AT&T's Q1 Revenue Declines 12% on Pricing Pressure, Lower Traffic

Citing continued pricing pressure and decreases in LD traffic, AT&T reported consolidated Q1 revenue of $7.0 billion, which included $5.3 billion from AT&T Business and $1.7 billion from AT&T Consumer. Consolidated revenue declined 12.2 percent versus the first quarter of 2004, primarily due to continued declines in LD voice and data revenue. Net income was $529 million, or earnings per diluted share of $0.66.

"AT&T continues to take targeted, strategic actions to elevate our operational and financial strength in advance of our pending merger with SBC Communications," said AT&T Chairman and Chief Executive Officer David W. Dorman.


Some highlights of the quarterly report:

AT&T Business

Revenue was $5.3 billion, a decline of 9.4 percent from the prior-year first quarter, primarily due to ongoing pricing pressure in traditional voice and data services, and declines in retail volumes. Revenue was positively impacted by approximately 1.0 percentage point due to a customer disconnect of prepaid network capacity and higher equipment sales.


Long distance voice revenue decreased 17.0 percent from the prior-year
first quarter, driven by continued pricing pressure and a decline in overall volumes, primarily reflecting a decline in retail minutes.


Local voice revenue declined 4.6 percent from the prior-year first quarter reflecting declines in reciprocal compensation revenue and the company's "All-In-One" bundled offer. As previously announced, AT&T has adjusted its strategy to be more selective in approaching the small business market, placing a greater focus on profitability over overall market share. This quarter, AT&T began to see the impact of this strategic change as the number of local access lines declined.


Data revenue declined 7.6 percent from the prior-year first quarter,
reflecting the impact of pricing pressure. Data revenue was positively impacted by approximately 2.0 percentage points due to a customer disconnect of prepaid network capacity.


IP&E-services revenue grew 6.6 percent over the prior-year first
quarter, reflecting AT&T's ongoing transformation to next-generation
networking services such as Enhanced Virtual Private Network (E-VPN)
and IP-enabled frame relay services, though declined sequentially.
Approximately half of the sequential decline was attributable to a
contract renewal at current market rates for a significant customer in
one of the more mature products within the IP&E-services portfolio.


Outsourcing, professional services and other revenue grew 0.4 percent
from the prior-year first quarter, reflecting continued strength in
government professional services and increased equipment sales. There
was an approximate 2.0 percentage point benefit to the total growth
rate associated with equipment sales.


CAPEX was $332 million as AT&T Business continues to upgrade its network and integrate its systems to further rationalize the company's cost structure, improve the customer experience and support growth in next-generation products and services.


AT&T Consumer

Revenue was $1.7 billion, a decline of 20.0 percent versus the prior-
year first quarter, driven by lower standalone LD voice revenue
resulting from the continued impact of competition as well as wireless
and Internet substitution, partially offset by targeted price
increases.


Operating income totaled $575 million, yielding an operating margin of
34.1 percent, compared with operating income of $371 million and an
operating margin of 17.6 percent in the prior-year first quarter.
Current-quarter operating income was positively impacted by a $31
million net benefit from lower depreciation as a result of the asset
impairment charges taken during the third quarter of 2004.


The year-over-year margin increase reflects a dramatic reduction in
sales and marketing expenses, primarily attributable to our change in
strategic focus, as well as reduced bad debt and customer care
expenses. In addition, targeted pricing actions contributed to the
margin improvement.


At the end of the first quarter, AT&T Consumer had approximately 22.7
million standalone LD and bundled customers.
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