Dreary Outlook Slams AT&T; Stock

Hope for a rebound this year in the ravaged telecommunications industry was dashed Thursday as long-distance leader AT&T; Corp. reported dismal fourth-quarter results and predicted that sales would continue to slide into 2004.

Basic operations at AT&T; and other traditional telecoms are being hurt by competitive price-cutting, the long-standing glut of fiber-optic capacity, weak demand for data services and a growing reliance by consumers on wireless phones and e-mail.

“AT&T; is just an indication of how bad the overall telecom industry is,” said David Willis, telecom analyst for consulting firm Meta Group Inc. in Stamford, Conn. “If AT&T; can’t capitalize on the current situation, I don’t think anyone could.”

AT&T;, the nation’s largest long-distance company, said it earned $516 million, or 66 cents a share, for the fourth quarter, contrasted with a loss of $1.4 billion, or $1.97 a share, for the final quarter of 2001. But the New York company’s latest results included a $1.3-billion gain from the November sale of its AT&T; Broadband unit to Comcast Corp. Based on continuing operations, the company lost $611 million, or 79 cents a share.

Sales fell 8.6% to $9.3 billion as price declines more than offset call volume gains.

For the year, AT&T; lost $13.1 billion, or $17.53 a share. It earned $9.1 billion, or $12.51 a share, in 2001.

After a run-up in telecom stock prices during the fourth quarter, AT&T; led a downturn Thursday as its shares dropped 19%, losing $4.83 to close at $20.49 on the New York Stock Exchange.

SBC Communications Inc., one of the four regional Bells and California’s biggest local phone company, fell $1.40 to close at $25.53 a share on the NYSE.

BellSouth Corp., the dominant local carrier in the Southeast, lost $1.73 to close at $23.55 after reporting a 25% drop in net income and an 8% fall in sales for the fourth quarter.

Helping cloud the industry’s prospects is WorldCom Inc.’s bankruptcy filing. WorldCom’s large business unit and its MCI consumer and small-business unit have been lowering prices to keep customers.

That has helped squeeze the rest of the industry.

“We’ve elected not to take a price approach,” AT&T; Chairman David W. Dorman told analysts. AT&T; will focus on quality, service and reliability, he said.

But AT&T; Business President Betsy Bernard said the company is monitoring industry pricing “on an hourly basis” and will move if need be.

How long the company can hold the line on prices isn’t clear. In the fourth quarter, business customers increased their use of telephone lines about 7%, the company said, but lower prices led to a 10% drop in revenue from those clients.

“AT&T; is a bellwether,” Willis said. “And what they have shown is that you can take market share but can’t raise prices.”

Analysts said AT&T; stock was hammered mainly because of its weak forecast for this year and its previously announced decision to stop forecasting earnings per share on a quarterly or annual basis, starting in April. The company expects to earn 50 cents to 55 cents a share for the first quarter ending March 30.

Management’s decision to stop making projections “suggests they too have limited confidence due to ... major business upheavals and competitive pressures that are evidently increasing,” analyst Adam Quinton at Merrill Lynch & Co. wrote in a note to investors Thursday. He reduced his rating on AT&T; stock to “neutral” from “buy.”

Wall Street had begun easing off telecom stocks last month as some analysts downgraded the Baby Bells, which now are approved to offer long-distance in 35 states and expect to be in most of the rest by year’s end.

AT&T;, along with MCI, has been trying to penetrate the local service markets primarily by relying on Baby Bell equipment leased at low wholesale prices set by state regulators.

SBC and other Bells have been resisting, urging regulators to revamp or eliminate the rules so they can raise prices.

Dorman, who said he doesn’t expect the rules to change much, acknowledged that the Baby Bells are taking much bigger chunks of the long-distance market than their competitors are taking of local markets.

After a two-year restructuring that saw the spinoff of AT&T; Wireless and the sale of AT&T; Broadband, the company has returned to its roots as a telephone service provider and, analysts say, it will need to boost its share of the local market.

AT&T; has about 2.4 million local customers in eight states, including “tens of thousands” in California, a spokesman said. The company won’t reveal how many long-distance customers it has lost to the Bells.

“Today’s weak 2003 forecast,” analyst Richard G. Klubman at Jefferies & Co. wrote in a note to investors, “only raises further suspicion of AT&T;’s ability to maintain viability” relative to the Baby Bells.