No Relief From BellSouth
The bad news just keeps on coming in the telecom industry. Only a day after WorldCom Inc. (Nasdaq: WCOME) filed for the largest bankruptcy protection in history, BellSouth Corp. (NYSE: BLS) today announced dramatically lower-than-expected earnings for its second quarter and cut its forecast for the full year (see BellSouth Reports Q2).
BellSouth not only cut its forecasts for full-year revenue by 2 to 3 percent, but it lowered expectations for capital spending and growth in high-speed Internet customers over the course of 2002. It now says its capital expenditures will fall to between $3.7 billion and $3.9 billion (excluding Cingular Wireless) in 2002. That's down $500 million from the budget issued at the end of the first quarter.
Despite the overall malaise in the industry, analysts and investors were clearly disappointed with the company’s results and forecasts. Along with the WorldCom bankruptcy filing (see WorldCom Files for Bankruptcy), BellSouth’s results helped drag down the entire telecom sector. The company saw its stock price plummet to a five-year low of $22 in morning trading, losing nearly 20 percent of its value. In afternoon trading, BellSouth shares were down $4.57 (16.55%) to $23.04. Fellow Baby Bells Verizon Communications Inc. (NYSE: VZ) and SBC Communications Inc. saw their share prices fall to six-year-lows. Merrill Lynch & Co. Inc. cut the ratings for all three Bells from Buy to Neutral today.
BellSouth, the dominant local telephone company in nine southeastern states from Kentucky to Florida, announced that net income had dropped 67 percent in the second quarter, falling to $293 million, or 16 cents a share, from $880 million, or 47 cents a share, in the year-ago quarter.
"I guess I’m not shocked,” says J.J.B. Hilliard, W.L. Lyons Inc. analyst David Burks, “but one would have hoped that their prior guidance would have been as conservative as possible. Who knows? Maybe it was. We are certainly well beyond a recession for the telecom industry.”
The poor results are, according to the company, due to weak demand for communications services in the U.S. and Latin America, market share loss in the U.S., and currency devaluations in Argentina and Venezuela. 11.2 million of BellSouth’s 44 million customers are located in Latin and Central America. The Latin America revenues were down by 20.2 percent, the company reported.
During the second quarter, the carrier took a charge of 7 cents for losses from currency devaluation and a 19 cent charge for losses on investments. In addition, the company took a charge of 12 cents a share in connection with a workforce reduction of 5,000 jobs, announced in May. A higher-than-expected bad debt expense of $255 million during the quarter also hurt the company’s results.
“We don’t believe that this is a secular change that will be with us forever,” Ron Dykes, CFO of BellSouth, said on a conference call this morning, speaking of the bad debt issue.
Overall, however, the company reports that its total debt declined by $1 billion during the quarter and that it has been reduced by $2.1 billion, or 10.4 percent, since the beginning of 2002. BellSouth also reports $1.4 billion in free cash flow in the second quarter.
BellSouth says it expects the poor results to rub off on the full year. The company cut its full-year earnings forecast for at least the third time, to a range of $2.13 to $2.20 per share excluding one-time items. When reporting its first-quarter earnings results in April, the company said it expected its full-year earnings to range from $2.36 to $2.43. The new forecast is also a far cry from the average estimate of $2.34 among analysts polled by First Call.
“We had expected earlier that we might see some improvement in the second half,” Dykes said, “Those revenues don’t seem to be forthcoming.”
The company’s revenues, including revenue from its 40 percent share of Cingular Wireless, fell to $7.23 billion from $7.35 billion, or 1.6 percent, compared to the same quarter last year. Analysts polled by First Call had expected revenues of $7.28 billion.
— Eugénie Larson, Reporter, Light Reading