SBC profits slide despite data growth

Despite record DSL sales and 10% growth in wireline data revenues, SBC Communications saw profits slide 40% in the third quarter, due in part to Cingular’s costs for its merger with AT&T and Hurricane Katrina recovery.

The company nonetheless generated $3.3 billion in cash from wireline operations and $1.4 billion from wireless subsidiary Cingular and is investing that money heavily in buying back its own stock--“the best investment we can make,” said CFO Rick Lindner. SBC bought back $507 million of its own shares in the third quarter and expects to spend an additional $1 billion doing so in the fourth quarter of this year.

Earnings per share were 38 cents on a diluted basis, or 47 cents before including merger and hurricane-related costs at Cingular.

SBC sold 528,000 DSL lines in the quarter, its best-ever quarterly result, due in part to the $14.95 a month promotion this company launched in the third quarter. SBC currently as 6.5 million DSL lines in service, the largest deployment of any U.S. carrier.

The company has improved its operating margin, largely through costs cuts and employee attrition, Lindner said. SBC had a 19 percent consolidated operating income margin, which is 250 basis points up from the third quarter of 2004.

“We have undergone major transformation of our call centers, and we are transitioning our sales and service transactions to the Web, and reducing our network costs through infrastructure optimization,” he said. “These process improvements have allowed us to achieve force reductions in a consistent, orderly way, mostly through attrition,” Lindner told analysts. “A big driver of our margin improvement has been lower employee costs. Our force is down 11,000 over the last 12 months, primarily through attrition. On top of that, we’ve made a number of benefit plan changes, all designed around trying to better control medical costs and our post-employment benefit costs.”

To date, SBC has trimmed 8000 jobs this year, including 3000 in the third quarter, and expects to cut another 2000 jobs this year.

The company had an overall decline in the number of business lines, but Lindner said most of those were UNE-P lines, or lines SBC provides to competitors. “Those are business customers we’ve already lost,” he said. “If you have to lose lines, those are the lines to lose.”

SBC’s third-quarter earnings were $1.2 billion, including its portion of Cingular’s merger and hurricane recovery expenses of $637 million and $96 million respectively. The comparison with third quarter of 2004 is also affected by retroactive earnings the company reported in that period from resolution of a UNE-P pricing challenge in California.

In terms of major initiatives, Rich Dietz, vice president of investor relations, said the AT&T merger deal is proceeding as planned and should be completed by year’s end, and that Project Lightspeed, the company’s advanced network initiative, is also on track. SBC has completed its San Antonio trial of VDSL 2 technology and IPTV and has Microsoft’s IPTV release 1.0 ready to go for a controlled launch of the service.