BellSouth leans further on Cingular

BellSouth traded big-business customers for small businesses in the second quarter amid continuing price pressure in the high-end market and traded lower-speed broadband users for higher-speed ones. And as the company’s profit dropped 20% from a year earlier, it continued to increase its reliance on Cingular Wireless.

The fraction of BellSouth’s revenue coming from wireless operations stayed sequentially flat at 40% in the second quarter, but the fraction of its operating income (before depreciation and amortization) is steadily rising, from 21% in the fourth quarter of 2004 to 25% in this year’s first quarter and 28% in the second quarter, a trend Pat Shannon, BellSouth’s senior vice president of finance, said is improving the company’s margins and revenue.

While the company’s small business revenues were up 6.2% from a year earlier to account for 7% of the company’s second-quarter communications revenue, revenue from large businesses sank 2% to represent 9% of the total. DSL has helped BellSouth slow the erosion of its small business base that has occurred since 2002, Shannon said on a conference call Monday morning.

“There’s a lot of supply chasing the demand [in the large-business market],” he said, citing continued price pressure there.

The company increased its DSL subscriber base by 124,000 (or 5%) in the quarter to about 2.47 million while reporting a net loss of 35,000 customers for its 256 kb/s DSL service, which Shannon attributed more to a drop in gross adds than to churn. At the same time, the company saw a 48% increase in net additions of subscribers to its 1.5 Mb/s and 3 Mb/s services, Shannon said.

BellSouth signed up 80,000 new customers for its DirecTV video service during the quarter, reaching a total of 394,000 customers in the last four quarters. In contrast to SBC’s recent strategy of focusing more on its own delivery of homegrown video service and less on that provided by its satellite partner, Echostar Communications, the Southeastern carrier has no plans to relax its outsourced satellite video efforts. BellSouth is “very happy” with its DirecTV partnership as a “near-term strategy” for video delivery, Shannon said, but the company is also “very excited” about the prospect of IPTV over ADSL2+.

“IPTV will come in due time,” he said.

While it continues to test ADSL2+ technology for the future delivery of video service, BellSouth has increased the amount of fiber its network 10% in the past year to 5426 miles at the end of the second quarter.

The company will offer 6 Mb/s broadband service in limited areas toward the end of the year but will not use ADSL2+ to do so, Shannon said, because it would overly limit the footprint of the service. BellSouth expects to be able to offer 6 Mb/s to 25% of its current customer base, he said.

At the end of the quarter, 62% of BellSouth’s resold lines were part of commercial agreements with other carriers as opposed to UNE-P. BellSouth instituted what Shannon called a “virtual freeze-out” of UNE-P lines in the second quarter, with essentially no new UNE-P lines added since. The company expects the trend of decreasing UNE-P percentages to increase its profitability, since lines resold through commercial agreement have an average revenue per user about $2.25 higher than UNE-P lines.

In a quarter typically expected to suffer from seasonal line loss, BellSouth’s total access lines were down 986,000 (or 4.5%) from a year earlier to 20.8 million.