SBC Q2 revenues, earnings fall year over year

SBC Communications today reported second-quarter 2002 earnings of $1.8 billion – or 55 cents per diluted share – a 10.9% decline compared with the same quarter a year ago. Total operating revenues for the quarter were $10.8 billion, down 5.5% year over year, while earnings before interest taxes depreciation and amortization (EBITDA) stood at $4.4 billion, a 16% decrease compared with second-quarter 2001.

On a normalized basis, SBC posted earnings of $2.03 billion – or 61 cents per diluted share – on revenues of $13.05 billion. These results included $2.2 billion in revenue generated by SBC’s 60% stake in its Cingular Wireless joint venture with BellSouth and $118 million from SBC’s sales of a portion of its interest in Bell Canada Holdings.

The normalized results also included two special charges: $220 million related to workforce reductions and $84 million in additional reserves made necessary by WorldCom’s Chapter 11 filing. Normalized revenues for the second quarter 2002 declined 3.9% year over year, while income declined by 1.6% compared with the same period last year. Normalized EBITDA for second-quarter 2002 was $5.5 billion, down 3.6% compared with second-quarter 2001.

Highlights for the quarter included the addition of 213,000 DSL subscribers, which brought SBC's total DSL subscriber base to 1.7 million, a 67% increase compared with one year ago. SBC also added 266,000 long-distance lines, a 33% increase from a year ago. Total long-distance lines now stand at 5.6 million.

Free cash flow after dividends increased 111% year over year to $21.7 billion. Finally, SBC reported that Cingular finished the quarter with 22.2 million subscribers, an increase of 4.6% compared to same quarter one year ago. SBC said Cingular also achieved subscriber revenue growth of 7.3% year over year.

Randall Stephenson, SBC’s chief financial officer, said continued top-line pressure would require the carrier to prolong its emphasis on cost management. SBC’s consolidated cash operating expenses were down 4.2% for the quarter, the third consecutive quarter in which SBC achieved a year-over-year reduction in this line item, according to Stephenson.

“As a result we have kept our EBITDA margin stable – 41.9% on a consolidated basis this quarter – which is essentially flat with the second quarter last year and up from the first quarter this year by 140 basis points,” he said.

Expense reductions came from a number of areas, said Stephenson, including DSL provisioning costs, support and overhead costs, and the aforementioned workforce reductions. SBC has reduced its total workforce so far this year by more than 13,000 and plans to cut another 3000 jobs before the end of the year. SBC Chairman and CEO Ed Whitacre left the door open regarding additional cuts.

“We've done a really good job of lowering expenses and will continue to do that,” Whitacre said. “But nothing is excluded. So there could be more layoffs depending on what happens going forward.” However, he added that SBC has seen a “leveling off” in the first six months of the year, in terms of the economy and its effect on SBC’s business.

Stephenson said SBC also would continue to drive down capital spending. It spent $1.7 billion in the second quarter of 2002, a significant reduction from the $2.9 billion invested in the second quarter one year ago.

He added that SBC was most hurt in the quarter by a sharp reduction in local voice revenues, which declined 7.7% year over year. This decline should be reversed as the economy improves, as residential customers add second lines and business customers start hiring again. Also helping will be SBC’s pending entry into long distance in California. The carrier is expecting to receive state commission approval of its 14-point checklist soon, perhaps as early as today, and hopes to be providing long-distance service under Section 271 of the Telecom Act before the end of 2002.

Stephenson said adding long distance to the mix in California, and ultimately its five-state Ameritech region, and driving deeper penetration of DSL would provide SBC with a significant boon because it would allow the carrier to effectively bundle all of its service offerings.

“When we combine DSL with the wireline, our churn rates drop dramatically,” he said. “Also, putting wireless together with wireline is real important, not only because it reduces wireline churn, but – studying the BellSouth model, where they’ve been pretty aggressive with this – wireless churn also drops dramatically. And obviously, when you put long-distance with any of those, you have a significant lift there as well.”

None of these efforts will matter if the FCC doesn’t adjust its thinking regarding the unbundled network element platform (UNE-P), said Whitacre. He said UNE-P was never mentioned specifically in the Telecom Act but was created by the FCC to jumpstart competition and to create a “toehold” in the market for competitors, who would eventually migrate to their own facilities.

“The mechanism in place now, in a word, is nuts,” Whitacre said. “We’re giving away our service at a 60% discount, and all they’re doing is reselling it. This has to change, and I think the policymakers know this.”

Whitacre predicted the FCC would adjust its UNE-P rules sooner rather than later because of what is at stake.

“UNE-P is driving us to make no investment, and no investment means these manufacturers and product suppliers will get worse, not better,” he said. “If you look at the whole picture, at some point sanity has to prevail. Telecom accounts for about 15% of the nation’s economy, and the government isn’t going to tolerate a ‘race to the bottom’ much longer.”