SBC Communications Inc. (NYSE: SBC) says it doubled its profits during its fourth quarter, despite a 5.3 percent dip in its quarterly revenues (see SBC Reports Q4).

Following the announcement today, the company saw its stock price slide 3.3 percent in the first hour of trading today, dropping 82 cents to $24.03 a share.

Including its 60 percent stake in Cingular Wireless, SBC’s total revenues for the quarter dropped to $13.3 billion from $14 billion for the same period last year; this is below Wall Street’s consensus expectation of $13.7 billion. Excluding Cingular, SBC’s revenues declined 5.8 percent, dropping to $11.2 billion from $11.9 billion last year.

"It was disappointing,” says Guzman & Company analyst Patrick Comack. “There’s no telecom recovery in 2003.”

Despite the gloom, SBC, which is the second largest local phone carrier in the U.S., did double its fourth-quarter net earnings to $2.4 billion, or 71 cents a share, from $1.2 billion, or 35 cents a share in the year-ago period. Before special items and the impact of expensed stock options, its earnings for the quarter declined to 62 cents a share from 64 cents a share last year. These results were in line with the 57 to 63 cent consensus of analysts surveyed by Thomson First Call.

During the quarter, SBC made $701 million in one-time profits from the redemption of its interest in Bell Canada (NYSE/Toronto: BCE) and a tax benefit following the restructuring of its ownership of Sterling Commerce Inc. The company also took $352 million in charges in connection with pensions and the restructuring of Cingular.

SBC reported its results a week after disappointing results from its competitors, AT&T Corp. (NYSE: T) and BellSouth Corp. (NYSE: BLS), affirmed feelings of pessimism throughout the telecom industry (see Unknown Document 588133 and BellSouth Reports Q4).

On a conference call this morning, SBC CEO Edward Whitacre insisted that the company’s slipping revenues are due to what he calls unfair regulations, coupled with a stagnated economy and dwindling demand. “No amount of cost-cutting can undo the damage of below-cost UNE-P,” he said on the call, pointing out that in 2002 the carrier lost 2.6 million access lines to the unbundled network elements platform. He said he expects the regulatory pressures to continue in 2003. “UNE-P losses are the biggest driver of our results.”

The UNE-P regulations, which are currently under Federal Communications Commission (FCC) review, require regional Bells like SBC to lease their access lines and other network elements, like switches, to competitors at fixed, low, wholesale prices (see Will Powell Pull the Plug?). In return, the RBOCs have had the opportunity to enter the long-distance markets in many states (see RBOCs Get Long Distance Go-Ahead).

SBC has already received FCC approval to offer long-distance services in nine of its 13 states and expects to receive approvals for the remaining four states in 2003. The carrier says it expects consistent long-distance growth throughout the year, with an anticipated 20 percent penetration rate within 12 months of starting to offer long distance in a state. SBC’s long-distance push is also allowing it to make significant progress in its bundled services offerings, the company says.

SBC says it added 245,000 high-speed DSL (digital subscriber line) subscribers during the quarter, bringing its total number of customers to 2.2 million. The carrier expects to see continued DSL growth in 2003.

But while sales in long distance and DSL are expected to rise, SBC says it will face significant increases in operating expenses in 2003, driven mostly by increased pension and medical costs. The company also says it will increase spending on sales and add more than 1,000 employees to its sales workforce. However, SBC expects its overall workforce to decrease over the coming year.

For all of 2002, SBC reported that, excluding extraordinary items and effects of accounting changes, its earnings were $7.5 billion, or $2.23 per diluted share, up from $7 billion, or $2.07 per diluted share in 2001. Revenues for the year were $43.1 billion, the company reported, compared with $45.9 billion in 2001. Operating expenses for the year declined to $34.5 billion from $35.4 billion the year before.

For 2003, SBC says it expects its revenues to continue to slide, falling by low single-digit percentage rates. The company also expects its capital spending to decline to between $5 billion and $6 billion, or 12 to 14 percent of revenues, excluding Cingular. That’s down from $6.8 billion in 2002.

The company says that starting in the current quarter, it will no longer break out normalized earnings or the results after onetime items. Instead, SBC said, it will list the onetime items, as well as the Cingular results, separately.

— Eugénie Larson, Reporter, Light Reading