AT&T (T) reported adjusted 3Q06 EPS of 63 cents, ahead of the 58 cent consensus estimate. 2 cents of the upside was widely expected following the strong earnings report from Cingular last week. Another 2 cents came from a reduction in operating expenses in prior periods that hit this quarter. Consequently, despite the positive surprise on headline numbers, T had largely an inline quarter.
The shares are down a bit in this morning’s strong market but I wouldn’t read too much into it. T has been a very strong performer and a pause given the lack of clear upside is not surprising.
In general, the quarter saw the same trends that have been in place over the past year: continued line losses, margin expansion due to cost cutting and merger synergies, growing data revenues across the business segments, growth in wireline, and negative revenue growth in traditional wireline businesses. The BellSouth merger will reinforce these trends. The story is that the declining businesses are beginning to stabilize and the the growing businesses still have upside, so with more cost cutting and merger synergies the company cans sustain double digit EPS growth. As long as this psychology holds, T shares will probably be good relative performers. I would expect that to be the case for at least a couple of more quarters…..

Looking at some other highlights in the quarter:
• Access line losses remain stubbornly high, down 6.2% year over year, a little worse than expected. Expect this trend to continue as cable telephony continues to grow rapidly.
• Regional Business remains a growth business with small and mid-size business producing double digit revenue growth.
• Project Lightspeed, T’s triple play product including wireline TV is still rolling out very slowly. T has 3,000 customers in San Antonio. Management is proud that it has a 10% take rate but that implies marketing to just 30,000 home after several months. Comcast is adding over 30,000 telephone customers per week! I still think T will shift to a fiber to the home solution or buy a DBS company. This represents the biggest risk to T shares.
• The share buyback is going strong and will reach $2-3 billion this year and $10 billion by the end of 2007.
• Broadband additions were light in the quarter at 380,000 vs. analyst expectations for 400,000 to 450,000. Management said that an unusually large number of prior promotions expired. I think this could be read negatively as it indicates that price remains the crucial factor for DSL subs. This means the company is attracting a lower end sub, while cable locks up the higher paying, better demographic subscriber.
• Margins continue very strong. There was some discussion on the call that 4Q guidance implies margins will retreat as the full year guidance is below the year to date results. I did not fully understand management’s response to this question so you should look at what the analysts say.