BellSouth Boosted by Broadband, Cingular

Don’t let the ILEC pedigree fool you. (NYSE: BLS) says its broadband services are developing fast.

As BellSouth released third-quarter earnings figures early Tuesday morning, it cited the solid additions in DSL access lines as one of the prime reasons for a 2.3 percent increase in profit. Third-quarter earnings were $817 million, or 44 cents a share, compared with $799 million, or 44 cents a share, in the year-ago quarter.

Revenue dropped 0.5 percent to $5.07 billion from $5.095 billion a year ago.

BellSouth's revenue and profit figures do not include continued margin increases generated by the company’s 40 percent share in Cingular Wireless LLC. Company officials said normalized earnings were $845 million, or 46 cents a share, which would have matched analysts’ consensus expectations.

In an earnings conference call Tuesday morning, CFO Ronald M. Dykes said the company will begin offering its 6-Mbit/s service, DSL Xtreme 6.0, to a targeted base of 25 percent of customers in the fourth quarter 2005.

Dykes also said BellSouth is achieving rates greater than the expected 12 Mbit/s with its next-generation ADSL2+ technology, even in the absence of copper bonding that should greatly increase capacity. He also said video over copper is working well.

“You can expect us to continue to deploy DSL2+ throughout 2006,” Dykes said. “And we may have a plan to articulate sometime in the first quarter of next year.”

As the company released third-quarter earnings figures early Tuesday morning, it reported adding 205,000 net new DSL customers and said that 60 percent of those came from higher-priced 1.5-Mbit/s to 3.0-Mbit/s lines. Its DSL customers, which total 2.7 million, now account for 14 percent of retail access lines, up 9.4 percent from the year-ago quarter.

In the earnings call, Dykes expressed optimism that successful integration of faster services into BellSouth’s network will bolster these recent successes in the DSL market, which he attributed to restructuring of pricing schemes.

But deployment and integration of new technologies do not come cheap. In the third quarter 2005, capex was at $886 million, or 16 percent of revenue, with about one third of that spent on broadband technologies.

This is in line with expectations the company set out one year ago, Dykes said. And he expects the capex percentage to remain steadily “in the mid-teens” in the coming quarters.

“I wouldn’t look for ADSL2+ to be a major mulligan in terms of our capital spending,” Dykes said. “We start with a fiber-rich environment and shorter loops on average than a lot of our peer companies.”

But despite the broadband growth, overall top-line revenues are still flat. BellSouth’s emphasis on the wireless success of Cingular and broadband underscores continued slow growth in wireline phone services, as customers migrate to cable providers for these services. Dykes estimated that 15 percent of line loss in recent quarters has been to cable companies.

One analyst asked Dykes if BellSouth’s recent partnership with (NYSE: FON) to increase nationwide IP networking capabilities for business customers hinted at a possible merger.

“We’ve done one merger over the last 20 years,” Dykes said. “It was to increase our exposure to wireless. So it’s hard for me to see high growth opportunity in wireline.” Among BellSouth’s priorities in the near future, Dykes cited the company’s goal to maintain competitive dividends for shareholders, which in the third quarter increased 7.4 percent compared with the previous quarter, and announced an authorized $2 billion share repurchasing plan.

BellSouth's stock price remained relatively flat in midday trading, up 0.15 cents or 0.59% from a close of $25.62 yesterday.

— Joe Tuzzo, special to Light Reading

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