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Cingular Wireless Posts Strong Fourth-Quarter Growth25 January 2005
Cingular Wireless, the nation's largest wireless provider, today reported fourth-quarter results driven by robust subscriber growth, lower subscriber churn versus the past several
quarters, and solid progress in key integration initiatives following its
acquisition of AT&T Wireless.
Cingular, which is owned by SBC Communications Inc. (NYSE: SBC) and
BellSouth Corporation (NYSE: BLS), completed its acquisition of AT&T Wireless
on Oct. 26, 2004, creating a wireless provider that now owns spectrum licenses
covering a total population of 290 million and currently serves all of the
nation's top 100 metropolitan areas.
In its first quarter of combined operations, the new Cingular delivered a
net increase in subscribers of nearly 1.8 million on a pro forma basis, which
incorporates results from AT&T Wireless for the first 25 days of October,
includes net additions from other acquired properties and excludes results
from markets that Cingular has agreed to divest. This increase was more than
double Cingular's pro forma net subscriber additions in both the preceding
quarter (808,000) and the year-ago fourth quarter (736,000). It was Cingular's
highest net-add quarter ever, when historical results of Cingular and AT&T
Wireless are combined. Not counting net customer additions of AT&T Wireless
for the first 25 days of the quarter and other pro forma adjustments for
dispositions and other acquisitions, reported net customer additions were 1.7
million.
Cingular ended 2004 with 49.1 million total subscribers.
Cingular's gross customer additions in the fourth quarter totaled 5.5
million on a pro forma basis, the highest quarter ever when historical results
of the two companies are combined, and average monthly pro forma subscriber
churn declined significantly versus pro forma results for the third quarter of
2004 and the fourth quarter of 2003.
"The merger is working, and it is everything we had hoped it would be.
The new Cingular is off to a very strong start," said Stan Sigman, President
and chief executive officer of Cingular Wireless. "We developed a thorough,
disciplined integration plan to follow through on our acquisition of AT&T
Wireless. Our execution of that plan has been crisp, with all initiatives on
or ahead of schedule. And customers have responded very positively, choosing
Cingular -- and choosing to stay with Cingular -- in record numbers.
"In addition to outstanding volumes, I am particularly pleased that we
have moved churn in the right direction right out of the gate," Sigman said.
"And I am very confident in our ability to deliver continued solid progress in
both churn and margins as we move forward.
"Our goal at Cingular is to be the best wireless provider in the
business," Sigman continued. "To that end, we have developed focused plans to
further expand and advance our network, enhance customer service and
strengthen distribution - while delivering substantial operational cost
synergies. We will execute with intensity in all of these areas in 2005, with
the clear expectation of delivering steady progress to reach industry-leading
metrics by 2007."
Detailed Customer Metrics, GSM Progress
In addition to robust subscriber growth, during the fourth quarter,
Cingular achieved solid progress in three additional key focus areas: growing
its GSM customer base, retaining former AT&T Wireless subscribers by
transitioning them to new Cingular plans, and reducing churn.
At year's end, more than 65 percent of Cingular's subscriber base was
GSM-equipped, up from a pro forma 57 percent at the end of the third quarter
of 2004. More than 8 percent of Cingular's customer base upgraded handsets
during the quarter -- almost entirely onto GSM.
Cingular operates the nation's largest digital voice and data network, and
79 percent of Cingular's total combined minutes are now carried on its GSM
network. GSM is the world's most widely used wireless technology. Through
roaming alliances with other GSM-based providers around the world, Cingular
provides the largest global presence of any U.S. wireless carrier, with
coverage in more than 170 countries.
Also during the final two months of the quarter, Cingular converted more
than 1 million AT&T Wireless subscribers to new Cingular postpaid plans, as
subscribers responded positively to Cingular's broad network coverage and
attractive features.
Cingular's progress in growing its GSM base and its network improvements
contributed to significantly improved churn levels. Pro forma average monthly
churn improved to 2.6 percent -- 60 basis points lower than pro forma churn
for the third quarter of 2004.
In addition, starting in the first quarter of 2005, Cingular will adopt a
new calculation for reseller churn that is more consistent with some of its
major competitors. Cingular currently includes reseller disconnects in its
churn calculation. In the future, Cingular will base its calculations on
total reseller net additions or reductions, in line with industry peers. If
this methodology had been in place in the fourth quarter, Cingular's pro forma
churn would have been 2.4 percent overall.
Financial Results
Cingular's fourth-quarter financial results reflect strong subscriber
growth and merger-related expenses.
In accordance with purchase accounting rules, Cingular's reported results
for the quarter ended Dec. 31, 2004, are composed of Cingular stand-alone
results for the first 25 days of the quarter, prior to the transaction's
close, plus combined Cingular and AT&T Wireless results for the remainder of
the quarter.
To provide comparability with previous quarters, Cingular also is
furnishing revenue comparisons based on pro forma results, which include
acquired properties and exclude divested properties from all periods.
-- In the fourth quarter, Cingular's reported revenues were $7.1 billion.
Pro forma revenues, which incorporate results from AT&T Wireless and
other acquired properties for the first 25 days of October and exclude
results from divested operations and operations to be divested, totaled
$8.1 billion, up 1.8 percent from the fourth quarter pro forma revenue
of 2003.
-- Reported average revenue per user (ARPU) in the fourth quarter was
$49.22. Pro forma ARPU was $49.67, down 5.8 percent versus pro forma
results in the year-earlier fourth quarter. ARPU was adversely impacted
primarily by the transition of customers to lower-priced GSM plans and
the continued popularity of FamilyTalk(R).
-- ARPU from data services continued its strong growth in the fourth
quarter, increasing to $2.89 on a reported basis compared with $1.75
for standalone Cingular in the third quarter of this year. This 65-
percent growth was driven by the popularity of text messaging, mobile
instant messaging, mobile e-mail, downloadable ringtones, games and
photo messaging. Cingular delivered more than 3.8 billion text
messages during the quarter.
-- Cingular's reported fourth-quarter operating expenses totaled $7.3
billion, and its reported OIBDA service margin was 19.3 percent.
(OIBDA margin is operating income (loss) before depreciation and
amortization divided by total service revenues.)
-- Direct merger integration costs increased Cingular's operating expenses
by $245 million in the fourth quarter. Normalized to exclude these
integration costs, Cingular's fourth-quarter OIBDA service margin was
23.2 percent. Purchase and other accounting impacts added an
additional $171 million to Cingular's fourth-quarter operating
expenses. This $171 million impact included $415 million for
amortization of intangible assets, partially offset by reduced
depreciation, primarily from lower network asset valuations.
-- Fourth-quarter expenses and margins also reflect increased operating
costs from higher levels of gross customer additions, progress in
customer conversions to new Cingular GSM contracts, and a range of
customer service and marketing initiatives. Expected synergies from
the merger of Cingular Wireless and AT&T Wireless operations are on
plan; however, they are not expected to significantly reduce operating
expense until later in 2005.
Major Initiatives
As it drove strong subscriber growth, Cingular also took important steps
in strategic areas that are key to future success:
-- Business Markets Group. In the fourth quarter, Cingular created a new
Business Markets Group to give business customers access to sales and
support professionals focused solely on their specialized needs.
During the quarter, Cingular closed sales with more than 300 high-end
business and government customers. Cingular Wireless serves 95 of the
Fortune 100 companies, and counts more than 80 percent of the Fortune
500 and more than 1,200 federal, state and local government agencies as
customers. Cingular was named the "front runner" in the wireless
business-to-business marketplace in Forrester Research, Inc.'s January
2005 "U S 2.5 And 3G Business Services" report.
-- Network expansion. Following the acquisition's close, Cingular moved
quickly to improve coverage and strengthen network quality in selected
areas. In the fourth quarter, Cingular completed network enhancement
programs in several states, adding more than 1,000 cell sites. In
addition, Cingular began a major expansion of its California and Nevada
network, which it expects to complete in 2006.
-- UMTS 3G deployment. Cingular also is moving forward with plans to
deploy UMTS (Universal Mobile Telecommunications System) 3G network
technology with HSDPA (High-Speed Downlink Packet Access) concurrent
with its AT&T Wireless network integration over the next two years.
UMTS with HSDPA provides superior speeds for data and video services,
and it delivers outstanding operating efficiencies, using the same
spectrum and infrastructure for voice and data on an IP-based platform.
Earlier this month, Cingular and Lucent Technologies announced that the
two companies have successfully completed the first HSDPA data calls on
the third-generation (3G) UMTS trial network deployed by the two
companies in the Atlanta market.
Outlook
Cingular expects further progress in key network and integration
initiatives, which will drive steady improvement in metrics. In 2005,
Cingular expects:
-- Positive total revenue growth versus 2004 pro forma results.
-- 2005 OIBDA margins before one-time integration costs will continue to
improve, increasing as synergies are realized and churn is reduced.
-- Total capital expenditures in the $6.8 billion to $7.2 billion range as
Cingular expands network coverage, builds out the California/Nevada
network and deploys UMTS. Cingular expects to return to a capital
expenditure run rate in the mid teens as a percent of total revenue
starting in 2007.
Fourth-Quarter Conference Calls
BellSouth's fourth-quarter earnings conference call, during which
Cingular's earnings results will be discussed, will be held at 10 a.m. Eastern
time on Jan. 25, 2005 and can be accessed at
http://www.bellsouth.com/investor/ .
SBC will host its fourth quarter earnings conference call, during which
Cingular's earnings results will be discussed, on Jan. 26, 2005. It will be
broadcast live via the Internet at 10 a.m. Eastern time at
http://www.sbc.com/investor_relations .
FORWARD-LOOKING INFORMATION
In addition to historical information, this document and the conference
calls referred to above may contain forward-looking statements regarding
events and financial trends. Factors that could affect future results and
could cause actual results to differ materially from those expressed or
implied in the forward-looking statements include:
-- the pervasive and intensifying competition in all markets where
Cingular operates;
-- failure to quickly realize capital and expense synergies from the
acquisition of AT&T Wireless as a result of technical, logistical,
regulatory and other factors;
-- problems associated with the transition of Cingular's network to
Higher-speed technologies;
-- slow growth of Cingular's data services due to lack of popular
applications, terminal equipment, advanced technology and other
factors;
-- sluggish economic and employment conditions in the markets Cingular
serves;
-- the final outcome of FCC proceedings, including rulemakings, and
judicial review, if any, of such proceedings;
-- enactment of additional state and federal laws, regulations and
requirements pertaining to Cingular's operations; and
-- the outcome of pending or threatened complaints and litigation.
Such forward-looking information is given as of this date only, and
Cingular assumes no duty to update this information.
OIBDA
OIBDA is defined as operating income (loss) before depreciation and
amortization. Although we have used substantively similar measures in the
past, we now use the term OIBDA to describe the measure we use as it more
clearly reflects the elements of the measure. OIBDA margin is calculated as
OIBDA divided by services revenue. These are non-GAAP financial measures. They
differ from operating income (loss), as calculated in accordance with GAAP, in
that they exclude depreciation and amortization. They differ from net income
(loss), as calculated in accordance with GAAP, in that they exclude, as
presented in our Consolidated Statement of Income: (i) depreciation and
amortization, (ii) interest expense, (iii) minority interest expense, (iv)
equity in net income (loss) of affiliates, (v) other, net, and (vi) provision
(benefit) for income taxes. We believe these measures are relevant and useful
information to our investors as they are an integral part of our internal
management reporting and planning processes and are important metrics our
management uses to evaluate the operating performance of our consolidated
operations. They are used by management as a measurement of our success in
acquiring, retaining, and servicing customers because we believe these
measures reflect our ability to generate and grow subscriber revenues while
providing a high level of customer service in a cost-effective manner.
Management also uses these measures as a method of comparing our performance
with that of many of our competitors. The components of OIBDA include the key
revenue and expense items for which our operating managers are responsible and
upon which we evaluate their performance. Lastly, we use this measure for
planning purposes and in presentations to our board of directors, and we use
multiples of this current or projected measure in our discounted cash flow
models to determine the value of our licensing costs and our overall
enterprise valuation.
OIBDA excludes other, net, minority interest expense and equity in net
income (loss) of affiliates, as these do not reflect the operating results of
our subscriber base and our national footprint that we utilize to obtain and
service our subscribers. Equity in net income (loss) of affiliates represents
our proportionate share of the net income (loss) of affiliates in which we
exercise significant influence, but do not control. As we do not control these
entities, our management excludes these results when evaluating the
performance of our primary operations. Although excluded, equity in net income
(loss) of affiliates may include results that are material to our overall net
income (loss). We may record impairment charges in the future related to our
investments if there are declines in the fair values of our investments, which
we deem to be other than temporary. OIBDA also excludes interest expense and
the provision (benefit) for income taxes. Excluding these items eliminates the
expenses associated with our capitalization and tax structures. Finally, OIBDA
excludes depreciation and amortization, in order to eliminate the impact of
capital investments.
We believe OIBDA as a percentage of services revenue to be a more relevant
measure of our operating margin than OIBDA as a percentage of total revenue.
We generally subsidize a portion of our handset sales, all of which are
recognized in the period in which we sell the handset. This results in a
disproportionate impact on our margin in that period. Management views this
equipment subsidy as a cost to acquire or retain a subscriber, which is
recovered through the ongoing services revenue that is generated by the
subscriber. We also use services revenue to calculate margin to facilitate
comparison, both internally and externally, with our competitors, as they
calculate their margins using services revenue as well.
There are material limitations to using these non-GAAP financial measures,
including the difficulty associated with comparing these performance measures
as we calculate them to similar performance measures presented by other
companies, and the fact that these performance measures do not take into
account certain significant items, including depreciation and amortization,
interest, and tax expense, and equity in net income (loss) of affiliates that
directly affect our net income or loss. Management compensates for these
limitations by carefully analyzing how our competitors present performance
measures that are similar in nature to OIBDA as we present it, and considering
the economic effect of the excluded expense items independently as well as in
connection with its analysis of net income (loss) as calculated in accordance
with GAAP. OIBDA and OIBDA margin should be considered in addition to, but not
as a substitute for, other measures of financial performance reported in
accordance with accounting principles generally accepted in the United States
of America. OIBDA and OIBDA margin, as we have defined them, may not be
comparable to similarly titled measures reported by other companies.
Pro Forma Revenues and ARPU
Pro forma revenues and pro forma ARPU are used to provide more meaningful
period to period comparisons of reported revenues and ARPU.
These unaudited pro forma measures incorporate AT&T Wireless' results for
the first 25 days of October 2004 and the three months ended December 31,
2003. The measures also include results from other acquired properties,
exclude results from divested operations, and reflect intercompany
eliminations and other adjustments for such periods. For further detail
regarding other pro forma combined historical financial information, see the
information filed by Cingular on Form 8-K dated October 25, 2004, as amended
on November 29, 2004.
The unaudited pro forma information is not intended to represent or be
indicative of the results of Cingular that would have been reported had the
merger and the above mentioned items been completed as of the dates presented,
and should not be taken as representative of the future results of Cingular.
Source: PR Newswire
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