AT&T reported a 74% increase in third-quarter revenues, based on wireless growth, improved wireline performance and faster-than-expected integration of AT&T and SBC Communications. In announcing those results, AT&T Chief Financial Officer Rick Lindner said the company will launch its U-verse video service in Houston in November and is on track to launch in a total of 15 markets by year’s end.

AT&T has long promised to hit 15-20 markets this year, but industry buzz had questioned that milestone, given that the service is still available commercially in only one market, San Antonio. Lindner said AT&T is adding high-definition TV to its San Antonio service in November, when it launches the Houston market, and will be including HD in all future U-Verse markets.

“We’re lined up to begin rolling markets on a weekly basis” once Houston is launched and HD is added to the San Antonio offer in late November, Lindner told analysts. Getting HDTV was a critical element before AT&T marketed the service too widely.

“We didn’t want to put too many customers on the platform” before HD was available, he explained, because of the costs and aggravation of then upgrading those customers once the high-definition service was available.

“It is a customer-affecting upgrade,” he said. Set-top boxes have to be replaced, and customers lose anything they have already recorded on a digital video recorder. As a result, AT&T limited its marketing base to an area of about 30,000 but achieved 10% penetration of that base within three months, Lindner said, and hit 25% penetration of some multi-dwelling units.

“The results so far are very encouraging,” he said. “We are using a different marketing technique--we have gone very local in the neighborhoods.”

Overall, AT&T “is hitting and exceeding our targets,” Lindner told analysts. The AT&T-SBC merger in particular is going better than expected.

“Clearly we are ahead of schedule in terms of migration of network traffic, and we are also ahead in terms of force reductions, probably in the neighborhood of a quarter ahead of plan.” Lindner said. “We are very confident in meeting those targets for AT&T merger, and overall we will get there quicker than the three-year spread we outlined initially.”

To date, he said, AT&T has trimmed 10,500 jobs this year. The company also completed the migration of SBC’s traffic off the Wiltel network and onto AT&T’s network in September of this year.

Net income for the third quarter was $2.17 billion, or 56 cents a share, up from $1.25 billion, or 38 cents, a year earlier, before the merger. Sales gained 52 percent to $15.6 billion. Earnings per share were 56 cents, up 47.4 percent from the previous year.

Other trends outlined by Lindner:

• Wholesale revenues are on the decline, as industry consolidation is prompting companies to move traffic onto their own networks, just as AT&T is doing. Wholesale revenues declined from $2.98 billion to $2.79 billion. There is growth in data traffic, but pricing pressure is depressing revenues there, he said. Wholesale revenues also reflect declining UNE-P sales. AT&T expects wholesale revenues loss to slow in 2007 and to flatten out by 2008.
  
• “On-balance, we are starting to top out in terms of line loss,” Lindner said, and that includes wireless substitution, wholesale line loss and the loss of voice lines to cable VoIP.
• The directory business remains an important part of AT&T and takes on new significance in the post-BellSouth merger era, when AT&T will own all of YellowPages.com, a joint venture with BellSouth. The company plans to make Yellow Pages searches available across its platforms, including wireless services and U-Verse, he said.
• Enterprise revenue declined 5.1%, but that is a smaller decline than in the past. That decline reflects the transition of many business customers from legacy packet services such as frame relay and ATM to IP-based services, Lindner said. “We are capturing that migration,” he said. Initially, buying IP-based services represents a decline in revenue but longer term, AT&T will be selling more bandwidth and more high-value offerings such as managed services and hosting, he said, so that revenue picture will improve. “We are encouraged by the results we have seen this last quarter or two,” Lindner said. Many of the declines in revenue are in long-distance voice traffic. It will be the second half of 2008, however, before AT&T expects to see revenue growth in this category.