AT&T
Q2
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Q2
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SYNOPSIS)* By Debora Tidwell (MF Debit) AT&T Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> UNION CITY, Ca., July 18, 1996/FOOLWIRE/ --- AT&T reported Q2 1996 financial results this morning. Last quarter, AT&T changed the format for their external reporting to better reflect the businesses of the new AT&T. The revenue and expense lines of the AT&T income statement now refer only to the continuing operations of AT&T. The financial results of Lucent Technologies, NCR, and AT&T Capital Corp. as well as related adjustments are now reflected in discontinued operations. As public companies, Lucent Technologies and AT&T Capital Corp plan to report their specific separate Q2 results. Specific information on NCR results is contained in AT&T's Investor Relations bulletin. Their discussion of earnings today focused primarily on the financial performance of AT&T's continuing operations.
Income, on a continuing operations basis, increased 10.9% in the quarter to $1.52 billion while earnings per share were up 9.2% to $0.94. Net income on a consolidated basis, which is now a less-relevant way to view AT&T's performance because it includes discontinued operations, was $1.49 billion. Earnings per share on that basis were $0.92 compared to $0.85 per share in Q2 1995. Continuing operations revenues for the quarter were over $13 billion, up 2.1% from last year's Q2.
On balance, AT&T believes they had a solid Q2. They had some significant accomplishments but also encountered continued turbulence in the consumer marketplace. They are pleased with recent successes in the business markets and in their wireless services. They are very excited about the opportunities opening up before them in new areas like local service, online services, and direct TV. They are confident that the long-term outlook for the company is very bright. At the same time, some areas of their business experienced extreme pressure in Q2 and fell short of their expectations. The telecommunications industry is in transition, nowhere more so than the consumer segment. AT&T senior management and all of its employees are building for the future and AT&T is exceedingly well positioned to grow successfully through this period of transition. AT&T's record of innovative products and services and history of quality and excellence achieved by its employees are tremendous advantages in the new competitive environment as they serve customers and build value for their share owners.
A BREAKDOWN OF RESULTS BY SEGMENT
Revenues from Communications Services including wireline, wireless products, and other services were up 3.4%. Wireline services revenues increased 1.7% for the quarter while volumes for switched long-distance services increased 5.1% compared to last year's strong Q2. The gap between revenue and volume growth increased slightly this quarter to 3.4%.
They continue to make good progress in business markets and believe they are growing at approximately the industry rate. Business inbound services continued to report good revenue and volume growth for business outbound services increased.
They showed good improvement in their international business, an area where they have become more aggressive. They had several important business wins during the quarter including contracts with JP Morgan, Merrill Lynch, and TCI as well as several significant resellers. Their solutions focus and expertise is making a difference with many of their most valued large customers. Internationally, this past quarter AT&T announced a modification to their UniSource partnership that broadens their relationship with their European partners. They also realigned their Alestra venture in Mexico which should allow them to accomplish their business objectives with less financial investment and risk.
Their consumer business experienced continued market turbulence during the quarter with intense pressure from both traditional and non-traditional competitors. Both volume and revenue growth in this segment have been under pressure for much of this year and that pressure appears likely to continue. They have seen the growth of some new competitors using some old tactics such as resellers and dial-around providers, promoting low prices, as well as some providers beginning to offer end-to-end services. In their view, some of these competitors are playing on and actively encouraging misleading perceptions regarding prices paid by consumers.
They have recently been aggressive in acquiring and reacquiring customers. They have been reasonably successful, acquiring more customers than they have lost this year. But, so far this year they have not achieved the kind of volume and revenue growth that they delivered last year. And, based on current trends, it does not appear that they will return to last year's growth rates in 1996. While their marketing strategies are geared to deal with today's competitive environment, their emphasis is on building and maintaining the customer relationships they need for future success. Their approach is rational and they do not intend to sacrifice their financial targets in order to meet a short-term volume growth metric that is becoming a less important measure of market success. But, they are absolutely committed to winning in the consumer marketplace and are confident of their ability to do so.
The wireless business is another part of AT&T that is doing well. Wireless Services revenues, including cellular, voice, and data, messaging, and air-to-ground services increased 17.9% to $854 million in Q2. The related cellular subscriber growth was 32.9% and the net additions were 11.6% better than last year's Q2. They added more than 300,000 subscribers during the quarter to bring the total to more than 6.2 million, an increase of 30.4% compared to the end of Q2 last year.
Alternative distribution channels and products, like kiosks, AT&T Wireless Services stores, AT&T Consumer and Business Long Distance marketing channels, and the AT&T Go Phone contributed to subscriber additions and also helped to reduce customer acquisition expense.
During Q2, AT&T launched the new digital PCS service in the Dallas area by upgrading their 800 mHz cellular system to the new IS136 TDMA standard. This capability allows new features such as Caller ID, Message Waiting indicators, and Short Messaging, as well as extended battery lives and improved fraud prevention. They plan to roll out this upgraded service in all their cellular markets by the end of the year. Beginning in Q1 1997, they will begin to activate the first of their 1.8 gigahertz PCS systems. They continue to make good progress on the buildup for those systems including tower citing and leasing, spectrum clearing, systems insulation, and testing.
Revenues from Products and Other services increased 23% to $536 million. This category includes revenues from AT&T Solutions, Data Networking, and Online Services as well as sales of their submarine systems and cellular products.
As far as operational expenses related to Communications Services, access and other expenses declined by $630 million compared to Q2 last year from 36.8% of Communications Services revenues last year to 30.5% this year. This reflects lower effective rates for access and international settlements, continued emphasis on managing this high-cost area of the business, as well as an accounting adjustment to previously estimated accruals to reflect actual billing. As part of their strategy, they are reinvesting these savings in the future growth areas of their business such as local, online, and wireless services.
Network and other Communications Services expenses increased $335 million, from 14% of Communications Services revenue last year to 16.2% this year. This expense increase reflects increased network expenses for their WorldNet Internet access product, AT&T Solutions, and the Operator Services expenses for increased 1-800-CALL-ATT calling. Increases in gross receipts taxes and the provision for uncollectables, due to initial expansion of international service offerings, also contributed to the increase. Depreciation and amortization expense was up $20 million or 3.3% from last year. SG&A expenses were up 19.8% compared to Q2 last year. This increase reflects increased marketing and sales expense during the quarter, particularly in the consumer segment and their wireless business as well as continued spending on important business initiatives such as billing take-back, customer care enhancements, and preparation for local service.
Operating income for the Communications Services segment increased 2.9% to $2.24 billion this quarter, producing an operating margin of 17.8% -- essentially flat with last year's second quarter.
FINANCIAL SERVICES -- AT&T UNIVERSAL CARD OPERATIONS
The Financial Services business represents primarily AT&T Universal card. Since last August, Universal card has securitized $5.5 billion of its cardholder receivables in order to diversify its funding sources. This quarter's revenue is less than Q2 last year primarily as a result of the securitization program but also reflecting the heightened competition and greater use of promotional pricing in the consumer credit card business. AT&T's Universal card's managed receivables, including those securitized, stood at $13.2 billion at the end of the quarter, up more than $850 million in the past 12 months. The number of accounts continues to grow and stood at 18.3 million at the end of the quarter, up 2 million from a year ago.
AT&T is managing this business by balancing the growth of customers, the growth of receivables, and financial contribution. Universal card's direct portfolio expenses decreased $150 million this quarter, primarily as a result of the securitization program. SG&A expenses, which are essentially unaffected by securitization increased $24 million this quarter as they transitioned to the new Universal Rewards customer loyalty program. Operating income for the Financial Services segment was $53 million, down $20 million, reflecting the decline in the portfolio performance. Without the benefits from the $2 billion of securitization from the quarter, there would have been an opeating loss.
COMBINED RESULTS FROM CONTINUING OPERATIONS
Netting all the aforementioned revenues and expenses, operating income from AT&T's continuing operations was $2.3 billion, up 1.9%, with an operating margin of 17.6%. A provision for income taxes declined $52 million this quarter, reflecting the tax benefits to AT&T from various legal entity restructurings. The income from continuing operations was $0.94 per share. Lucent Technologies and AT&T Capital will report their results separately, Lucent announcing their results this morning and AT&T Capital within the next several days. AT&T will continue to provide quarterly financial information for NCR on a standalone basis until it reports as a separate entity.
NCR Q2 RESULTS
AT&T is pleased with the improvement at NCR this quarter. Total revenues for NCR were $1.68 billion, down 17.7% compared to Q2 1995. However, the decrease in revenues primarily reflects exiting the PC manufacturing business. Normalizing for that, revenues were down only about 1%. Gross margins increased 27.6%, up 7.2% from Q2 last year. This reflects the benefits from a smaller portion of NCR's product sales coming from low-margin PCs as well as its restructuring. Operating expenses were significantly lower again this quarter, decreasing 28.7% compared to last year's Q2, primarily as a result of NCR restructuring activities. Through the end of Q2 NCR had eliminated approximately 8100 of the 8500 positions targeted in its restructuring plan. NCR reported an operating profit of $11 million for the quarter, a substantial improvement from the $219 million loss in the year ago quarter, and the best Q2 in 4 years.
STATUS REPORT ON THE AT&T STRATEGIC RESTRUCTURING
In early April, AT&T completed the IPO for Lucent Technologies. The Board of Directors approved a stock dividend of AT&T's remaining 82.4% interest in Lucent yesterday. The distribution date will be September 30th and the record date is September 17th. Further, they are pleased to announce that the Board approved a resolution indicating its intention to maintain the AT&T dividend at its current level of $1.32 per share after the Lucent stock dividend. The net effect to share owners of receiving dividends from both companies will be a dividend increase of about 7.5%. In June, they announced that they had received an agreement on the sale of their remaining 86% ownership in AT&T Capital for $45 per share. Lucent also announced a sale of its AT&T Paradyne unit for $175 million. Also, by year end, AT&T plans to spin off their 100% ownership of NCR to their share owners. They believe that these transactions, along with other restructuring activities will allow each business, including the new AT&T to achieve greater focus, to serve customers better, to capitalize on the opportunities from the industry transformation, and to reward AT&T share owners.
SPECIAL NOTE: One of the advantages of being AT&T is that you have your own in-house teleconferencing services. If you would like to listen to the AT&T conference call in its entirety, call 1-800-475-6701, and enter 310625 when prompted for the conference call ID number. The call lasts approximately 20 minutes and is a toll free call from anywhere in the US.
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