Carrier profits in full bloom: Wireless units growing the top line

While investors wait for the broader market to revive, some major carriers did their part last week, posting first quarter earnings reports that equaled or exceeded expectations. BellSouth, Sprint and Qwest Communications eked out earnings-per-share performances one penny above consensus analyst estimates, while Level 3 Communications announced a loss per share 12cents better than forecast.

BellSouth's domestic wireless group added about 100,000 customers per month in the quarter, bringing the total subscriber count to 5.6 million in the U.S., while revenues grew to $792 million and average revenue per subscriber (ARPU) reached $53, an increase of 8.2% from a year ago. Through its various ventures, BellSouth's international wireless subscriber base added almost 1 million customers, but the expansion also reduced the RBOC's operating cash flow margin and reduced ARPU to $39.

"BellSouth really made great gains in wireless but also saw a lot of cost by offering prepaid plans to international customers," said Michael Hodel, equity analyst at Morningstar Research. BellSouth plans to merge its U.S. wireless operations with those of SBC Communications later this year, which most analysts say will give it the national scope needed to attract a larger customer base.

BellSouth's data revenues climbed 30.6% to $811 million. The company said growth was driven by primary rate ISDN, DS-1 and frame relay services, and Web hosting, Internet access and e-commerce applications.

One area where BellSouth and the other RBOCs continue to disappoint is building a customer base in high-speed Internet access services such as DSL. BellSouth said total DSL and integrated fiber-in-the-loop customers totaled 49,000 at the end of its March quarter, up from 30,000 in December.

"It's not an easy thing to deploy a whole new digital network and there are profit incentives for [the RBOCs] not to do so," said Brent Bracelin, an analyst at Pacific Crest Securities.

Sprint, a few months away from what it hopes will be an unhindered takeover by MCI WorldCom, also experienced a top-line boost from wireless subscriber growth. Sprint PCS reported a loss of $513 million, or 54cents per share, but added 831,000 customers, beating Wall Street's estimate of 711,400 customer adds.

U.S. wireless carriers are reporting stabilizing and increased ARPUs, thanks to bucket plans and data usage, wrote Tim O'Neil, analyst at Wit SoundView, in a report.

"Carriers that have been early to adopt data products such as Sprint PCS and Nextel may soon be realizing the benefits of their investments," O'Neil said.

Although Qwest and Level 3 reported good quarters, analysts seemed more impressed by Level 3 keeping its losses down while adding 450 new employees and exiting the quarter three months early on its intercity conduit construction.

"They're still a fairly speculative company and don't have the revenue or earnings to support their share price, but they have $7.5 billion in cash sitting on their balance sheet, and that's especially important in light of what the market's been doing," Hodel said.

Another round of earnings calls comes this week as Bell Atlantic, GTE, MCI WorldCom, SBC and U S West disclose first quarter financials. AT&T and MCI WorldCom will get special attention as analysts look for strong growth from MCI WorldCom's Internet unit to calm fears about the re-pricing of its contract with America Online. Others will watch for AT&T's numbers to show progress in voice over cable and a revenue impact of its restructuring with Excite@Home.