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Where? 60 Hudson Street?
Yes. This building is without question the single most important site for world telecommunications. 60 Hudson Street is the pre-eminent telecommunications hub and interconnection between international carrier facilities, domestic long distance facilities and local loops. 60 Hudson's importance is based upon the large presence by its anchor tenant, AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>. Almost every U.S. facilities based carrier has some sort of interconnection or point of presence at or near 60 Hudson. All these companies, directly or not, are attracted to 60 Hudson by AT&T's terminal points to international circuits and the heft of its 58% share of all telecommunications traffic entering or exiting the U.S.
No matter what we decide for any upcoming new investments, AT&T is THE Rule Maker in telecommunications service. For example, the amount of fiber bandwidth that traveled directly in between Europe and Asia has been miniscule in comparison to that coming to the United States. The reason is that cables did not tend to get built unless AT&T was a partner. The advent of private cable owners such as Global Crossing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GBLX)") else Response.Write("(NYSE: GBLX)") end if %> and FLAG Telecom (a private company jointly owned by a consortium, including Bell Atlantic and, of course, AT&T) has changed how international circuits are provisioned, but AT&T's signature on a project still nearly guarantees its viability.
But AT&T also has had its weight used against it by its competitors. For years, AT&T put up a minimal fight as more aggressive companies such as MCI -- now MCI Worldcom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> -- Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>, and Qwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Q)") else Response.Write("(NYSE: Q)") end if %> tore into certain markets, including domestic and small business long distance, private line circuits and private calling cards. AT&T became a non-entity in the multi-billion dollar telecommunications resale market, as if its management believed that these interlopers were nothing more than a nuisance. AT&T seemed content to hold onto and manage its largest high-margin customers and maintain its dominance on carrier-to-carrier business. Two years ago, I analyzed AT&T and concluded that it was dead, that it was incapable or unwilling to compete in the increasingly rough-and-tumble world of telecommunications. Even those checks I would get from AT&T to switch my long distance seemed somewhat desultory by comparison.
And then, an amazing thing happened. AT&T's management suddenly sprang into action, and if they weren't actually revolutionary, at least they quit being comfortable. In the course of a few months, AT&T accomplished the following: turned the cellular market on its head with its aggressive flat-rate programs; bought TCI and along with it, Liberty Media Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LMGa)") else Response.Write("(NYSE: LMGa)") end if %>; and purchased a portion of @Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>. Suddenly AT&T became the largest single cable television provider in the United States. What's more, AT&T completely repositioned itself as not just a common carrier but also a provider of both the bandwidth and the content.
The first move convinced me that AT&T was capable of changing. I mean, imagine, the pre-eminent long distance company setting up a cellular rate plan that charged nothing extra for long distance, thus leading its oldest, most sacred cash cow to slaughter. The second two moves showed that AT&T has picked a path. It is no longer a long distance company; it is a media company. Just how successful AT&T has been in its transformation was evident during last week's merger announcement between America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> and Time Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %>. The company that most pundits looked to for reaction first? Ma Bell.
The elephant has awakened, and all of the critters in her part of the jungle would be wise to pay attention.
Just as I did with Cable & Wireless <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CWP)") else Response.Write("(NYSE: CWP)") end if %> last week, I'll run down the Rule Maker criteria for AT&T.
1. Dominant Brand -- Uh, yes. From it's 50%-plus hold on telecommunications services in the U.S. to its role as determining factor as to whether many international fiber facilities get built, AT&T is king of the telecom world, despite advances by the pretenders. AT&T's purchases of TCI and other cable facilities make it the largest cable provider in the U.S. as well.
2. Repeat Business Purchases -- Again, yes. For all the reasons listed in last week's C&W report, plus AT&T's subscription services from its cable properties, @Home, and its carrier purchase agreements. Telecommunications may be the most perfect industry in regard to repeat purchases, until someone comes along and tries to market air.
3. Convenience -- Just pick up the phone. Even if you don't pay your bills to AT&T, more than likely you use them. You say that your long distance is provided by MCI Worldcom? MCI is AT&T's largest customer. Sprint, the number three carrier in the U.S., is AT&T's second largest customer. Kinda puts that whole "pin drop" ad campaign in perspective, doesn't it? In fact, most smaller telecom companies rely very heavily on the facilities of the big boys to provide service to places where they do not go. More often than not, the underlying carrier is AT&T.
4. Expanding Possibilities -- Until recently, the answer would have been a resounding "no." AT&T was the doddering old tycoon that everyone else was waiting on to die. AT&T instead confounded its competitors and reinvented itself, first as the only cellular provider not to charge long-distance rates, then as a broadband provider, then as a cable company, then as a media company. AT&T's prospects aren't so much expanding as they are combining, but you will see Ma Bell's voice telecommunications efforts become less and less of a corporate focus. I'll even bet they go from Paul Reiser to Pauly Shore for their next spokesman.
5. Your Familiarity and Interest -- Again, the cop out (and get ready, cause I'm copping out again next week). It is this: I can't answer this one for you. Any American who has not heard of AT&T probably does not need to be investing. And AT&T is certainly in dynamic businesses. But do you care? Does Ma Bell interest you? For me, the answer was no, until she forsook her old monopolistic ways and began to reinvent herself.
6. Sales Growth of 10% Per Year -- Okay, first problem with AT&T. The company has had several years of fairly stagnant growth, around 6% annually between 1990 and today. This was due to market share losses in its core businesses and erosion of differential pricing for basic telecommunications. Not good news. But then the reinvented AT&T drops a 17% sales gain on us in 1999 over the prior year. And remember, as one of the world's largest revenue producing companies, for AT&T to move that much means that it has added more than $10 billion in new business in continuing operations (meaning net of business from TCI). Wow.
7. Gross Margins of 50% -- AT&T does not report gross margins, and for very good reason. It is nearly impossible to determine what portion of the cost of provision of a single minute of telephony is included in the actual product, particularly now in the age of digital signaling and packetized voice. The COGS for each minute is, in these cases, less than a thousandth of one cent. In other words, not meaningful.
8. Net Profit Margins of at Least 7% -- Now we're cooking with gas. AT&T's net profit margins from operations were 8.6% for the first three quarters of 1999. This is, however, substantially down from the net of 15.4% from 1998. If we back out the extraordinary charges relating to this year's takeover of TCI, the net profits are much more in line, and are well above our target.
9. Cash No Less Than 1.5x Total Debt -- Oops. AT&T falls waaay below the mark, here. Due to the TCI takeover, AT&T reports zero cash and $22 billion in long term debt. Prior to this event, AT&T held $3 billion in cash but $5 billion in debt, for a ratio of 0.6, far below what we're looking for. Consider, however, that the Liberty Media Group stock held by AT&T is a huge liquid asset, and with AT&T's portion being worth $35 billion, it's a large pool of potential cash.
10. Efficient Use of Cash (Flow Ratio Below 1.25) -- The Flow ratio measures a company's use of cash -- the faster it can get cash in and the longer it takes to pay out loans, the better. One would expect a behemoth like AT&T to have some influence in demanding its payment terms. After all, how may vendors expect an AT&T check not to clear? And in fact, this is the case. By subtracting out the cash from AT&T's current assets and dividing it by the current liabilities less the current portion of long-term debt, we get a Flowie of 0.88. Very, very good.
All in all, I find AT&T to be a strong candidate, though the debt it took on for TCI concerns me. As always, we're interested in what you think. Drop by one of the Rule Maker boards linked below.
Related Links:
AT&T Website Investor Rations Web Site
FCC International Bureau Traffic Report
Liberty Media General Web Site
Motley Fool Special Report on the Break up of AT&T 10/19/99
Fool on!
Bill Mann -- TMFOtter on the boards