Jan Dawson
Telecoms and the economy - lessons from AT&T
AT&T released its fourth quarter 2007 results on Thursday. Revenues were up, profits were up, wireless net and gross adds were both records, and broadband and video growth continue at healthy rates too. However, AT&T's share price was down 2% by late afternoon and is down around 14% since 8 January, when CEO Randall Stephenson spoke at Citigroup investor conference and suggested that the softness in the US economy was having a small impact on trends in AT&T's consumer business. The share price of Verizon, the competitor closest to AT&T in size and scope, has dropped by a similar amount so far this year, while Sprint's share price has fallen much more quickly, but due to its own set of well-publicised problems rather than worries about the economy.Comment: It appears AT&T's share price is being punished for Stephenson's honesty in a Q&A session about the impact of the slowing economy on AT&T's performance (it actually dropped several percent during the rest of the Q&A in response to his first comments about softness in demand). He and the rest of the AT&T management team had made similar comments during the AT&T analyst day in December, but without similar results. What changed in the month between the two events? The simple answer is that the consensus about the US economy among analysts and other experts is that it will likely head into recession shortly if it hasn't already done so.AT&T's senior management team has been very clear about the fact that the impact on its customer trends from the softening economy has been very small to date, both in its analyst day and in its quarterly results call on Thursday. And it again stood by its up-beat guidance for 2008 during the earnings call. So far, though, the share price has refused to budge, suggesting scepticism about its outlook. Given the increasing consensus about an economic downturn, the question is how much impact this is likely to have on the performance not just of AT&T but of other US carriers (and, by extension, other carriers in countries where growth is slowing).The area where AT&T has seen an impact so far is in what it calls 'non-pay disconnects' - i.e. customer disconnections due to non-payment of bills - in both its broadband and access line businesses. It has seen very little evidence of slowing demand for new services, however, and wireless has been untouched by these trends so far, evidence that wireless is becoming the service customers are least willing to give up, with access lines often the first thing to go.Access lines, though, are already shrinking at a fairly rapid rate, and slightly faster declines there wouldn't break the bank - they would simply speed up existing long-term trends. Slower growth in broadband would be more problematic, since this is where a large part of AT&T's future lies, and broadband lines have helped offset that access line decline in the past. Any impact on AT&T's ability to sign up new customers or retain existing customers for its U-Verse TV service would be even more worrying, since it is investing large amounts in its fibre rollout to support the service. The robustness of wireless, meanwhile, could be a life saver in that it is the major driver of growth for AT&T. All of these trends would impact Verizon similarly, and weakening demand for TV services would hit it even harder than AT&T since it is investing so much more heavily.
AT&T also says it hasn't yet seen an impact in its enterprise business, although it may be too early to tell given the long sales cycle for enterprise services compared with the relatively recent consensus on recession. AT&T suggests that because migration to IP and associated value-added services is often part of cost saving efforts by customers this demand should remain fairly robust. While we agree that migration to IP should largely hold up during a downturn, we are more sceptical that additional services will similarly hold up, and there is a risk that enterprise revenues might return to a decline as a result.
The first quarter of 2008 will be an important period for testing the resiliency of consumer demand, since consumer behaviour tends to show up pretty quickly in the financial results. However, any weakening in enterprise demand is unlikely to be clear until at least the second half of 2008 because of the long sales cycles previously mentioned. If AT&T and its competitors are able to post solid first quarters the market may begin to take their outlook more seriously. On the other hand, if first quarter results are below guidance share prices may fall even further.
