AT&T Broadband lost 1.3% of its customers ? a whopping 179,000 of its 13.6 million subscribers ? in the first quarter, a downward trend company executives say will continue into the second quarter.

Eighty percent of the losses, or about 143,000, were attributed to a backlog of disconnects, according to AT&T Broadband CEO Bill Schleyer. ?We discovered the disconnects simply weren't being done,? he said.

Some 50,000 pending disconnects were found in Chicago alone, Schleyer told analysts and reporters during the company's quarterly conference call last week.

At the same time some 36,000 AT&T Broadband customers defected to direct broadcast satellite in the first quarter. Schleyer believes that as the company continues to improve its customer service and upgrade its networks, the migrations will slow significantly. But he also admits the company will continue to lose customers in the second quarter, estimating the decline to be around 64,000 subscribers ? due to both defections and seasonal disconnects.

Schleyer reassured analysts that while the second quarter ? traditionally a slow period for cable growth ? will produce continued subscriber erosion, the second half of the year should rebound with strong customer growth as the company expands its bundled product mix into upgraded areas.

Bear Stearns analyst Ray Katz wasn't fazed by the company's overall results, but admits he's somewhat concerned about the number of defections to DBS. Most of the problem exists largely in areas that haven't been upgraded, he says.

?AT&T Broadband's numbers weren't as bad as some people think,? Katz says. ?Their biggest problem is their [lack of] upgraded properties, and once they begin spending money to upgrade, they'll be better off. People didn't expect much from them, and they got what they expected.?

AT&T Corp., which expects to close the sale of its broadband unit to Comcast by year's end, lost 28 cents a share, or $975 million. Some $856 million of the loss, or 24 cents a share, was a writeoff of goodwill.

At AT&T Broadband, revenues slipped 1.1%, to $2.44 billion. The cable company's cash flow margin also dropped to 19%, up 6 percentage points from the same period a year ago, but down from the 22.7% it posted in the fourth quarter. Cash flow, excluding certain costs, was $465 million, up 66.4% from the $279 million reported in the first quarter of last year.

Schleyer blamed the margin erosion on increased spending on customer care initiatives and an aggressive uptick in capital spending to upgrade its cable properties. He said the company's growth has been hindered by the fact that only 40% of AT&T Broadband's systems are rebuilt to 750 MHz and research shows that churn is 20% higher and new connects are 5% lower in nonupgrade markets. The company has slated $1.1 billion to upgrade and rebuild plant this year.

During the conference call Schleyer alluded to the fact that AT&T will be adding digital tiers and reconfiguring its digital video offerings in the second half of 2002, but declined to provide details.

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