BellSouth posts sharp earnings increase

BellSouth today posted net income for third quarter 2003 of $936 million (51 cents per diluted share), a 40% increase over the $640 million (34 cents per diluted share) posted in the year ago quarter. The RBOC also reported a modest revenue increase for the quarter to $5.73 billion, a 5.4% increase from the $5.43 billion posted for third quarter 2002.

The largest revenue gain on a percentage basis occurred in the carrier’s Latin America unit, which increased revenues 18.8% to $588 million. BellSouth credited the gain to strong customer growth and more stable local currencies. The unit added 1.4 million customers on a consolidated basis during the quarter, an 18.2% gain, including 421,000 wireless customers. The unit now serves 9.4 million customers.

BellSouth’s domestic voice revenues were flat year over year, as the carrier posted a 1.6% gain to $3.18 billion. BellSouth added 654,000 net long-distance customers in the quarter, which brought the total number of customers served to 3.4 million. BellSouth said 24% of its residential customers and 34% of its mass-market small business customers subscribe to its long-distance service. Additionally, 2.6 million customers now subscribe to one of the BellSouth Answers bundles, which combine, local, long-distance, Internet and wireless services, a 21% penetration rate. Of these, 509,000 were added in the third quarter.

"Our new Unlimited Answers consumer plan has been a great success," said BellSouth CFO Ron Dykes. "Since launch, over one-third of our new long-distance customers have chosen the unlimited plan."

Answers customers provide greater average revenue per user compared to those who do not subscribe to a bundled package, because all, including those who choose unlimited long-distance, must also purchase Complete Choice, a premium package that combines local access with unlimited call features such as Caller ID and Call Waiting. BellSouth has achieved 36% penetration of total consumer lines with this offering, Dykes said.

"Answers has spurred growth of Complete Choice, as we have added nearly 200,000 Complete Choice customers in the first nine months of this year. This change tells us our customers are buying up in services to qualify for the value-based pricing of Answers packages," Dykes said.

Offsetting these gains was a 4.0% loss in access lines compared to the same quarter last year. BellSouth currently has 23.9 million access lines in service, compared to 24.9 million one year ago. The number of lines provisioned to competitive carriers via the unbundled network element platform roughly doubled year over year, to 1.53 million. However, 188,000 lines were lost to competitors via UNE-P during the quarter, the fewest in any quarter dating to fourth quarter 2001, BellSouth said.

BellSouth’s data business posted revenues of $1.1 billion, a 5.5% increase year over year. The carrier added 111,000 net DSL customers during the quarter, which brought the total to 1.3 million. BellSouth credited the July 2003 introduction of FastAccess DSL Lite, which allows customers to choose from two tiers of service, for much of the success.

Cingular Wireless, the 40% joint venture with SBC Communications, contributed revenues of $1.58 billion for the quarter, a 4.7% increase year over year. Moreover, Cingular added 745,000 net customers during the quarter, the largest addition in 10 quarters, and more than the total number of net customer additions posted for the first half of 2003. Cingular had 24.4 million customers at the end of the quarter. However, BellSouth’s share of the unit’s operating income fell 20.7% year over year, to $195 million from $246 million.

BellSouth blamed much of the reduction on increased costs stemming from "significantly higher" gross customer additions and from customer retention programs put in place to offset the impact of wireless number portability, which takes effect November 24. BellSouth also said Cingular encountered higher depreciation costs stemming from its network upgrade. Cingular’s GSM/GPRS network currently covers 92% of potential customers and the carrier is ahead of its year-end 2003 target, BellSouth said.

Capital expenditures for the quarter totaled $764 million, bringing year-to-date capex to $2.1 billion, a 25.8% reduction year over year. At the same time, BellSouth further pared its total debt, lowering it to $15 million at the end of the third quarter, a 13.8% reduction from the $17.4 billion it had on the books at the start of the year. Dykes said these trends would continue, to a degree.

"Under normal circumstances, reinvestment is a good thing, but regulatory uncertainties make more investment in fiber and broadband risky and imprudent right now," Dykes said. "Hopefully we’ll see some clarity in the near term. As for our debt, I believe our current debt level is appropriate, and I would not expect to accelerate debt reduction."