Tech Industry

THE DAY AHEAD: AT&T has to deliver broadband promises

AT&T (NYSE: T), which is trading near its 52-week low, trimmed its profit forecasts yet again as it officially adopted Excite@Home's financial woes. The move, which is good news to cable Internet access provider Excite@Home, isn't going to instill much confidence in Ma Bell.

Although many analysts will give AT&T a free pass on its latest profit warning, news that Ma Bell cut its third quarter earnings outlook by a nickel a share is worrisome. Ma Bell lowered expectations for the second quarter too. Couple AT&T's profit and revenue growth problems with Excite@Home's penchant for mixed quarterly results, and you have some potential credibility issues.

For the record, AT&T's guidance was expected to head lower once the company started to include Excite@Home's results. Excite@Home used to be profitable, but decided to spend aggressively on expansion.

Amid a confusing corporate structure, AT&T decided to consolidate control in Excite@Home and make it a key part of its broadband strategy. The AT&T-Excite@Home deal, which was completed ahead of schedule, will cut AT&T's operating results to a profit of 35 cents a share to 38 cents a share. AT&T will now control Excite@Home's board.

But the concerns about the AT&T-Excite@Home partnership go a lot farther than just the bottom line. Can these two companies deliver on their broadband promises? Can these two compete with the soon-to-be-merged America Online Time Warner juggernaut? And can this duo put together a few glitch-free quarters?

Judging from recent results, the answer isn't so clear.

AT&T's woes

When AT&T chief C. Michael Armstrong arrived at the company a few years ago, he planned to transform the company into a next-generation communications provider. He did -- at least on paper. AT&T has spent nearly $100 million on cable acquisitions. The company gobbled up TCI and Media One to name a few.

The grand plan was to offer broadband services and cable telephony to the masses. AT&T reckoned it could leapfrog the Baby Bells, which are now taking AT&T's long-distance market share.

AT&T is making progress, but hasn't excited investors. Revenue growth in the second quarter was up a mere 4.5 percent. As for those broadband customers, Ma Bell reported 223,600 broadband telephony customers with 689,000 high-speed data customers at the end of the second quarter.

The company said it is on track with its broadband rollout. The real issue is whether AT&T can roll out services fast enough. Its business services division is losing customers, and competition from local companies such as SBC (NYSE: SBC) and Verizon (NYSE: VZ) is hurting long-distance profits.

Excite@Home's spotty financials

If you're an AT&T shareholder, you may not want Excite@Home on your books. The company lost $45.3 million in its latest quarter and ditched profits to expand. Excite@Home also didn't meet its subscriber targets in the second quarter. The company fell short of expectations by adding 300,000 cable subscribers in the second quarter. The company cited cable modem shortages.

In the first quarter, Excite@Home shocked Wall Street with an earnings miss. The company also went back to its money-losing ways. The timing couldn't have been worse -- dot-coms were on the verge of a big shakeout.

But things could be improving. Excite@Home said last week that it has hit the 2 million subscriber mark. The company maintains it will hit its goal of 3 million subscribers by the end of the year.

Broadband dreams

AT&T and Excite@Home have to do two things if they want Wall Street on their side. First, they have to deliver a few solid quarters. And, more importantly, they need to hit broadband subscriber growth targets.

Excite@Home's 2 million cable Internet access subscribers are impressive, but AOL Time Warner will likely transition at least some of AOL's 22 million subscribers to broadband services. In addition, there's stiff competition from digital subscriber line technology.

As for AT&T, it has to step up its broadband services rollout. It has no choice. The company's previous cash cows are being squeezed by the competition. Without broadband services, AT&T may never see double-digit growth rates.TDAIN