Financial: AT&T’s Third Quarter Operational Profits Were $1.00 Per Share, Excluding a Gain and Merger-Related Expenses

Financial: AT&T’s Third Quarter Operational Profits Were $1.00 Per Share, Excluding a Gain and Merger-Related Expenses – Company Financial Information

AT&T Monday announced that third quarter operational profits from continuing operations were $1.00 per share, an increase of 66.7 percent compared to year-ago earnings of 60 cents per share, excluding a pension settlement gain and merger-related expenses. AT&T’s total revenue rose 4.3 percent for the third quarter. On a consolidated basis, the company reported third quarter profits of $1.09 per share. This included a pre-tax gain of $602 million due to settlement of pension obligations for former employees who accepted the company’s voluntary retirement incentive program and pre-tax Teleport Communications Group Inc. (TCG) merger-related expenses of $85 million. These two non-operational events resulted in a combined net gain of 16 cents per share. In addition, the company recognized an extraordinary loss of 7 cents per share, or $137 million, related to expenses incurred when the company retired $1.046 billion in debt obligations. However, this debt retirement will produce a significant amount of interest expense savings over time. For the third quarter of 1998, income from continuing operations rose to $2.096 billion, compared to $1.078 billion in the year-ago quarter, an increase of 94.4 percent. Excluding the settlement gain and merger-related expenses, income from continuing operations rose $730 million, or 67.8 percent. The significant rise can be attributed to the company’s ongoing efforts in reducing expenses as well as realizing revenue growth. Total revenue for the quarter increased 4.3 percent to $13.653 billion, compared to $13.090 billion in the third quarter of 1997. Business services, wireless services, TCG, AT&T Solutions, international operations and ventures and AT&T WorldNet services all contributed to the revenue growth. As anticipated, AT&T’s consumer services revenue declined slightly as the company continued to implement its strategy of targeting and retaining profitable customers by migrating them to more favorable optional calling plans such as One Rate Plus. “AT&T’s record earnings, coupled with revenue growth, demonstrate that we’re successfully executing our strategy to reduce costs, achieve profitable growth and win in a competitive environment,” said AT&T Chairman C. Michael Armstrong. “We’re making the right decisions to deliver value to our investors and build innovative services for our customers.” Stock Repurchase Update As announced last quarter, the AT&T Board of Directors authorized the repurchase of up to $3 billion of the company’s common stock. The repurchase of about 53 million shares was completed during very favorable market conditions in September. The company plans to reissue the repurchased shares as part of the shares to be issued in connection with the Tele-Communications, Inc. (TCI) merger. TCI Merger and BT Joint Venture Update AT&T reported last week that it is on track with its timetable for the TCI merger and has completed all initial U.S. regulatory filings, including those with the Federal Communications Commission (FCC), the Department of Justice, eight states and 940 local jurisdictions. The company also announced that it has filed confidentially with the Securities and Exchange Commission (SEC) a preliminary proxy/prospectus. Following SEC review, the company said it expects to make the proxy publicly available and send it to all AT&T and TCI shareowners. “We are aggressively moving forward with our merger plans,” Armstrong added. “Presuming shareowner and regulatory approvals, we expect to close the TCI merger in the first half of 1999.” AT&T also said that it had reached a definitive agreement with BT on the final terms of the global joint venture announced last July. The company said that it expects to complete the initial filings of the appropriate documentation with regulatory authorities in the U.S. and Europe next week. Third Quarter Continuing Operations Highlights: o With the completion of AT&T’s acquisition of TCG in July, prior-year results have been restated to reflect the merger. o Total revenue from business services increased $262 million compared with the year-ago quarter, or 4.7 percent, led by growth in highospeed data services. Revenue from wireless services rose $230 million, an increase of 19.4 percent from the third quarter of 1997. Revenue from consumer services decreased $171 million, or 2.9 percent compared with the third quarter of 1997. Total revenues for the third quarter were $13.653 billion, an increase of 4.3 percent compared with the $13.090 billion reported for the third quarter of 1997. o Total operating expenses for the third quarter of 1998 were $10.341 billion, an 8.8 percent decrease compared to the $11.343 billion reported for the third quarter of 1997. Excluding the pension settlement gain and TCG merger-related expenses, total operating expenses for the third quarter of 1998 decreased 4.3 percent to $10.858 billion. o Access and Other Interconnection expenses fell by 3.9 percent, compared with the third quarter of 1997. As was the case in the previous two quarters, the decline can be primarily attributed to access charge reduction and lower international settlement rates. As the company passes through access charge savings to its business and residential customers, revenue decreases. o Selling, General & Administrative (SG&A) expenses declined $564 million, or 14.5 percent, when compared to the third quarter of 1997. This demonstrates the company’s ongoing success in reducing costs. For the quarter, SG&A expenses were 24.4 percent of revenue, down from 29.8 percent in the year-ago quarter. Excluding TCG, SG&A expenses declined $626 million for the quarter and $1.061 billion for the first nine months of 1998. AT&T has targeted a decline in SG&A expenses (excluding TCG) to an SG&A-to-revenue ratio of 22 percent by the end of 1999. o For the first nine months of 1998, the company showed income from continuing operations of $3.151 billion, or $1.74 per share, on revenues of $39.695 billion, compared with $2.998 billion, or $1.69 per share, on revenues of $38.674 billion in the first nine months of 1997. o On a consolidated basis, for the first nine months ended September 30, 1998, including charges, gains, discontinued operations and the extraordinary loss, the company reported net income of $4.314 billion, or $2.38 per share compared with $3.153 billion, or $1.77 per share, for the first nine months of 1997. Third Quarter Results in Detail Business Services Total revenue from business services increased $262 million, or 4.7 percent, to $5.823 billion in the third quarter compared to $5.561 billion in the third quarter of 1997. This increase was driven primarily by strong double-digit growth in high-speed data services such as frame-relay and high-speed private line services. billion, an increase of 4.4 percent compared to the $5.555 billion of revenue reported for the third quarter of 1997. During the third quarter, business services won significant contracts with Microsoft, Massachusetts Port Authority, Countrywide Home Loans, WESCO Distribution and SmartStop, among others. EBIT grew 32.5 percent to $1.471 billion. The increase can be primarily attributed to revenue growth and the company’s ongoing successful cost-reduction efforts. Consumer Services Revenue from consumer services was $5.806 billion reflecting a sequential improvement for the third consecutive quarter while decreasing 2.9 percent in this quarter when compared to the year-ago period. As expected, the rate of decline in revenue has moderated from earlier in the year on a low single-digit decline in calling volumes as the company’s strategy becomes more fully implemented. As the company reported last quarter, the decline in revenue reflects competitive pressures as well as reductions in access charges that the FCC imposed in 1997 and 1998. The company also remains committed to migrating customers to optional calling plans as a critical piece of its strategy to retain, cultivate and grow its customer base. For example, AT&T now has more than 25 million customers on its One Rate plans. Similar to the previous quarter, the company was affected by robust competition in domestic and international long-distance markets, including the impact of competitors’ dial-around services, and the substitution of wireless services for calling card and other higher-priced long distance services. These factors contributed to the negative revenue and volume growth rates for the third quarter. Recently, AT&T has launched a number of initiatives to address the competitive market. For example, in the third quarter, consumer services introduced a 5-cent weekend rate, which has had a positive response. Earlier this month, the company announced that popular AT&T pre-paid calling cards would be available for purchase at 5,000 participating 7-Eleven convenience stores nationwide. And college students across the U.S. can now purchase AT&T pre-paid calling cards at any of 300 on-campus Barnes & Noble bookstores. The company also introduced The Lucky Dog Phone Company, a new alternative dial-around service. By dialing 10-10-345, customers can call long distance for 10 cents per minute (plus a 10 cent connection fee) and have an opportunity to win one of 345 daily prizes. For consumer services, EBIT rose 32 percent to $1.755 billion, when compared to the third quarter of 1997, driven primarily by reduced SG&A expenses, including lower, yet more cost-effective customer acquisition and retention programs targeted to high-value customers. Wireless Services Total revenue from wireless services, including product sales, increased $230 million, or 19.4 percent, to $1.420 billion, compared to the third quarter of 1997. As seen in the last quarter, the increase was driven by continued strong market response to the company’s Digital One Rate offer. Total net subscriber additions for the third quarter were 325,000, an increase of nearly 74 percent compared to the third quarter of 1997. The increase in part reflects the ongoing success of the Digital One Rate offer. In addition, AT&T continues to successfully migrate customers to digital services. Total digital subscribers represent 53 percent of the company’s 6.8 million consolidated wireless customer base as of September 30, 1998, compared with 45 percent of the 6.5 million subscriber base at June 30, 1998. Including AT&T’s partnership markets, of the total 9.1 million subscribers, approximately 4.2 million were digital subscribers at September 30, 1998. Core wireless EBITDA was $415 million for the third quarter, which excludes the impact of new wireless businesses (the new 1900 MHz markets, wireless data, and fixed wireless development). This represents a decrease of 6.9 percent compared to the third quarter of 1997. Core wireless EBIT was $176 million for the third quarter, a decrease of 26.2 percent compared to the third quarter of 1997. The decreases in EBITDA and EBIT are primarily due to increased customer acquisition costs and the costs associated with migrating customers from analog to digital service. Other/Corporate Revenue for other/corporate, which includes TCG, AT&T Solutions, AT&T WorldNet services and international operations and ventures, increased $221 million, or 31.8 percent, to $913 million compared with the year-ago quarter. For other/corporate, EBITDA was $389 million, compared to a loss of $567 million reported for the third quarter of 1997. Similarly, EBIT was $218 million, compared to a loss of $702 million. The respective increases of $956 million and $920 million reflect the net impact of the settlement gain and merger-related expenses of $517 million, as well as an improved cost structure. Supplemental Disclosures Local Services Local services revenue for the third quarter totaled $247 million, a substantial increase from the $147 million reported for the year-ago quarter. The increase was driven by the continued growth of TCG local operations. EBITDA (including merger-related expenses) for the third quarter was a negative $150 million versus a negative $187 million for the third quarter of 1997. EBIT (including merger-related expenses) for the third quarter was a negative $227 million, an 8.6 percent improvement from the negative $248 million for the third quarter of 1997. The improvements in both EBIT and EBITDA reflect revenue growth combined with improvements in cost structure, partially offset by TCG merger-related expenses. AT&T Solutions AT&T Solutions, the company’s networking-centric, professional services business comprised of outsourcing, networking integration and multi-media call center services, grew revenue 34.5 percent in the third quarter to $273 million versus $204 million for the year-ago quarter. During the third quarter, AT&T Solutions announced that it had signed a six year contract with BANC ONE valued at $1.4 billion, its largest to date. AT&T Solutions will assume management of BANC ONE’s voice and data networking requirements, transforming the corporation’s legacy communications networks to an integrated, state-of-the-art Internet Protocol (IP)-based networking platform. In addition to BANC ONE, the unit currently has more than $4 billion in long-term business under contract with clients such as Citibank, McGraw-Hill, United HealthCare, Textron, J.P. Morgan, Merrill Lynch and MasterCard International. EBIT for AT&T Solutions was $16 million for the third quarter, compared to a loss of $37 million in the year-ago period. This marks the first EBIT-positive quarter for AT&T Solutions. On-line Services WorldNet and other on-line services includes AT&T WorldNet internet access service for residential and business customers and web hosting and other electronic commerce services. Revenue increased 65.1 percent to $100 million versus $61 million reported for the year-ago quarter. AT&T WorldNet Service serves 1.2 million subscribers and provides reliable, easy Internet access with 452 local dial-up points-of-presence across the nation. During the third quarter, the company announced additional cross-marketing agreements with leading Internet search engines companies, including Yahoo!, Excite, Lycos and Infoseek. EBIT improved $20 million to a negative $104 million, primarily reflecting the impact of increased AT&T WorldNet service revenue. International Operations and Ventures International operations and ventures include AT&T’s consolidated foreign operations such as AT&T Communications Services UK and the company’s transit and reorigination businesses. This category does not include bilateral international long-distance traffic. The equity earnings or losses of AT&T’s non-consolidated international joint ventures and alliances, such as Alestra in Mexico and AT&T Canada Long Distance Services, are also included. Revenue increased 22.7 percent to $218 million, versus $178 million for the year-ago quarter. EBIT also improved to a negative $40 million compared to a negative $82 million in the third quarter of 1997, as the company continued to streamline its international operations. On July 26, 1998, AT&T and BT announced that they will create a $10 billion global joint venture to serve the complete communications needs of individuals and businesses around the world. The venture will combine the trans-border assets and operations of each company, including their existing international networks, all of their international traffic, all of their international products for business customers — including an expanded set of Concert services — and AT&T and BT’s multinational accounts in selected industry sectors. In the first year, the venture is expected to contribute positively to the earnings of both parents. The venture is pending regulatory approvals and is expected to close by next summer.

AT&T

Consolidated Statements of Income (Unaudited)

For the Three For the Nine

Months Ended Months Ended

Dollars in Millions September 30, September 30,

(except per share amounts) 1998 1997 1998 1997

Revenues………. $ 13,653 $13,090 $39,695 $38,674

Operating Expenses

Access and other

interconnection….. 3,819 3,975 11,649 12,488

Network and other

communications

services ……… 2,515 2,455 7,268 7,067

Depreciation and

amortization…….. 1,194 1,019 3,388 2,927

Selling, general and

administrative… 3,330 3,894 10,419 11,347

Restructuring and

other

charges(Note 1)….. (517) – 2,827 –

———— ——— ——— ———

Total Operating

Expenses……… 10,341 11,343 35,551 33,829

——— ———- ———— ——–

Operating Income……. 3,312 1,747 4,144 4,845

Other income – net….. 156 132 1,169 371

Interest expense………. 114 75 322 241

———- ——– ——- ———

Income from continuing

operations before

income taxes…….. .. 3,354 1,804 4,991 4,975

Provision for income

taxes………….. 1,258 726 1,840 1,977

——– ——– ——– ———

Income from continuing

operations……. 2,096 1,078 3,151 2,998

Income from discontinued

operations (net of taxes

of $6 in 3Q

1997, $6 YTD 1998

and $49 YTD 1997)……. – 20 10 89

Gain on sale of discontinued

operations (net of taxes

of $43 in 3Q 1997 and

$799 YTD 1998 and $43

YTD 1997)…… – 66 1,290 66

Extraordinary loss

(net of taxes of

($80) in 3Q 1998 and

YTD 1998)(Note 1) (137) – (137) –

——— ——— ———- ——–

Net Income …………. $ 1,959 $ 1,164 $ 4,314 $ 3,153

========== ========= ========== ========

Weighted average common

shares and potential

common shares

(millions)* 1,804 1,787 1,810 1,784

Per Common Share – Basic:

Income from

continuing operations…$ 1.17 $ 0.60 $1.76 $ 1.69

Income from discontinued

operations …. – 0.01 0.01 0.04

Gain on sale of discontinued

operations – 0.04 0.71 0.04

Extraordinary loss…….. (0.08) – (0.08) –

———– ——— ———- ——–

Net Income ………… $ 1.09 $ 0.65 $ 2.40 $ 1.77

============ ========== ========== ========

Per Common Share – Diluted:

Income from continuing

operations……. $ 1.16 $ 0.60 $ 1.74 $ 1.69

Income from discontinued

operations …. – 0.01 – 0.04

Gain on sale of discontinued

operations – 0.04 0.71 0.04

Extraordinary loss…… (0.07) – (0.07) –

———– ———- ——— ——–

=========== ========== ========= ========

Net Income ………. $ 1.09 $ 0.65 $ 2.38 $ 1.77

=========== ========= ======== ========

Dividends declared

per common share…. $ 0.33 $ 0.33 $ 0.99 $ 0.99

o Amounts represent the weighted-average shares assuming dilution from the potential exercise of outstanding stock options (including SARS). Amounts are reduced by 13, 2, 15 and 5 million shares for 3Q1998, 3Q1997, YTD 1998 and YTD 1997 respectively, assuming no dilution.

After-tax Diluted earnings per

(dollars in share

millions)

——————— —————-

———————————————————-

Net Income $ 1,959 $ 1.09

———————————————————-

Pension Settlement

Gain ($602 pre-tax)

and TCG Merger (287) (0.16)

Related Expenses

($85 pre-tax)

———————————————————-

Extraordinary Loss

($217 pre-tax) 137 0.07

———————————————————-

Operational earnings

from continuing

operations $ 1,809 $ 1.00

———————————————————-

Note 1 During the third quarter 1998 AT&T recorded a net, pre-tax gain of $517 million. This included a pre-tax gain of $602 million due to the settlement of pension obligations for former employees who accepted the company’s Voluntary Retirement Incentive Program (VRIP), partially offset by $85 million of pre-tax TCG merger related expenses. The total after-tax benefit recorded was $287 million, or 16 cents per share. In the third quarter 1998 the company also recognized an extraordinary loss of $137 million, or 7 cents per share as a result of an early retirement of $1.046 billion of debt obligations. This debt reduction will produce significant savings in interest expense over time.

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