Dow Jones ernings story (includes analyst comments)
MCI Worldcom's 3rd-Quarter Net More Than Tripled, Meeting Estimates
October 28, 1999 1:13 PM
NEW YORK -(Dow Jones)- MCI WorldCom Inc., which has agreed to
acquire Sprint Corp. in a blockbuster deal valued at $120 billion, said
Thursday that third-quarter net income more than tripled, in line with
analysts' estimates.
The Clinton, Miss.-based telecommunications giant (WCOM) turned in net
income of $1.09 billion, or 55 cents a share on a fully diluted basis,
compared with $359 million, or 19 cents a diluted share, a year earlier.
The mean estimate of 25 analysts surveyed by First Call was for earnings of
54 cents a share.
Total revenue, excluding results from the recently acquired Brazilian
long-distance carrier Embratel Participacoes SA, rose 11%, to $8.52 billion.
MCI WorldCom acquired Embratel last year during the privatization sale of
state-owned Telebras. Including Embratel, revenue for the latest third-quarter
was $9.2 billion, the company said. The results for the third quarter of last
year are on a pro forma basis, excluding merger costs.
Third-quarter earnings before goodwill amortization, or cash earnings, came
to $1.4 billion, or 71 cents a share. MCI WorldCom said operating cash flow
margin expanded to 35% from 25% a year ago, which also was better than
expected.
MCI WorldCom's revenue from domestic voice services grew a
stronger-than-expected 6%. Domestic data revenue increased 28%,
excluding the $29 million in service credits the company gave customers
after a nationwide frame-relay data service outage during the summer.
Internet revenue jumped 57% while international revenue rose 54%.
Revenue from communications services, which includes voice, data and
international, rose 16% when the service outage is factored in, said
Goldman, Sachs & Co. analyst Frank Governal. Excluding that,
communications revenue rose 17%.
Chairman and Chief Executive Bernard J. Ebbers said the company will
soon offer a redundant frame-relay network, reflecting the company's effort
to use the service failure as an opportunity to improve service. He called the
outage, which caused intermittent service failures for about 10 days, "a little
hiccup."
MCI WorldCom said sales, general and administrative costs fell to $2 billion,
or 23% of revenue, from $2.1 billion, or 28% of revenue, a year ago. Sales,
general and administrative costs are generally viewed as a key indicator of
expense control.
"These were excellent results across the board," said Governali of Goldman
Sachs. "The thing that really made this quarter impressive is that 70% of
the growth is coming from newer businesses."
Those include data, Internet and international, which are regarded as the
industry's future, in contrast to conventional long-distance phone service,
which carries lower margins and slower growth rates.
MCI WorldCom was formed through the merger of the former MCI
Communications Corp. with WorldCom Inc. Cost savings from that
combination are flowing smoothly to the bottom line, analysts said.
The ever-acquisitive WorldCom is planning to add wireless to its portfolio of
fast-growing businesses when it buys Sprint (FON), the third-ranked
long-distance company. That deal, the biggest merger ever, includes the
nation's second-largest wireless carrier, Sprint PCS Group (PCS).
"The third quarter certainly should give people confidence about their ability
to extract the synergies, which is very important, and their ability to run a
large, complex organization," Governali said.
Increased network traffic and falling costs more than offset the effect of brisk
price competition in the long-distance business. Investors fretted throughout
the third quarter that price cutting would undermine the top carriers' financial
performances.
But those fears appear to have been exaggerated. AT&T Corp. (T) and
Sprint have already reported earnings that were broadly in line with
expectations and didn't indicate that the price war has become seriously
destructive.
"This was one more example that, yes, prices are more competitive, but
this is standard procedure, not a fundamental deterioration in the pricing
environment," said Donaldson Lufkin & Jenrette Securities Inc. analyst
Richard Klugman.
MCI WorldCom gained some benefits from the price competition, attracting
new residential customers with a rate of five cents a minute on some calls.
On a conference call after earnings were published, company officials
described its five-cent offer as "a grand slam hit." Ebbers said customer
loyalty is at its best level in three years. The company didn't say exactly
how many new customers signed up.
Looking ahead, Chief Financial Officer Scott Sullivan said the company is
"comfortable" with analysts' earnings forecasts for 1999 and 2000. The
mean estimate of analysts surveyed by First Call/Thomson Financial was
for earnings of $1.96 a share from continuing operations in 1999 and $2.84
in 2000.
The company forecasts 1999 capital spending of $7.5 billion, having
reported capital spending of $1.9 billion for the third quarter.
Copyright (c) 1999 Dow Jones & Company, Inc.
All Rights Reserved.
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