Access line loss slows, says BellSouth

In what could be the last earnings call for BellSouth as a separate company, Chief Financial Officer Pat Shannon said access line loss rates are “flattening,” as cable VoIP deployment is completed and losses to wireless substitution are reduced.

“Year-over-year losses to access lines are flattening,” Shannon said. “This is a new data point. Access lines are still down 265,000 for the quarter, and that is driven by wireless substitution and by cable VoIP competition, but we did not see an acceleration in cable losses.”

BellSouth residential access lines were down 8.7% year over year in the third quarter versus 9% in the second quarter and 8.8% in the first.

Cingular’s strong results, coupled with growth in DSL and long-distance revenues helped offset those losses as BellSouth reported a 30% increase in third-quarter profit. Net income rose to $1.06 billion, or 58 cents a share, from $817 million, or 44 cents a share, in 2005, when hurricane restoration efforts reduced profit by 11 cents. Overall sales were up 2.9% to $5.22 billion.

Most notable, however, were Shannon’s comments on access line loss, a competitive reality that has been the plague of traditional carriers for several years now.

“With access line trends beginning to moderate, some of the pressures you have seen on the margins should begin to abate, if you continue the profitable growth of DSL and long-distance, things should be okay,” he said.

And while admitting that it’s a long way from this quarter’s access line loss rate of 8.8% to zero, the slowing of line losses is a step in the right direction, Shannon said.

“The good news is, trends in this business don’t flutter around,” he said. “We have seen competition come into the small business market years before the consumer market add we saw line loss and revenue share go down there. Then over the last few years, there was a slowing of that trend until eventually it turned back positive.”

Small business revenue was up 10.6% in the third quarter and 9.9% for the year, Shannon said.

“On residential side, the competition has been significant and growing,” he said. “Now it appears, we are reaching a flattening. It is still high – we have large year-over-year rates. But it does appear that over the last couple of quarters, it has flattened, and we could see that turn back toward zero.”

At this point, the major cable operators’ VoIP services are almost fully deployed in BellSouth’s market, he added. In addition, wireless substitution, which is still the largest contributor to access line loss, is slowing.

“Over the last three quarters, we have seen a reduction in the absolute losses to wireless substitution,” Shannon said. “It’s hard to pinpoint with any degree of accuracy what exactly the wireless substitution threshold is going to be. These are trends we are going to have to continue to watch. We have seen a slowing--that bodes well for the future. How far can you take that, and does it stop completely? You have to watch the trends.”

Shannon’s remarks in some ways echoed those by AT&T’s CFO Rick Lindner, made Monday. He also noted a slowing in rate of access line loss in announcing AT&T’s third-quarter results.

As many analysts noted in offering personal thanks to Shannon and Nancy Davis, vice president of investor relations at BellSouth, this could be the company’s last independent investor call. The Federal Communications Commission will vote on Nov. 4 to approve or reject AT&T’s acquisition of BellSouth for $81 billion.

Other trends noted by Shannon:

• BellSouth posted its fourth straight quarter of double-digit earnings per share growth.
• The Communications Group’s margin was up, due to workforce reductions and elimination of overtime attributable to hurricane cleanup, and BellSouth’s ability to capitalize on scale deployments of DSL and long-distance, with higher margins.
• Gains in DSL and long-distance more than offset losses of access line revenue. DSL subscribers were up 29% year over year, and revenue was up 33% year over year as more subscribers bought higher-speed 3 Mb/s and 6 Mb/s services. Average revenue per user in data was $40.
• Core retail data service revenues were up 9% as the sale of Metro Ethernet and other new services offset a decline in legacy packet services.