BellSouth Q2 revenues, earnings slip year over year

BellSouth today reported net earnings for the second quarter 2002 of $293 million – or 16 cents per diluted share – a 66.7% decrease compared with second quarter 2001. Revenues for the quarter declined by 3.4% year over year.

BellSouth took a 37-cent-per-share special charge in the quarter to cover losses on foreign currency transactions and equity investments, and costs associated with its 5000-person workforce reduction announced in May. The charges resulted in reported normalized earnings of $996 million – or 53 cents per diluted share - an 8.2% decline compared to the $1.085 billion posted in second quarter 2001.

The carrier said weak demand domestically and in its Latin America unit, which saw its operating revenues decline 20.2% percent year over year, affected results. BellSouth was able to reduce operating expenses in Latin America by 21.5%, virtually offsetting the dip in revenue, which was partly due to currency devaluations in Argentina and Venezuela, the company said.

A significant contributor to the lackluster results for the second quarter was a $255 million expense for bad debt, which raised the amount of uncollectable revenue for the year to $462 million. This figure compares with $271 million in bad debt through the first two quarters of 2001.

"Bad debt increased dramatically in the second half of last year, a trend that has continued this year," said Ron Dykes, BellSouth's CFO, in an investor conference call this morning.

Operationally, BellSouth added 74,000 digital subscriber line customers in the quarter, bringing total retail and wholesale broadband customers to 803,000. However, the additions were significantly below Soundview Technology Group’s estimate of 87,000 new subscribers for Q2, according to Michael Bowen, analyst.

Total residential and business access lines in service at the end of Q2 stood at 25.14 million, a 2.1% decline year over year. While total retail residence access lines dipped 4.5% compared with second quarter 2001, wholesale access lines increased by 63.3%, fueled by unbundled network element-platform (UNE-P) lines, which jumped to 586,000 from 114,000 in the year previous.

Access line equivalents – unbundled loops, DS-0 and ADSL, DS-1 and DS-3 and higher – increased 25.8% year over year, to 42.77 million, bringing total equivalent access lines in service to 67.9 million, a 13.8% increase year over year.

Cingular Wireless, the joint venture with SBC Communications in which BellSouth owns a 40% stake, posted operating income for Q2 of $722 million, a 4.9% decrease compared to the second quarter last year. Cingular’s revenues for the quarter stood at $3.75 billion, a 4.2% increase year over year. Based on its 40% interest in Cingular, BellSouth posted operating income from its domestic wireless segment of $289 million, a 4.6% decrease year over year.

Bowen, in a report issued this morning, called Cingular’s 353,000 net subscriber additions in the quarter “a bright note” compared to his firm’s estimate of 184,000.

BellSouth adjusted its guidance for full-year 2002. The carrier expects total operating revenue growth (excluding Cingular) to decline by 2%-3%, compared to the previous guidance of a 1% increase. In addition, normalized earnings per share are expected to range from $2.13 to $2.20, compared to the previous range of $2.36 to $2.43.

BellSouth is also reducing its capital expenditures for the year to a range of $3.7 billion to $3.9 billion, from the previous range of $4.2 billion to $4.4 billion. Data revenue growth is expected to be in the mid-single digits, compared with the mid-teens, and DSL subscribers are now expected to reach 1 million by the end of the year, compared with previous guidance of 1.1 million.

According to Dykes, BellSouth had hoped to see improved revenues for the second half of the year, but "medium to large business customers aren't spending on telecom," he said.

"There seems to be two economies," Dykes said. "One for housing and car sales and another for telecom and high tech, which isn't responding as we had hoped."

This in turn caused BellSouth to reduce its capex, but Dykes said the carrier would continue to invest in strategically important sectors. "Reducing capital spending is the right move, but that doesn't mean we will stop investing in key growth areas such as data, wireless, DSL and long distance," he said.

However, Cingular also announced a reduction in capex today, according to Soundview Technologies' Bowen, who said the carrier will cut its capital spending for 2002 to a range of $4.2 billion to $4.6 billion, down from the previous range of $5.4 billion to $5.8 billion. Bowen pointed out that the low-end $4.2 billion level would represent a 24% increase year over year.

In addition, Cingular said it would delay completion of its GSM overlay to "the end of 2004," said Bowen, who added that smaller markets will be "most affected." Previously, Cingular had predicted completion of the overlay by the end of first half 2004, Bowen said.

-– Glenn Bischoff, senior news writer