Carriers Reap Mixed Harvest
U.S. carriers seem economically stable, but they're gripping their wallets firmly. That's the conclusion that emerges from the latest round of earnings reports from the domestic service providers still standing.
At this time last year, more than a dozen major domestic carriers reported third-quarter results. Now, that number's down by at least three in the wake of bankruptcy filings. And the carriers that remain in a top competitive position have a mixed bag of results to offer.
On the plus side, earnings are positive, though revenues continue to decline. Further, the use of one-time charges appears to have lessened. And all of the top carriers have reduced debt since the start of 2002, although de-leveraging their balance sheets remains a priority.
On the downside, capex guidance is still coming down and has yet to show clear signs of bottoming. Regulatory issues are a universal concern.
Let's take a closer look at the specific carriers' recent reports:
AT&T Corp. (NYSE: T) Overall revenues declined one percent sequentially and 8.2 percent year-over-year (see AT&T Reports Q3). Earnings improved to $0.05 per share from a loss of $0.69 a year ago. The company didn’t record any charges from WorldCom Inc. (OTC: WCOEQ) exposure during the quarter. Total debt has been paid down to $46.5 billion from $53.5 billion at the beginning of 2002. Capex totaled $2.06 billion during the quarter, with 53 percent coming from the Broadband unit.
The biggest unknown with AT&T is how the company will look when its Broadband unit is spun off during the fourth quarter (see AT&T Looks for Life After Broadband). In the third quarter, Broadband was the only unit to show positive revenue growth (8.3 percent). Of the remaining operations, Business Services revenues fell, albeit by a mere 1.5 percent. The consumer long-distance business was a different story. What used to be a cash machine has been ravaged by competition (RBOC reentry). Indeed, like the rest of the IXCs, AT&T appears to be more challenged by current regulatory initiatives than the ex-RBOCs (see AT&T Delayed in PA and AT&T Asks FCC to Curb RBOCs).
BellSouth Corp. (NYSE: BLS) is focused, like other regional Bells, on the regulatory issues involved in gaining interLATA long-distance reentry and fighting a battle over unbundled network elements (UNEs) in the local loop (see UNE-P Debate Rages On). That's taking a toll on the company and has caused it to essentially put its metro DWDM initiatives on hold.
Meantime, including Cingular Wireless, third-quarter revenues declined seven percent year-over-year to $7.02 billion (see BellSouth Reports Q3). Reported EPS came in at $0.52 versus $0.53 in the previous quarter and $0.59 a year ago. Total debt has been reduced to $17.7 billion from $20.1 billion over the past three quarters, and cash flow remained strong ($2.34 billion versus $2.13 billion sequentially). Full year 2002 capex guidance was reduced to a range of $3.7 billion to $3.9 billion, a decrease of 30 percent from original guidance.
SBC Communications Inc. (NYSE: SBC) earnings declined to $0.53 per share from $0.61 a year ago. Charges included workforce reductions. Still, third-quarter results were solid despite what management sees as a difficult regulatory environment (see SBC Q3 Earnings Down).
Balance sheet and cash flow metrics remained solid. Total debt stands at $24 billion, down from $26.1 billion at the beginning of 2002. Operations generated $10.74 billion in cash through the first three quarters, slightly higher than the $10.72 reported in the year-ago period. Capital spending declined to $1.5 billion from $1.73 billion in the previous quarter. Full year 2002 capex is expected to total $7.5 billion, about 40 percent below original projections.
Sprint Corp. (NYSE: FON) reported flat sequential revenue growth (see Sprint Announces Q3) and kept earnings positive at $0.39 (versus $0.34 a year ago). Long-distance reentry by the RBOCs was a sore spot during the quarter that could lead to more margin pressure in an already brutal segment. On a positive note, Sprint is gaining enterprise business from distressed carriers, most notably WorldCom.
Sprint's bottom line was hurt by charges related to ION and uncollectible receivables from WorldCom. Total debt has been reduced to $4.4 billion from $5.4 billion over the past three quarters. Management hopes to reduce debt by another 25 percent over the next few years with proceeds from asset sales and improved cash flow. This will be tough to achieve, but the recent progress is encouraging. During the quarter, capex declined 13 percent sequentially to $468 million. Full year 2002 guidance was lowered again to $2.3 billion.
Verizon Communications Inc.'s (NYSE: VZ) third-quarter revenues came in at $17.1 billion, as compared to $16.8 billion in the previous quarter and $16.9 billion a year ago (see Verizon Earnings Reflect New Business). Excluding gains from asset sales, the carrier earned $0.77 per share versus $0.75 a year ago. Total debt has been lowered to $57.4 billion from $64.4 billion since the beginning of 2002, and management expects to end the year with $55 billion to $56 billion in debt. Capital spending totaled $2.6 billion in the quarter, which compares to $3.14 billion on a sequential basis. Guidance for full year 2002 capital expenditures was lowered to $12.3-$12.7 billion from previous guidance of $13-$13.5 billion.
Conclusion: Most carriers have reported sequential revenue declines, while Sprint's revenues remained essentially unchanged. Earnings are still down, but positive. Carrier financials seem stable, but that stability's come at the cost of new initiatives, particularly in the data services area. Until the regulatory picture clears, spending plans will likely stay subdued.
— Chris Bulkey, Financial Analyst, Optical Oracle
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