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SBC Puts on a Happy Face

Light Reading
News Analysis
Light Reading
1/26/2005

Even after seeing quarterly profits drop and issuing 7,000 pink slips, SBC Communications Inc. (NYSE: SBC) execs were very optimistic when announcing the company’s financial results today.

SBC earned $754 million, or 23 cents a share, on revenues of $10.3 billion in the fourth quarter of 2004, down 16.7 percent from the $912 million, or 27 cents a share, earned on revenue of $10 billion in the same period last year.

For the full year 2004, SBC earned $6 billion, or $1.52 a share, on $40.8 billion in revenue, a 30 percent drop from 2003’s income of $8.5 billion, or 1.77 a share, on revenues of $40.5 billion.

In a morning conference call, executives touted a 3.6 percent growth in wireline revenues, double-digit growth in data revenue, and an increase in bundled services helping lead to the company’s third consecutive quarter of increased revenue growth.

The carrier's core voice revenue dropped 5.4 percent in 2004, but the growth in data services (up 8.2 percent) and long distance voice (up 28.7 percent) for the year, helped prop up revenue numbers. Strong subscriber growth at Cingular Wireless, of which SBC owns 60 percent, also helped contribute to the bottom line, something execs stressed would continue to be a future growth area for the company.

SBC made strong gains in the data market, adding 425,000 DSL lines in the quarter, bringing the company’s service total to 5.1 million. It also added 1.1 million long-distance lines, surpassing the 20 million mark.

SBC’s COO Randall Stephenson noted that the company is making progress in the consumer market where it faces stiff competition. “The key is bundling,” he says. “The number of customers with bundled services hit 61 percent in the fourth quarter, up from 44 percent last year.” He went on to say the annual revenue per user (ARPU) for customers who take more than two services — long distance, DSL, joint-billed Cingular Wireless or SBC/DISH Network video — from SBC are more than double those without bundles.

Declining access lines is another sign that SBC will need to move fast to implement its video strategy. The company's retail consumer base lost 192,000 access lines in the fourth quarter, but SBC says that was a “a substantial improvement from declines of 259,000 in the preceding quarter and 424,000 in the fourth quarter a year ago.”

SBC fared no better with its UNE-P wholesale access lines, which declined by 238,000 in the fourth quarter. They lost 46,000 more UNE-P lines from the 192,000 dropped in the third quarter. SBC ended 2004 with 45.1 million retail lines and 52.4 million total switched access lines.

On the video front, SBC reported it had added 97,000 subscribers to its SBC|Dish Network service it offers in partnership with EchoStar Communications Corp., bringing the total number of subscribers to 323,000. Stephenson noted the company is currently in FTTP testing for its previously announced “Project Lightspeed” and expects its FTTN deployment to start in the first quarter of 2005. Project Lightspeed is expected to bring next-generation video services to more than 18 million homes by the end of 2007 (see SBC Sheds Light on 'Lightspeed').

Brad Wilson, a telecom analyst at Legg Mason Inc., predicts SBC’s video initiative will be too little to late. “My guess is that as cable ramps up its VOIP offerings, they’ll take more customers than SBC will be able to win back with its video offering,” he says. “We predict that they’ll start to see revenue declines by 2007.”

SBC will continue to use staff reductions as a means to keep costs in line, saying that it expects to drop 7,000 workers from the payroll (see Cutting the Fat (Really)). Earlier, the company had predicted it would cut more than 10,000 by the end of 2005. In 2004, SBC reduced its workforce by 6,000 and closed more than 50 network and call centers.

Even though the company puts a happy face on its outlook for 2005, touting continued expansion of DSL lines, single-digit percentage of revenue growth, increased operating margins, and increased wireless business, many are predicting that the days of a truly positive outlook is a thing of the past for all the Bells. “When you fold in the wireless, you get positive revenue and growth,” Wilson says. “But the fact is that wireline is a shrinking business.” — Chris Somerville, Senior Editor, Next-Generation Services

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