• by Laurie Sullivan , April 23, 2008

Consumers ditching home phone lines for cellular service boosted AT&T's earnings during the first quarter in 2008. The No. 1 U.S. phone company reported Tuesday that profit rose 22% on savings from the $86 billion purchase of BellSouth and sales of mobile handsets such as Apple's iPhone.

Revenue rose 6.1%, to $30.7 billion, in the three months ended March 31, and net income climbed to $3.46 billion, or 57 cents a share, from $2.85 billion, or 45 cents, a year earlier.

While the San Antonio, Texas-based company experiences better days and higher profits, marketing and technology employees at the carrier are paying the price. AT&T CEO Randall Stephenson has relied on the BellSouth acquisition, completed in 2006, to eliminate 10,000 jobs in overlapping functions, mostly marketing and Information technology. AT&T announced 4,650 additional cuts April 18 to reduce the number of middle managers in the home-phone business.

Apart from the "softness" seen in local phone lines, there have been few signs that weakness in the U.S. economy would affect the carrier. "We are bundling [services] more aggressively, and that includes wireless," said Rick Lindner, AT&T CFO, during a conference call with analysts and investors. "You may have noticed that last week we launched a new wireless plan for small and midsize firms called Business Talk, which brings the family talk concept to business customers. Second, we are helping customers migrate to IP. That's reflected in our IP growth rates."

For now, similarities in AT&T and BellSouth businesses could help the carrier add contracts and remain profitable. As cost-cutting opportunities dwindle toward the end of 2008, however, AT&T's consumer business will likely once again become a weightier anchor, according to Craig Moffett, senior analyst, U.S. telecommunications, cable and satellite broadcasting at Sanford C. Bernstein & Co.

The challenge for AT&T remains the company's balancing act between wireline and wireless. "As wireless grows, AT&T hopes to leave its consumer wireline heritage far astern, but it can only do so to a degree," Moffett writes in a report. "For now, merger synergies are helping wireline profitability from being even worse, and wireless margin improvements are enough to keep the ship on course."

In the first quarter, AT&T announced a three-year marketing agreement with SAP America in which the carrier serves as the primary host for data and servers for multimillion-dollar businesses headquartered in North America. Recent contracts under this deal include a five-year agreement with Royal Dutch Shell, which calls for AT&T to provide, manage and maintain Shell's worldwide communications infrastructure.

The agreement with Shell follows a series of other contracts signed in the past year, including deals with Starbucks, General Motors, IBM, and the U.S. Department of the Treasury.

AT&T's Advertising & Publishing business has improved, too. It offers a suite of local search options, including print and Internet Yellow Pages, along with web site design and search engine marketing. The unit delivers print directories to more than 83 million residences and businesses in 22 states. The online service offers consumers access to local business information, latest business listings, city guides, maps and driving directions.

Combined, these print and online products receive approximately 5 billion consumer searches a year for local business information and provide more than 1 million advertisers with sales leads to help businesses grow, AT&T says in a published report.

AT&T reports that Advertising & Publishing revenue trends during the past several quarters have been stable, with print declines reflecting migration to electronic search having been largely offset rapid growth in yellowpages.com. In the first quarter of 2008, Advertising & Publishing's Internet revenue grew 41.1% versus the year-earlier quarter and 12.9%, sequentially.

In March, AT&T announced a distribution agreement with Microsoft Corp., putting yellowpages.com's advertising listings and content in front of consumers who use Microsoft's local search sites. The agreement, launched in early April, gives the carrier's advertisers exposure through Microsoft's search pages within the Live Search and Live Search Maps properties, including MSN Yellow Pages.