Video: Telecom troubles

updated 10/8/2004 9:48:53 AM ET 2004-10-08T13:48:53

AT&T Corp. is cutting 7,400 more jobs and slashing the book value of its assets by $11.4 billion, drastic moves prompted by the company’s plan to retreat from the traditional consumer telephone business following a lost court battle.

The company announced Thursday that it now plans to shrink its work force by a fifth, or about 12,300 jobs, during 2004 — up from a previous target of about 4,900 jobs.

About 9,000 of the people affected have already left the company or been notified. AT&T now expects to finish the year with about 49,000 workers, down from nearly 62,000 at the start of 2004.

Severance costs and other expenses related to the job cuts will reduce third-quarter earnings by $1.1 billion, the company said.

The asset writedown of $11.4 billion — about a quarter of the company’s assets — reflects the reduced value of AT&T’s network now that it will be carrying less consumer voice traffic. It will be charged against earnings in the third quarter.

While the writedown is an acknowledgment that AT&T wasted billions of dollars upgrading its network and marketing to consumers, the sharply reduced value of the company’s assets will mean tremendous savings on paper in terms of depreciation expense.

To begin with, AT&T said, the writedown will reduce depreciation expense by about $1 billion in the second half of 2004.

Depreciation is an accounting method that reflects how wear and tear reduces the worth of property and equipment. An estimated share of an asset’s value is subtracted from earnings with every passing quarter. Because AT&T’s assets will be worth $11.4 billion less, the quarterly value lost to wear and tear falls.

The announcement came after the close of Thursday’s regular stock trading. But shares of AT&T, which had slipped 16 cents to $15.04 on the New York Stock Exchange, rose 2.5 percent in after-hours trading, or 37 cents, to $15.41.

Many analysts have speculated that AT&T will make itself a more attractive takeover candidate by cleaning up its books and reducing depreciation expense. Talks to be acquired by former subsidiary BellSouth Corp. collapsed earlier this year.

AT&T, still the nation’s biggest long-distance carrier with about 30 million customers, announced in July that it would no longer spend money to sell long distance or local service to consumers.

That withdrawal followed a federal court decision that will make it more expensive for AT&T to sell local service by leasing residential lines from the regional Bells, who at the same time are luring away AT&T’s long-distance customers.

Federal regulations struck down by the court decision had enabled AT&T, MCI Corp. and Sprint Corp. to lease those Bell lines at appealing rates set by state governments.

Based on those regulations, AT&T invested heavily in advertising bundles of unlimited local and long distance, signing up 4.6 million homes for local service by the end of June.

The announcement of more job cuts and an asset writedown had been expected for weeks.

In an August filing with the Securities and Exchange Commission, AT&T warned that the value of its national phone network would need to be recalculated since it could no longer be relied upon to generate as much revenue.

AT&T invested billions of dollars upgrading that network, the company’s biggest single asset, during the technology boom.

At the end of June, AT&T’s assets totaled $43.8 billion, including $22.8 billion in property and equipment and $4.8 billion worth of goodwill, which reflects the premium AT&T paid above market value for acquisitions.

“In response to recent regulatory developments and a highly competitive market, we have made some tough decisions to reduce our work force and cut costs,” said AT&T chairman and chief executive Dave Dorman.

The company said the acceleration of job cuts, reduced marketing and other efforts to reduce costs are having a positive impact on profitability across the business.

AT&T also said it continues to generate significant cash flow in line with its previously established targets for 2004. As a result, the company is on course to finish the year with net debt of under $7 billion, a reduction of almost 50 percent over the past two years. Net debt is calculated by subtracting a company’s cash and liquid assets from its long-term liabilities.

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