Earnings come due: For RBOCs and GTE, revenue mix is a-changin'

Wall Street will be watching closely this week as the RBOCs and GTE post fourth-quarter financial results.

While the Street expects solid overall numbers to close out fiscal 1999, analysts don't see much to get excited about - yet. Growth in data and wireless services still is hidden. Investors may have to wait to see sizeable upticks in revenue, said Prudential Securities analyst Guy Woodlief.

The group's earnings per share (EPS) growth for 1999's fourth quarter will be less than earth-shattering, according to consensus estimates from First Call/Thomson Financial Securities Data.

BellSouth posted the largest EPS growth from the year-ago quarter - 52cents per share vs. 42cents per share in 1998. Bell Atlantic and GTE posted modest increases. Analysts anticipate 77cents a share from Bell Atlantic compared with 69cents a share last year, and 99cents per share for GTE over last year's fourth quarter profit of 88cents a share.

U S West posted a fourth quarter EPS of 78cents a share, an increase of 5cents from the 1998 period, while SBC came in at 54cents a share, 4cents above 1998's fourth quarter number.

While the local telcos' forecasted percentage growth in EPS on average is lower than the average for the S&P 500 and slightly lower than EPS growth in 1999's third quarter, analysts warned not to read too much into the numbers.

"These companies are in the best position for [revenue and earnings] growth in their corporate histories," Woodlief said. Rapid growth is predicted because of the strong underlying economy, cost synergies from pending mergers and the first entries of RBOC's into long-distance, he said

Revenue growth for the five will be in the single digits for the quarter, led by BellSouth with a 9% increase. That may sound paltry compared with growth at Internet-related companies, but that's because growth in voice services, which still represent most revenues for these incumbents, is slowing.

"The combined local plus long-distance wireline market is growing faster than ever as robust Internet-related data traffic growth more than offsets the ongoing slowdown in voice," said Dan Reingold, Credit Suisse First Boston's senior wireline analyst, in a report. The more important benchmark will be the increase in revenues from wireless and data sources.

Data revenues continued to grow in the 25% to 40% range in 1999's fourth quarter, said Reingold. As a percentage of total revenue, data increased to 11.4%, up from 11.1% in the third quarter and 9.4% in 1998's comparable period. GTE's huge data business led the way with 40% growth, followed by U S West with 38%, BellSouth and SBC with 30% and Bell Atlantic with 25% expansion, Reingold said.

"People will be looking for indications that DSL is starting to ramp up, but it won't be as fast as we had hoped," Woodlief said.

Reingold estimates DSL subscriber growth in the quarter to be unspectacular, on par with the third quarter for all four RBOCs and GTE. That will change as rollouts such as SBC's $6 billion, three-year Project Pronto heat up DSL competition. The upfront capital costs required for such projects will put a dent in future earnings, Reingold said, but the near-term penalty will be more than offset by cost savings and revenue boosts later.

The fourth quarter also produced increased revenue from domestic wireless operations. The fastest wireless revenue growth belonged to Bell Atlantic and SBC, which showed 23% and 20% fourth quarter increases, respectively, analysts estimate.

While most of Wall Street has been waiting out this transition phase of the local telcos, Paine Webber analyst Eric Strumingher wasn't. On Jan. 12, he cut his investment rating on SBC, Bell Atlantic and GTE from "buy" to "attractive." He attributed the downgrade to concerns about the companies' long-distance voice revenue growth, pressures on operating margins due to dilutive investments in wireless and spending on customer acquisitions.