News

AT&T Loses 129K More Basic Subs

10/27/2002 7:00 PM Eastern

AT&T Broadband turned in what its CEO called a "solid" third quarter, as revenue rose 6.4 percent even though basic subscriber rolls continued to decline, this time by 129,000.

On a pro forma basis, adjusting for system deals during 2001, the revenue gain, to $2.55 billion, worked out to 8.2 percent versus the same period a year ago. The MSO was sticking to guidance of "low double-digit" revenue growth for the year CEO Bill Schleyer said during a conference call last Tuesday.

Growth in the quarter came from digital video (up 285,000 units, to 4.2 million), high-speed data (up 172,000, to 1.9 million) and telephony (up 102,000, to 1.3 million).

Basic subscribers — AT&T Broadband ended the quarter with 13.1 million such customers — primarily fled to direct-broadcast satellite and other competitors, mostly in non-rebuilt systems, Schleyer said. But September was a strong month that produced net subscriber gains, he said, while the fourth quarter looks like it will be the year's best "by far."

AT&T management expects fourth-quarter basic losses to be in the 50,000-subscriber range, said Salomon Smith Barney Inc. analyst Niraj Gupta. But if you pencil in 100,000 in basic losses, to be conservative, that would mean AT&T Broadband subtracted a net of 533,000 basic-cable customers during 2002, said Gupta.

That's a net decline of 3.9 percent of basic subscribers since the start of the year.

AT&T Broadband lost 124,000 basic subscribers in the second quarter and 179,000 in the first quarter.

More losses seen

Next year — when AT&T Broadband will be part of AT&T Comcast Corp., assuming that merger closes in the fourth quarter, as expected — Gupta conservatively estimates that another 1.5 percent of the basic rolls will be lost in those systems, although Comcast should be able to "stabilize" things by late in the year.

During September and October — a couple of relatively strong months on the subscriber-retention front —AT&T Broadband did some more mass advertising, Schleyer said, but didn't do anything different in terms of pricing or packaging.

Satellite competitors — notably EchoStar Communications Corp.'s Dish Network and Hughes Electronics Corp.'s DirecTV Inc. — have advertised heavily in AT&T markets that haven't been rebuilt. That level of ad spending should decrease as AT&T and AT&T Comcast complete system upgrades, Schleyer said.

At the end of the quarter, 63 percent of AT&T Broadband's plant was upgraded to at least 750-megahertz capacity, up 5 percentage points since the start of the year but still last among its cable peers. Gupta said AT&T's upgrade priorities this year are Boston, the San Francisco Bay area and Chicago.

The repackaging and repricing of digital video services did have an impact, Schleyer said, making those services more profitable yet trimming monthly disconnect rates slightly, at least for September.

AT&T's third-quarter repackaging raised the price of digital-video service by an average of $2, Gupta said in a note. Because the hikes were phased in across AT&T's 16 markets, the increase bumped up average revenue per digital unit by only about 50 cents in the quarter, but that should increase to $1 to $1.50 in the fourth quarter, the analyst estimated.

Margin gains

Excluding $107 million in what were called expenses related to the MSO's pending merger with Comcast Corp., AT&T Broadband's EBITDA margin — or earnings before interest, taxes, depreciation and amortization costs as a percentage of revenue — was 26.5 percent, which Schleyer called the best in two years. He credited cost reductions and savings from "scaling" the high-speed data and telephony businesses. AT&T Broadband also scaled back spending on initiatives like video-on-demand.

Total EBITDA rose to $676 million from $586 million a year ago, after various adjustments.

Looking ahead, last week Gupta said Comcast Corp. cable unit CEO Steve Burke had moved swiftly to put a transition plan in place for integrating AT&T Broadband, naming managers for all 16 systems and regrouping the combined operation into six divisions.

New incentives

Burke also has been changing incentive plans in place in AT&T that don't place a high priority on growing basic subscribers. Sales people in the field, for example, get much higher commissions to sign up phone customers, even though it's typically easier to add telephony customers than it is to sign up new basic video subscribers, the analyst said.

AT&T Broadband also has suffered because of its lagging upgrades and customer-service problems, exemplified by Jacksonville, Fla.'s attempts to actually revoke AT&T's franchise over customer complaints.

Comcast's priorities for its acquired systems are to drive basic growth, boost cash flow, add to the high-speed-data rolls, increase the digital video count and grow telephony, in that order, Gupta said.

September