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T AT A GLANCE

P/E ► 13.0 AVG EV/EBITDA ► 6.27 AVG ROA ► 5.6% AVG ROE ► 11.3% AVG Debt to Equity ► 1.68 AVG Current Ratio ► 0.779 AVG Interest Coverage Ratio ► 6.40 AVG

 

 

 

 

 

 

AT&T Inc.(NYSE:T) is a U.S. telecommunications company and provider of voice and data services; more specifically, it is the second largest U.S. wireless carrier and the largest U.S. broadband provider, with over 81.6 million wireless customers and 17 million broadband connections, respectively, as of 3Q09^[1]. To counteract the secular trend away from landlines (AT&T lost over 1 million home phone lines in 3Q09^[1]), which has traditionally been its core business, AT&T has invested heavily in emerging technologies. At the forefront of these efforts is "U-verse", which offers high-speed internet, phone, and television services in one package using one protocol. This initiative is also an attempt to retain market share against competitors such as Verizon Wireless, which replaced AT&T as the largest U.S. wireless carrier late in 2008.^[2]

AT&T has also begun investing more capital into mobile devices. AT&T entered into the smartphone industry through a partnership with Apple, and has capitalized on the 50 million iPhone sales and over 20 billion application downloads as of September 2009^[3]. Additionally, of the 4.3 million phones added to its network in 3Q09, three-fourths were iPhones^[1]. The success of the iPhone sales through its distribution channels has also given AT&T the opportunity to boost their revenue from data services, including Web surfing and email use^[1]. AT&T has also sought expansion by embedding its 3G service into Sony books and through a partnership with Garmin^[4] and investigating internet connectivity for e-reader devices, such as Amazon's Kindle.^[5].

Company Overview

History

AT&T traces its roots to the beginning of the telephone era in 1876. From its founding through the 1970s, it dominated the telephone industry as a monopoly. In 1974, however, the Federal Government filed an anti-trust suit and in 1984 the company was forced to break into smaller pieces. Those seven pieces were termed Regional Bell Operating Companies (RBOCs), and they conducted business autonomously for about a decade.

In the 1990s, SBC began buying former AT&T subsidiaries and in 2005 it purchased what remained of AT&T Corp. The resulting company was rebranded AT&T Inc. Finally, in December of 2006, AT&T Inc. purchased BellSouth, creating the corporation that exists today. At this point, 5 of the 8 spin offs of the original AT&T have been reunited under the new AT&T Inc brand, though competition from other companies and technologies has calmed fears of a re-emergence of the original monopoly.

Anti-trust rulings broke up AT&T's monopoly in 1984. Since then, the company has consolidated several significant wireline and wireless holdings, culminating in its merger with Cingular in 2004 and SBC in 2006.^[6]

Business Segments

AT&T’s main business units are: wireline services (including DSL and internet service), wireless services (AT&T Wireless), and its directory business.

AT&T Operating Revenue by Segment^[7]

AT&T Customer Revenue Mix^[8]

Wireline Services (53% of revenues, 37% of income in 2Q09^[9])

AT&T’s wireline unit serves approximately 62 million customers.^[9] The wireline unit has three core sources of revenue: voice (includes local and long-distance), data, and other services. Other services include U-verse and satellite video, network, server, data storage and other hosting services. Its U-verse TV service reached 1 million subscribers in December 2008.^[10] Technology substitution (VoIP, etc.) has resulted in declining voice revenues, but the declines have slowed in recent quarters. As of June 2009, AT&T provides broadband services to approximately 16 million customers, keeping its rank as the largest U.S. broadband provider.^[11]

Wireless Services (43% of revenues, 58% of income in 2Q09^[9])

AT&T provides local and long-distance wireless communication services, both voice and data. With over 79 million wireless subscribers in 2Q09^[12], it is the second largest U.S. wireless carrier by subscribers, following Verizon. With its takeover of BellSouth complete, AT&T now owns all of Cingular Wireless, the nation’s previously largest wireless carrier. Cingular had approximately 61 million subscribers and a low churn rate (the rate at which customers leave the corporation each month) of 1.8%. Cingular recently completed an overhaul of its GSM network to increase coverage and improve reliability and in June of 2007, Apple began offering its iPhone exclusively through AT&T Wireless. AT&T built a 3G network to support Apple's 3G iPhone.

Advertising & Publishing (4% of revenues, 6% of income in 2Q09^[9]

AT&T’s advertising & publishing business comprises all of its directory services, including traditional phone books and electronic and internet publishing. Its Yellow and White Pages continue to dominate the markets in which they operate and its internet outfits, especially YELLOWPAGES.COM, are also industry leaders.

Project Lightspeed

Project Lightspeed is an initiative to install fiber and high-speed digital subscriber lines (DSL), which would enable AT&T to offer enhanced data, video, and telephone services; as of January 2009 its only product was U-verse TV. This project is going on throughout AT&T’s nationwide wireline network and has reached 19 million living units as of 1Q09^[13]. AT&T is using a fiber to the node (FTTN) model that essentially provides a fiber connection to a neighborhood and then uses a traditional copper connection to go into each house. AT&T elected to use this technology instead of the traditional fiber to the home(FTTH) model (where a fiber cable goes directly into each home) because it is faster and cheaper to build a network; however, some areas use FTTH. Still, it remains to be seen what the long-term consequences of this system will be. It is possible that it will not provide sufficient bandwidth for video and high-speed connections, which could either alienate customers or require additional investments in infrastructure. Another drawback to the model is that it requires significantly more infrastructure in the long term than the FTTH model. As a result the cost of maintenance is much higher.

Business and Financial Metrics

Revenue totaled $124 billion in 2008, a 4.3 percent increase from its previous year while net income increased 7.7 percent to $12.8 billion.^[14]. This meager growth could be attributed to ongoing weakness in its landline business. In comparison, AT&T’s revenue increased about 89 percent in 2007 to $118.9 billion, compared to $63 billion in 2006.^[15] The increase was primarily due to its acquisition of BellSouth and increased sales of data products. In the same period of fiscal 2007, income increased 62 percent, or $4.6 billion, compared to the previous year.^[15]

AT&T currently stands as the nation’s second largest wireless subscriber, with nearly 80 million subscribers as of June 2009 (a 63% increase since 2004)^[11]. It is the number one U.S. broadband provider, servicing over 16 million broadband subscribers^[11]. However, its partnership with Apple (AAPL) has resulted in an increase in brand loyalty (record low total subscriber churn rate of 1.43% in 3Q09) and an increased focus on data services, which has resulted in rising YoY ARPU (average revenue per subscriber) the past seven fiscal quarters^[1].

Trends and Forces

Battle over Net Neutrality Hurts AT&T's Image

AT&T and other broadband network providers have been under scrutiny by The Federal Communications Commission (FCC) for what may be preferential treatment to their own subscribers. For example, AT&T could be video services at high speeds to subscribers, and make those of its competitors unavailable or slower^[16]. With strong support from the U.S. Congress, the FCC may regulate these networks to enforce net neutrality, a decision that could drive up consumer prices^[17].

Video services owned by the providers or their business partners could be delivered to subscribers at top speed while competitors are slowed or blocked.

Technology substitution risks and opportunities

The telecommunications industry is fast-paced and constantly innovating, so technology substitution is a common occurrence and a serious concern for AT&T. The primary point of concern for AT&T is in its wireline businesses. The industry is undergoing serious changes as people are increasingly turning to new technology—such as VoIP and wireless—as their primary mode of communication. If customers continue to shift from traditional landline services, AT&T’s core wireline business revenues will be hard hit as they lose customers and are forced to compete to retain their bases. AT&T has taken steps to shed some of its losing wireline business, as evinced by its exiting out of the payphone market after 129 years of service.

At the same time, AT&T is relatively well-positioned to hedge against this change and even exploit it. Through its DSL offerings and Cingular, AT&T provides services that complement trends in technology substitutions. Around 50% of residential line defections go to wireless and an additional 25% go to broadband (eg, VoIP)—DSL counts for almost half of the new broadband customers. AT&T Wireless is obviously in a good position to take advantage of this shift and Project Lightspeed is making AT&T increasingly competitive in the DSL arena. These other aspects of AT&T’s business have the potential to offset losses to the wireline unit and grow rapidly as the landscape changes.

Regulatory environment exposure

AT&T Inc.’s businesses are subject to many levels of complex regulation and any significant changes could have a major impact on the company as a whole. In the 1990s, the FCC began implementing policies that encouraged competition for local telephone service providers, epitomized by the Telecom Act of 1996. The new rules imposed on the industry during this period stifled growth and had a negative impact on earnings for AT&T.

In early July 2009, both the FCC and DOJ have been asked by Senator Herb Kohl of Wisconsin to investigate anti-competitive practices in the cell phone industry ^[18]. The concern is that 4 companies (AT&T, Sprint, T-Mobile USA, and Verizon) control 90% of the market. Kohl has expressed concern about price increases by the four main carriers for text messaging at the same time. Kohl would also like to see better rates for roaming, a stop to exclusive deals with handset manufacturers, and acceptable rates in the so-called "special access" market where wireless companies pay other carriers to connect to central phone and Internet arteries. AT&T Senior Executive Vice President of External and Legislative Affairs James Cicconi responded to Senator Kohl's concerns by saying that this market is one of the most competitive, innovative, and lowest priced in the world. He said that 95% of the U.S. can choose between at least three different wireless providers, showing that there is not a lack of competition. Increased regulation or a break-up of the industry like what happened to AT&T in the mid-1980s would be very harmful to all wireless carriers as it would reduce margins considerably.

High-speed internet and video investments

AT&T has made significant investments in developing high-speed internet and video offerings to compete with cable companies such as Time Warner Cable and Cablevision Systems (CVC). At the core of this drive is Project Lightspeed, AT&T’s initiative to provide broadband to 19 million households. As mentioned above, AT&T has decided to pursue the FTTN model, allowing it to build its network quicker and less expensively than some of its competitors. If this model is ultimately not able to provide sufficient capacity to meet the needs of AT&T’s customers, the company might not be able to fully capitalize on upward trends in broadband use.

Furthermore, AT&T is betting heavily on being able to provide high-quality video services to its customers. So far, however, its video offerings have stumbled. As mentioned before, there are questions about the capacity of the lines delivering content to homes. Right now, one high-definition video stream can eat up more than a third of the new network’s capacity, potentially slowing other offerings and hurting the quality of the video. In addition, it is unclear what regulatory approval is necessary for AT&T to provide video offerings. Some states have suggested local approval is necessary, while others contend that AT&T is exempt from local regulation. As these issues come to the forefront, they will affect AT&T’s ability to capitalize on its broadband and video plans.

AT&T was involved in a bundling agreement with EchoStar Communications (DISH) to provide broadband and telephone services along with Echostar's satellite television. The laying of their own fiber optic wires puts the future of this relationship at risk. AT&T’s U-verse competes with Verizon’s FiOS and Docsis 3.0 which is provided by cable companies. U-verse supplies a maximum of 18Mbps, compared to FiOS which offers 50Mbps and Docsis 3.0 which can potentially reach speeds of 160Mbps. Price also vary for each service, $100/month for U-verse, $140/month for FiOS (New York $90/month), and $150/month Docsis 3.0 from Comcast.

Competitors

After completing its acquisition of BellSouth, AT&T cemented its position as the largest telecommunications company in the United States. AT&T’s wireline business dominates the regions it serves and faces only local competition for wireline service. More and more it is facing challenges from non-wireline telecommunications providers including VoIP and high-speed internet companies. AT&T also has a significant advantage over Verizon in that it owns 100% of Cingular vs. Verizon's 55% ownership of its wireless division. This is significant because Verizon faces many of the same issues as AT&T. When a Verizon customer switches from landline service to wireless, Verizon captures only 55% of resulting revenue. AT&T is able to capture 100% of the revenue. This puts AT&T in a better position to take advantage of the shift from wireline to wireless. However, in 2008 the FCC approved Alltel Corp. to be acquired by Verizon Wireless increasing Verizon’s share of the market and making it the largest U.S. wireless carrier.^[2]

Source: Deutsche Bank, Yahoo! Finance

AT&T’s wireless unit, AT&T Mobility, faces considerable competition in the wireless sector. While it is the second largest U.S. wireless provider, it does not dominate the industry and its competitors are right on its heels. Furthermore, low customer satisfaction has contributed to a slightly higher churn rate (attrition rate) than Verizon, its closest competitor.

Source: Deutsche Bank

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} "AT&T Quarterly Earnings Dip on Landline Loss" 10/22/09
2. ↑ ^{2.0 2.1} FCC Approves Two Big Wireless Mergers, November 5, 2008
3. ↑ "Apple passes 2 billion app downloads" Reuters, 9/28/2009
4. ↑ "AT&T, Verizon plow billions into mobile" MarketWatch, 9/18/2009
5. ↑ Stephen Lawson (June 2, 2009). AT&T Wants Kindle Rival, New Data Plans.
6. ↑ AT&T History
7. ↑ T 2008 10-K pg. 4  
8. ↑ AT&T 10-K 2007 Earnings Release, page 23.
9. ↑ ^{9.0 9.1 9.2 9.3} AT&T 10-K 2007, Pg 3-5
10. ↑ AT&T U-verse TV Reaches 1 Million Subscriber Milestone, December 17, 2008
11. ↑ ^{11.0 11.1 11.2} Strong Wireless Gains, Sound Operational Execution Highlight AT&T's Third Quarter; Results Led by 2.4 Million iPhone 3G Activations, Rapid Wireless Data Growth, October 22,2008
12. ↑ AT&T 2008 Thirds Quarter Results, October 22, 2008
13. ↑ Media Kit: AT&T U-verse
14. ↑ AT&T Financial Reports, 2007-2008
15. ↑ ^{15.0 15.1}
16. ↑ "AT&T Takes on Google Over 'Terrifying' Internet Rules", Bloomberg, 10/21/09
17. ↑ "AT&T Asks Employees to Deter Net Neutrality" The Consumerist, 10/20/2009
18. ↑ Fawn Johnson (July 8, 2009). AT&T Disputes Antitrust Allegations Against Cell Phone Cos. Dow Jones.