end of 2010, up from the revised 17-million target by the end of 2008 (see United States: 8 November 2007: AT&T Pays More, Expects Less from U-Verse Deployment and 8 May 2007: AT&T Bumps Up U-Verse Investments).
AT&T has been using resale of satellite services from both DirecTV and Echostar—which hived off its Dish Network TV operations from its hardware unit last week—to offer quad-play packages over its whole footprint while it deploys U-Verse. It was also announced that, as expected, AT&T is to stop selling DirecTV services in the first quarter of 2008. However Chief Financial Officer Rick Lindner is reported by Reuters as being in no rush to confirm AT&T's long-term choice of a single satellite partner: "We want to make sure we have the best long-term answer to our customers and the best economics from the commercial agreement that fairly represents the distribution channel…The time frame I think for making a decision on a new long-term contract is probably pushed off until sometime in 2008, maybe even the second half of 2008" (see United States: 17 May 2007: AT&T May Expand EchoStar Partnership at the Expense of DirecTV).
Outlook and Implications
With the largest mobile subscriber base, AT&T is the dominant telco in the United States, generating third-quarter 2007 revenues of US$30 billion to Verizon's US$24 billion, while Comcast, the largest cable operator, only managed to generate revenues of US$7 billion (see United States: 27 November 2007: The Quad-Play Battle in the United States). There are questions over the wisdom of choosing to deploy fibre only to the neighbourhood, compared to Verizon's Fibre to the Premises FiOS deployment—which provides significantly greater bandwidth potential albeit at some greater cost—but to its advantage AT&T has now taken full control of the mobile division, while Verizon is still forced to share the high-growth revenues with wireless partner Vodafone. Despite this dominant position, AT&T has benefited from an easy ride from its regulatory body, the Federal Communications Commission (FCC) over the last year. Under the firm direction of Chairman Kevin Martin, the FCC has somewhat controversially directed its ire on the cable industry while passing de-regulatory moves for the telcos, including soft mega-merger conditions, regulatory forbearance for business broadband and local long-distance separation and easy entry to the video market. With Martin now attracting closer attention as he moves into what is likely to be his final year as for chairman, AT&T may face greater scrutiny (see United States: 7 December 2007: FCC Chairman Under Fire from Commerce Committee, 1 November 2007: U.S. Bans Video-Exclusivity Clauses for Multi-Dwelling Units, 3 September 2007: Verizon and AT&T Given Go-Ahead to Combine Local and Long-Distance Units, 23 October 2007: AT&T Forbearance is Challenged, 10 August 2007: U.S. Cable VoIP Providers to Pay Regulatory Fees as Telecoms Service Providers, 6 July 2007: Comcast Takes FCC to Task over STB Ban and 14 March 2007: FCC Looks to Affirm 30% Cap on Cable Market Share).